Canadian Solar: Overstated Tariff Fears Offer Excellent Pay-Off

seekingalpha04-25

Canadian Solar is one of the largest solar panels manufacturer in the world.The company's subsidiary, Recurrent Energy, secured a $500m investment from BlackRock, providing financial and reputational ...

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00:15 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4685680-canadian-solar-overstated-tariff-fears-offer-excellent-pay-off><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Canadian Solar is one of the largest solar panels manufacturer in the world.The company's subsidiary, Recurrent Energy, secured a $500m investment from BlackRock, providing financial and reputational ...</p>\n\n<a href=\"https://seekingalpha.com/article/4685680-canadian-solar-overstated-tariff-fears-offer-excellent-pay-off\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0323240290.USD","symbol_name":"HSBC GIF GLOBAL EQUITY CLIMATE CHANGE \"AD\" 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Energy A2 SGD-H"},"translate_title":"加拿大太阳能：夸大关税的恐惧提供了极好的回报","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"FSLR":1,"CSIQ":1,"BLK":0.9},"content_text":"Canadian Solar is one of the largest solar panels manufacturer in the world.The company's subsidiary, Recurrent Energy, secured a $500m investment from BlackRock, providing financial and reputational value.CSIQ faces risks due to its heavy dependence on China for production and potential tariffs on Chinese imports, but the company is taking steps to mitigate these risks.   alvarez/E+ via Getty Images Canadian Solar (NASDAQ:CSIQ) is a Canadian company, the fifth largest solar panels manufacturer globally with shipments totaling 30.7GW in FY23 and a nameplate capacity of 57GW as of December 2023. Through its subsidiary Recurrent Energy, it is also involved in the development and sale of solar and battery storage systems, O&M, as well as electricity sales through its proprietary PV generation facilities. The stock price of CSIQ declined by 60% from April 2023 to April 2024, mainly due to concerns related to new tariffs on U.S. imports of Chinese-manufactured solar panels and the challenging environment of high interest rates, which represent significant headwinds for the company. Despite these challenges, CSIQ has experienced substantial revenue growth year after year, diversifying its range of products sold and delivering a profit in each of the past 10 years. Moreover, in January 2024, Recurrent Energy secured a $500m preferred equity investment convertible to common equity from BlackRock. The capital raised could be used to sustain subsidiary’s expansion, enabling BlackRock to achieve a 20% stake in Recurrent Energy. This investment would provide CSIQ with an important partner, both financially and in terms of reputation. For these and other reasons discussed in depth within the article, I rate Canadian Solar as a buy. If interested in the world of renewable energy, on EuroEquity Research you'll find several analyses of companies operating in it. CSI solar snapshot CSI Solar is a 62% subsidiary of CSIQ as a result of its listing in Shanghai on June 9, 2023. It specializes in the production of Ingots, Wafers, solar cells, and solar modules, with an annual module manufacturing capacity of 57GW as of December 2023. In FY23, it achieved sales of 30.7GW, compared to 21.1GW in FY22, representing 78% of total revenue, up from 74.1% in FY22. Management anticipates solar module sales in the range of 6.1GW to 6.4GW in Q1 2024, and 43GW to 47GW in FY24, reflecting the global surge in distributed and utility-scale PV systems demand. It launched Solbank in FY22, entering the battery storage business, targeting utility-scale systems. It sold 1.14GWh (-36.3% YoY) of storage capacity in FY23, with a manufacturing capacity of 10GWh as of December 2023, projected to double to 20GWh by December 2024. The Battery Storage Solutions segment reported disappointing results in FY23, showing a 44.31% decrease in revenue due to 760MWh not accounted for in FY23 financial statements and because of the decline in battery prices following lithium price collapse. Management has released Q1 2024 guidance of 1GWh and between 3.5GWh and 4GWh in FY24 (excluding 2.5GWh intercompany operations). They reported multi-year contracted backlog of $2.6B as of Jan. 31, 2024. CSI solar is CSIQ's main revenue source, contributing to 93.46% of revenue in FY23, up from 89% in FY22. It achieved a gross margin and EBIT margin of 15.3% and 6.3% respectively in FY23, compared to 16.5% and 4.9% in FY22. The EBIT margin improvement can be attributed to a 19% fall in operating costs, despite a 5% increase in cost of sales.   CSIQ March 2024 Investor Presentation CSI Solar geographic revenue breakdown shows good diversification. 40% of revenue are originated in Asia (including 28% in China), 22% in North America, 13% in South America, and 25% in EMEA. CSI solar is also facing significant risks as well. Over 75% of solar modules manufacturing is located in China, 19% in Thailand, and only a 3.5% in the United States. Tariffs on the import of solar panels from China could have a significant impact on CSI's economic performance and consequently on CSIQ as well. The picture gets even worse considering 100% of Ingots & Wafers manufacture is in China. New investments in Texas and Indiana between FY23 and FY24 will partially mitigate this risk, increasing U.S. manufactured solar module to 8% (5GW) of total capacity (61GW) by December 2024. CSIQ SEC Filings and Author's Analysis Recurrent Energy Snapshot Following $500m deal closed with BlackRock, CSIQ holds an 80% stake in Recurrent Energy. The subsidiary is focused on the development and sale of utility-scale PV plants, operating internationally with 1.9GW under construction and 5.5GW backlog as of Jan. 31, 2024. Additionally, CSIQ owns a 1GW portfolio of utility-scale PV systems in operation (748MW in South America, 191MW in China, and 59MW in Japan), as well as 0.6GWh of storage systems through which it sells electricity, typically through Power Purchase Agreements (PPAs). Recurrent Energy revenue experienced negative performance, declining from 21.3% of total revenue in FY21 to 6.54% in FY23. Despite this, both gross margin (41.1%) and operating margin (19.4%) outperformed in FY23, compared to 19.6% and 9.8% in FY22. Moreover, the partnership with BlackRock seems likely to enable Recurrent Energy to achieve a turnaround and return to revenue growth in FY24. In my opinion, the business unit is characterized by 3 major tailwinds: (1) Recurrent revenues consisting of Electricity Revenue and O&M services (8.2 GW contracted projects) performed positively between FY21 and FY23. These activities can provide more stability to Recurrent Energy's revenue and improve margins as they have higher marginality compared to the Solar Power Project Sales segment. (2) The BlackRock partnership will contribute to changing the business model, making it less capital-intensive and increasing the share of projects retained. This represents a positive driver in terms of marginality, as explained in the previous point. CSIQ March 2024 Investor Presentation (3) Recurrent Energy has a backlog of 3.1GWh of storage capacity and 0.4GWh under construction. The integration of PV power plants with storage systems creates cost and revenue synergies that may help to improve margins. FY23 financial statement summary and forecasts CSIQ's revenue grew 1.94% YoY in FY23, at a slower pace than FY22 and FY21. The slowdown was mainly due to the sharp decline in revenue from Recurrent Energy, as well as lower solar panels and lithium battery prices. Gross margin remained flat at 16.81% in FY23 compared to 16.93% in FY22. EBIT margin increased to 5.95% in FY23, up from 5.54% in FY22, primarily due to an 8.9% drop in operating expenses. This decrease was driven by a 33.8% Selling and Distribution expenses reduction, partially offset by a 44.4% increase in Research and Development expenses and a 28.2% increase in General and Administrative expenses. CSIQ reported a profit of $274m, or a net income margin of 3.6% in FY23 (vs 3.21% in FY22). CSIQ Annual Reports and Author's estimates For FY24 I expect revenue of 8.7B, at the low end of the guidance released by management which expects revenue between $8.5B and $9.5B. The loss reported in Q4 2023 could be symptomatic of lower profitability during FY24, and so I estimated a profit of $199m (net income margin of 2.29%) with a forward PE of 4.67x compared to First Solar (FSLR) FY24 forward PE of 12.87x, pointing out CSIQ undervaluation. Higher margins from Recurrent Energy and more stable solar panel prices between FY25 and FY26 should result in a further increase in earnings expected to be in the $300m range by FY26, resulting in a FY26 forward PE around 3x. CSIQ is financially sound, with net debt of $1.6B and a NetDebt/EBITDA ratio of 2.68x as of December 2023. The company has a significant cash buffer consisting of $1.9B in cash and $1B in restricted cash as well as solar power systems worth $959m and PP&E worth $3B, evidencing capital strength. A further measure of current undervaluation is the price-to-book of 0.36x as of December 2023. CSIQ generated $684 million in OCF in FY23, used to cover a portion of the $1.52 billion development CAPEX allocated to the construction of solar module manufacturing facilities in the U.S. and to increase production of Ingots & Wafers in China. Cash outflow was partially funded by $928m raised through the listing of CSI Solar in Shanghai. During FY24, I anticipate a negative FCF due to investments in supply chain enhancement and the implementation of a new strategy to retain more PV utility-scale systems.   CSIQ Annual Report and Author's Analysis Comparing Canadian Solar and First Solar Margins The comparative analysis between Canadian Solar and First Solar clearly shows U.S. company’s advantage over CSIQ in terms of marginality, except in FY22 when the price increase of monocrystalline silicon solar panels exceeded that of thin-film solar panels, resulting in CSIQ's better margins. Companies SEC Filings and Author's Analysis Moreover, the gap became even more pronounced in FY23 due to the Inflation Reduction Act, which provides a manufacturing production credit (Section 45x) for solar modules produced within the U.S. territory, ensuring a competitive edge for First Solar over CSIQ. First Solar FY23 Financial Statement Once the construction of the Texas and Indiana manufacturing plants is completed, Canadian Solar will also be able to take advantage of this credit. However, its impact on FY24 - FY25 economic results is expected to be smaller. By the end of FY24, CSIQ will produce only 5GW out of its 61GW production capacity in the United States, accounting for just 8% of total PV production compared to First Solar's 39% (FY24 expected production). Main Risks The main risk of CSIQ involves its heavy dependence on China, where most of its production is located. Tariffs imposed by the U.S. government could lead to a large negative margins impact. The dependence of CSIQ on China makes the company highly reliant on Chinese government decisions, which could have negative economic impacts. Additionally, generating globally diversified revenues, such concentrated production could lead to a significant increase in logistics and transportation costs in the event of supply chain issues, as occurred in the wake of the pandemic. The debt of CSIQ is mainly financed by Chinese banks, as visible from the FY22 Financial Statement. CSIQ FY22 Financial Statement Maxeon has filed a patent infringement lawsuit against Canadian Solar on March 28, 2024. The outcome of this lawsuit could have negative economic and financial impacts. The high CAPEX planned by the company, if not coupled by improved Operating Cash Flow (OCF), may lead to a significant increase in debt, which would be a negative factor in a high interest rate environment, or to capital dilution. CSIQ is extremely sensitive to changes in silicon and lithium prices. An increase in the price of these two materials may result in lower margins. Discounted Cash Flow I conducted a DCF analysis to assess CSIQ's intrinsic value, returning a valuation of $20.8 per share, about 45% above the current market price. Beta = 1.26x obtained from Investing.com MRP (6.6%) and Risk-Free rate (3%) were obtained using 2024 Fernandez's data referring to China, the country where solar panel manufacturing facilities are located. It resulted in a cost of equity of 11.32%. WACC = 11.32%, was left equal to the cost of equity for prudential reasons because the cost of debt returned by interest expense to total debt ratio (3.12%) appears to be too low and therefore unreliable. g = 2% Author's Analysis & Estimates Conclusion In my opinion, the market has been overly severe with CSIQ, despite the various risks that characterize its business model. Such low forward PE multiples and EV/EBITDA seem more consistent with a company on the edge of bankruptcy than with the fifth-largest global manufacturer of solar panels. Moreover, the anticipated strong increase in PV demand in the coming years would positively impact CSIQ economic performance. BlackRock's $500m investment in Recurrent Energy may provide benefits in terms of capital inflows and reputation, presenting a new growth opportunity for the subsidiary. For these and other reasons that I discussed in depth within the article, reinforced by the DCF results, I rate Canadian Solar as a buy. In my opinion, the risks underlying the investment don't justify such a discount valuation.    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