Company Overview: Canadian Solar Inc. (NASDAQ: CSIQ) is a vertically integrated solar power products producer with operations in the Americas, Europe, South Africa, the Middle East, Australia, and Asia. The company develops solar modules, solar ingots, solar cells besides, it engaged in solar power projects, the sale of electricity, and providing operations & maintenance and asset management services. Its manufacturing activities are conducted in China and Southeast Asia. The company operates into two segments - CSI Solar Segment that accounts for ~89.3% of FY20 revenues, and Global Energy Segment contributing 20.9% of revenues (before intersegment elimination). The former segment particularly cater to the Chinese market through the CSI Solar subsidiary, while the latter serves all other regions.

CSIQ Details

 

Solar Module Portfolio: CSIQ has delivered over 52 GW to 150 countries (on a cumulative basis), covering North America, Latin America, Asia-Pacific, Japan, China, and EMEA regions. Recently, the company changed its reporting structure to carve out businesses catering to China. Its CSI Solar serves top tier brands delivering 11.3 GW of solar modules in 2020. Solar module shipments are expected to surpass historical CAGR with 65% growth in 2021 reaching 18-20 GW. The company intends to capture a market share of 11% in 2021 (from 9% in 2020).

Figure 1. Market Share to Accelerate in Solar Modules Manufacturing:

Source: Company Reports

Strength in Integrated Operations: CSIQ intends to expand manufacturing capacity in China through deepening integration that helps to boost market share gains. The company uses silicon wafers and solar cells manufactured at its plants to make solar modules used in solar power development projects. The company intends to reduce manufacturing costs by improving solar cell conversion efficiency, expanding manufacturing yields and reducing material costs.

Figure 2. Deepen the Vertical Integration to Reduce Costs:

Source: Company Reports

Solar Project Pipelines: CSIQ aims to increase the share of recurring revenues through strong pipelines in solar power projects. It has a 7.2 GWp of solar projects development pipeline for 2021. CSIQ expects global solar PV installation to reach 14,000 GW by 2050 from 780 GW in 2020.  With ambitious decarbonization goals in many economies and efforts to reduce the levelized cost of energy, this seems reasonably achievable. CSIQ boasts ~20 GWp of project pipelines in solar, globally. Its project development sales are expected to achieve a CAGR of 25% in the next five years to 2025. Its operations and maintenance services (O&M) and asset management portfolio is expected to register 11.0 GWp of projects in 2025 (from 2.2 GWp in 2020).

Figure 3. CSIQ Boasts ~20 GWp of Solar Projects Pipeline:

Source: Company Reports

Battery Storage Pipeline: CSIQ reaps synergies from diversified solar business model and global presence with plans to deliver 1 GWh of battery storage projects in the US in 2021, reaching 10% market share. Its Global Energy segment saw onboarding by power purchasers through contract signing. Its battery storage project development pipeline stood at 8.8 GWh (globally).

Historical Financial Trend:

CSIQ provides integrated solar systems catering to the premium market that contains the solar module, inverter, and battery systems. The share of distributed generation to total revenues stands tall for CSIQ with over 50% compared to 38% by the industry. An increase in the share of distributed generation mix provides greater demand stability and commands a higher average selling price. CSIQ commands a premium to the tune of 340 bps in gross margin vis-à-vis its peers, drawing the benefits of vertical integration, a higher share of the distributed generation mix, and geographic diversification.   

Figure 4. CSIQ Maintained Healthy Gross Margin Ahead of Peers:

Source: Company Reports

CSIQ made the record high solar module shipments reaching 11.3 GW in FY20. The increase in solar power project revenues in China was partly offset by reducing the average selling price of modules ($0.29/W in FY19 vs. $0.25/W in FY20). The cost of module manufacturing increased to $0.219 per watt in FY20 resulting in erosion of gross margin over pcp. Operating income saw a 15% decline due to increased shipping and transportation costs, partly offsetting lower R&D spend and a decrease in impairment of certain manufacturing assets.

Figure 5. FY20 Key Financial Highlights:

Source: Company Reports

CSIQ unlocks cash through the sale of developed power projects to third-party or realizes recurring cash flows through long-term contracts (PPAs). It helps to translate steady cash flows. The company witnessed stretched payables that lead to working capital inflows historically. It had experienced an improvement in collection days, and inventory conversion leads to better cash flows. The company kept its capex to revenues in the range of 8%-9% historically. CSIQ continues to deleverage its balance sheet with net debt to EBITDA falling from 2.9x in FY19 to 2.4x in FY20. It had closed the period with a cash balance of $1.18 billion as of December 2020. It had raised $222.8 million of proceeds from the issuance of convertible notes.

Top 10 Shareholders: The top 10 shareholders together form ~52.47% of the total shareholding. Qu (Shawn Xiaohua) and Invesco Capital Management LLC hold a maximum stake in the company at 23.51% and 5.88%, respectively.

Figure 6. Top 10 Shareholders

Key Metrics: The company’s revenues were impacted by declining average selling prices of solar modules. Its solar projects development provides steady revenues with long-term PPAs. CSIQ intends to increase the share of recurring revenues with a healthy project development pipeline. The benefits of vertical integration paved off with gross margin reaching healthy levels over the past five years. CSIQ saw cash cycle days increasing as the company off late started to pay off suppliers (less stretching).

Figure 7. Key Financial Metrics

Growth and Liquidity Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Outlook: CSIQ is expecting to show revenues from its energy storage business in the upcoming quarters. Through its Global Energy segment, CSIQ plans to fully integrate batteries within the solar development projects. It is well-positioned to capture utility-scale energy storage projects. For Q1 FY21, CSIQ expects module shipments to be in the range of 3.0 GW to 3.2 GW. Total revenues are expected to be in the range of $1.0 billion to $1.1 billion. Gross margin is expected to be between 16% and 18%. CSIQ reaffirms its full-year FY21 guidance with total shipments to be 18 GW to 20 GW and deliverable for solar power projects in the range of 1.8 GW to 2.3 GW. Revenue is projected to reach $5.6-$6.0 billion in FY21. In the recent development, CSIQ has begun rolling of high-efficient solar module with a power output of up to 665 W. The company’s listing of its China subsidiary, CSI Solar Co. Ltd., is going as per the plan. It had roped several institutional investors as part of the pre-IPO placement. The company expects the official listing of its subsidiary by Q2 FY21 (i.e. CY2022).

Key Risks: CSIQ experienced margin pressure from increasing polysilicon and glass prices in the recent period. Rising freight costs also impacted its FY20 operating profit. The silicon production capacity has expanded rapidly, leading to an oversupply of solar wafers, solar cells, and modules. It may put downward pressure on the selling price of solar modules. The offtake of solar panels is influenced by regulation on tax credits and rebates by the federal government. CSIQ is exposed to currency fluctuation risk as its revenues were denominated in diverse currencies while it had paid its expenses and costs in Renminbi. CSIQ requires sizeable funding for the development of solar projects, which later sold. Delay in funding and increase in project financing costs may impact cash flows and profitability.

Valuation Methodology: EV to EBITDA Multiple Based Relative Valuation (Illustrative)

EV to EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: CSIQ has delivered 3-month and 6-month negative returns of ~22.02% and ~2.74%, respectively. The stock is trading above the average of the 52-week high price of $67.39 and 52-week low price of $15.83. On the technical front, the stock has a support level of ~ US $41.365 and a resistance level of ~US $44.208. We have valued the stock using EV to EBITDA multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a premium compared to its peer median EV/EBITDA (NTM Trading multiple) considering the recent fundraising of $208 million through the issuance of the Japan Green Infrastructure Fund that helps to shore up capitalization. CSIQ has a solid pipeline of ~20 GWp of solar projects and ~8.8 GWh of battery storage development project. For this purpose, we have taken peers such as First Solar Inc. (NASDAQ: FSLR), SunPower Corp (NASDAQ: SPWR), Enphase Energy Inc. (NASDAQ: ENPH), to name a few. Considering the increasing trend in module shipments, integrated operations, strong liquidity, and financing flexibility, we give a “Buy” recommendation on the stock at the current market price of US $42.91, up 0.75% on April 20, 2021.

 

CSIQ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.