Company Overview: Canadian Solar Inc. (NASDAQ: CSIQ) is engaged in manufacturing solar photovoltaic modules, generating solar energy, and facilitating battery storage solutions. CSIQ’s reporting segments include the Global Energy segment and CSI Solar segment. Although both the segments are involved in the development, sale, operation and maintenance of solar power projects, they are differentiated geographically. While the Global Energy segment caters to the US, Australia, Japan, Mexico, Canada, Brazil and the EU markets, CSI Solar segment solely concentrates to Chinese market.

­­­­­­CSIQ Details

Material Business Updates

Entered into 600 MWH Long-term Energy Storage Agreement: As per the 10 August 2021 announcement, Recurrent Energy LLC, a wholly owned subsidiary of CSIQ, closed a 15-year energy storage agreement with Pacific Gas and Electric to cater 150MW/600MWh energy storage. The agreement came in response to the California Public Utilities Commission’s (CPUC) concern over potential extreme weather conditions and recent proclamation to expedite the new green energy projects.

Secured US$100 million of Financing Facility from Brazil: As per the 27 July 2021 announcement, CSIQ closed a circa US$100 million financing facility with Brazilian banks – BTG Pactual and Itaú BBA. CSIQ aims to utilize the facility to fund around 70% of equity contribution into the Brazilian project portfolio to support establishing a publicly listed vehicle (FIP-IE) with operating projects.

CSIQ recorded First Project Monetization via Corporate Offtake Contracts: Recurrent Energy LLC sold the Maplewood 1 and the Maplewood 2 solar projects to one of the leading US annuity and life insurance companies. The Maplewood projects hold a capacity to deliver 328 MWp and are expected to tap commercial operation before the end of Q3FY21.

Historical Financial Trend:

CSIQ illustrated sustainable historical growth while expanding operations via Power Purchase Agreements (PPAs) and monetizing projects. As a result, the operating revenues have assumed a modest dip in the past two years, but EBITDA margin have remained relatively stable at 13% levels. As a result, operating revenues grew at a 5.1% CAGR (FY16 – FY20).

Figure 1: Historical Financial Overview

Source: Company Reports, Analysis by Kalkine Group

Second Quarter FY21 Performance:

Driving Factors of Top-Line and Gross Profits: Sequential improvements in module shipments of 3.7GW, high revenue contribution from battery storage shipments, and increase in average selling price (ASP) delivered 105% PcP growth in net revenues and 26% PcP surge in gross profit. Gross margins stood at 12.9%, way beyond upper-end guidance of 10.5% due to improved manufacturing efficiencies.

Update on Cash Flows and Liabilities: Operating cash outflow was registered at $61 million, relative to outflow of $83 million in Q1FY21. The outflow was primarily driven by increased working capital investment, influenced by capacity expansion measures. In addition, total debt declined to $2.23 billion from $2.28 billion registered in Q1FY21, warranted by curtailed project financing activities upon project sales.

Figure 2: Quarterly Performance

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

Operational Overview: Gross margin for FY20 stood at 19.8% relative to 22.4% in FY19. The average selling price declined to US$0.25/Watt from US$0.29/Watt in FY19, primarily driven by sequential oversupply across the value chain and foreign trade disputes. In addition, CSIQ diversified its revenue stream via entering onto battery storage solutions which presented US$7.9 million in revenue.

Figure 3: Changes in Critical Line Items

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~47.81% of the total shareholding. Qu (Shawn Xiaohua) and BlackRock Investment Management (UK) Ltd. holds a maximum stake in the company at ~­­­23.13% and ~5.80%, respectively.

Figure 4: Top 10 Shareholders

Under Penetration in Solar Exhibits High Growth Potential: Solar penetration remains at circa 3% despite sequential growth. Conversely, cumulative capacity of solar is estimated to tap 14,000 GW levels by 2050 in line with the 1.5°C Paris Agreement.

Guidance Update: For Q3FY21, CSIQ estimates total module shipments to fall in the range of 3.8GM to 4.0GW and total revenues to clock US$1.2-1.4 billion with a gross margin range of 14-16%. For FY21, CSIQ reaffirms total module shipments of 16-17GW and total revenues of US$5.6-6.0 billion. Project sales guidance stands at 1.8-2.3GW and total battery storage shipment at 810-860MWh.

Key Risks:

Potential risks of oversupply present high possibilities of decline in average selling prices. In addition, the solar power market is still at an early-stage development phase; hence potential demand uncertainty for solar power products and services remains high.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

Stock Recommendation: CSIQ has delivered 3-month and 6-month returns of ~-4.142% and ~-40.031%, respectively. The stock is trading below the average of the 52-week high price of US$67.39 and the 52-week low price of US$25.45, indicating an opportunity for accumulation. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in % terms). The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), considering prudent capacity expansion strategies. For the purpose of valuation, few peers like Weatherford International PLC (NASDAQ: WFRD), Oceaneering International Inc (NYSE: OII), Forum Energy Technologies Inc (NYSE: FET) have been considered. Considering the under penetration of solar PV market, growing demand for electric vehicles and energy storage solutions, and potential upside as indicated by the valuation, we give a “Buy” recommendation on the stock at the current market price of $34.71, down by ~6.34% on 17 August 2021.

CSIQ Daily Technical Chart (Source: REFINITIV) 

Note: Green color line reflects RSI (14-Period) and purple line reflects 21-day SMA.

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.