About Company
Canadian Solar Inc. (CSIQ) is one of the world's largest manufacturers of solar panels and consumables. The company accounts for 10% of the global solar module market. Canadian Solar operates in two segments: CSI Solar manufactures and sells inverters and batteries for energy storage, and Global Energy is focused on developing projects related to energy storage. The company was founded in 2001 and is headquartered in Guelph, Canada.
What's the idea?
- Strong competitive positioning has enabled Canadian Solar to grow significantly faster than the market and increase its share.
- Despite the price increase, the company's management is seeing strong demand for products within the CSI Solar segment.
- Through long-term service agreements for energy storage systems, Canadian Solar can secure a steady cash flow.
- With projects already contracted, Canadian Solar alone can achieve a multiple of its revenue growth in the Global Energy segment.
- The stake in Crimson Storage will not only make a tangible contribution to Canadian Solar's operating results, but will also have a significant impact on the company's reputation.
- Canadian Solar is trading at a discount to the industry average. According to Wall Street consensus, the upside potential is more than 30%.
Why do we like Canadian Solar Inc. ADS?
Reason 1. Industry opportunity
According to IHS Markit, photovoltaic capacity worldwide will double in the next five years and the global market for solar projects will grow at a compound annual growth rate (CAGR) of 5% over the same period. The main drivers of industry growth are high hydrocarbon prices, concerns about global warming, and significant technological advances that have made electricity produced by solar plants cheaper than that produced from less "clean" energy sources.
Cost of electricity depending on energy source
Europe's energy transformation is also an important driver for industry growth. Under the REPowerEU plan, the EU plans to accelerate the transition to renewable energy. REPowerEU envisages capacity growth to more than 320 GW of new solar photovoltaic installations by 2025 (more than double today's level) and to nearly 600 GW by 2030. Germany, the EU's largest economy, aims to more than triple its solar capacity to 200 GW by 2030.
Projected solar PV capacity
Due to its vertical integration and leading position in the solar module market, Canadian Solar has a strong competitive positioning that has enabled the company to grow significantly faster than the market and increase its share. In 2021, for example, Canadian Solar's share of the solar module market grew by two percentage points to 8%, and it reached 10% in the most recent reporting period. The company's management expects the market share to grow to 15% within the next 2-3 years.
Company share in the solar module market
Reason 2. The potential of the CSI Solar segment
Within the CSI Solar segment, the company manufactures, sells, installs and services inverters (converts direct current to alternating current) and battery energy storage systems.
In Q2, CSI Solar delivered 5.1 GW of solar modules, 800 MWh of batteries and generated $1.8 billion in revenue, a record for Canadian Solar. Despite higher prices, the company's management notes strong demand for its products. As a result, the company has energy storage systems in development with a combined capacity of 11 GW at the end of the last reporting period.
Energy storage systems in development
Storage systems represent a significant opportunity for the company, as its customers typically enter into long-term service agreements with Canadian Solar with fixed, regular payments. Today, the company serves projects with a combined capacity of more than 3.1 gigawatts, but management plans to reach 20 gigawatts by 2026. In this way, Canadian Solar can secure a sustainable cash flow in the future.
With increasing demand and supply consolidation, CSI Solar's strategy has been to expand capacity and increase the level of vertical integration to increase market share, enhance pricing power and improve profitability. Indeed, the company's capacity has gradually increased over time. Module capacity is expected to grow from 27.9 GW in H1 2022 to 50 GW by the end of 2023.
Company production capacity
Reason 3. Growth of the Global Energy segment
Within the Global Energy segment, the company specialises in the development, financing and construction of solar power plants and energy storage systems around the world. The company is one of the global leaders in this field.
In the second quarter, the Global Energy division completed about 880 MW of power projects in Australia, the US, Japan and the UK. At the same time, the capacity of contracted solar projects under operation and construction is 5.6 GW, including backlogs; the total capacity of all the company's anticipated solar projects is 26 GW.
Canadian Solar's global solar portfolio
In this way, Canadian Solar can secure a multiple of its revenue growth from already contracted projects alone. Management expects revenue from solar projects to grow at an impressive compound annual growth rate (CAGR) of 50% until 2026.
In mid-October, Canadian Solar and its partners launched Crimson Storage, the world's largest single-phase 350MW energy storage project that powers California's energy system. A fund managed by Axium Infrastructure US owns 80% of Crimson Storage, while Recurrent Energy — a subsidiary of Canadian Solar and the project developer — retains 20% ownership. Agreements are already in place with California's largest utilities, Southern California Edison and Pacific Gas and Electric Company. The stake in Crimson Storage will not only make a tangible contribution to Canadian Solar's operating results, but will also have a significant impact on the company's reputation.
Financial indicators
The company's financial results for the last 12 months can be summarised as follows
- TTM generated revenue of $6.23 billion, an increase of 19.8% year-on-year from 2021. The figure increased in both the CSI Solar and Global Energy segments.
- Gross profit rose by 18.6%: from $927 million to $1.01 billion. The gross margin was 17.38% against 17.56% for the year.
- Operating profit increased by 30.2%: from $205 million to $267 million. Operating margin increased from 3.88% to 4.22%.
- Net profit rose from $110 million to $175 million. Net profit margin increased from 2.08% to 2.77%.
Trends in the company's financial results
Company margin dynamics
The financial results for H1 2022 are as follows
- Revenue rose 41.5% year on year, from $2.52 billion to $3.57 billion.
- Gross profit increased by 45.5% year-on-year: from $379 million to $552 million. Gross margin increased by 0.42 percentage points: from 15.06% to 15.48%.
- Operating profit was $132 million compared to $70 million a year earlier. The operating margin increased from 2.77% to 3.69%.
- Net profit rose from $32 million to $98 million. Net margin increased by 1.46 percentage points: from 1.27% to 2.74%.
Trends in the company's financial results
At the end of the latest TTM reporting period, operating cash flow was -$100 million compared to -$408 billion at the end of the year. The negative operating cash flow is due to the fact that since the beginning of 2021, due to supply chain issues and increased demand, management has built up strategic inventories and thereby increased net working capital.
Free cash flow on equity rose from -$838 million to -$502 million. The deeply negative figure is due to a massive capital expenditure programme, which is expected to significantly improve the efficiency of operations in the future.
Company cash flow
Canadian Solar has a healthy balance sheet: total debt is $2.56 billion, cash equivalents and short-term investments account for $1.05 billion and net debt is $1.5 billion, which is 2.5 times TTM EBITDA (Net debt/EBITDA — 2.49x).
Evaluation
Canadian Solar trades at a discount to the industry average: EV/Sales — 0.83x, EV/EBITDA — 9.82x, P/E — 14.60x, P/B — 1.15x.
Comparable estimate
The minimum price target from investment banks, set by Wells Fargo, is $36 per share. Oppenheimer, on the other hand, values CSIQ at $56 per share. By consensus, the fair market value of the stock is $45.40 per share, suggesting a 35.72% upside.
Price targets of investment banks
Key risks
- The renewable energy industry is at an early stage of development. The emergence of disruptors on the market could lead to a significant redistribution of market positions.
- Although Canadian Solar is headquartered in Canada, its production facilities are mainly concentrated in China. If trade wars escalate, the company's financial performance could decline significantly.
- The company has low margins, which pose a risk to shareholder value in the current macroeconomic turbulence. For example, an increase of a few percentage points in the cost of sales could result in a net loss.
- Negative cash flow coupled with large-scale capital investment can lead to dilution of shareholder shares.