The Future is Sunny for Canadian Solar

Price $39.88                          Growth Holding                        August 2, 2021

  • Leading global manufacturer of solar panels.
  • Solar is becoming cost-effective without subsidies.
  • Significant tailwinds as green energy spend accelerates.
  • Favorable legislation and technology improvements are allowing the price per KWh to decrease and planning to become more accessible.
  • Solar electricity to benefit from a global push for green energy.
  • Solar to benefit from both distributed generation and solar farms.
  • Long PPA contract length and large >5GW project backlog.

Investment Thesis

Canadian Solar (CSIQ) is an end-to-end solar provider, from manufacturing to project development to energy storage and maintenance. Canadian Solar offers a hyper-scalable model, from tiny individual homes to massive Gigawatt (GW) scale utility projects. For a sense of scale, a single megawatt (MW) of solar can power about 200 US homes; a gigawatt can power about 200,000.

Solar energy only has a 3% market penetration. However, to meet the climate targets of the Paris climate agreement, solar’s market penetration will need to be near 30%, around 440GW of annual installations from now until 2050. The state of Florida, for example, has around 67GW of power generation capacity at any given time – with only 0.6GW being allocated from renewables thus far. This puts Canadian Solar in a position with massive growth tailwinds; the cost per Kilowatt-hour (KWh) has fallen, making solar energy not only green but cost-effective. Management expects 65% revenue growth in 2021. We believe the solar industry is at the beginning of a multidecade spending boom. We believe Canadian Solar, with its leadership position, is poised for significant growth over the next several decades.

What is Canadian Solar?

Canadian Solar is one of the leading firms in solar energy, being one of the oldest. Canadian Solar has expertise in developing the solar value chain, operating with offices in 23 countries and cells in 150 countries. Currently, Canadian Solar operates two divisions: Global Energy and CSI solar.

CSI solar is the retail arm, manufacturing and selling solar modules and energy solutions to consumers, firms, and governments – either in whole or with purchase plan agreements (PPAs). This is estimated to be 18-20GW in solar cells shipped in 2021, with 55GW shipped since inception. CSI solar is also beginning to ramp up battery production, expecting to sell around 850MWh capacity in 2021.
Global Energy is Canadian Solar’s project development arm, focusing on building and operating solar power plants and battery storage worldwide.

Investor Deck May 2021. 1 GWp = 1 GW. GWp is GW of production in optimal solar conditions.

Projects in all stages of development amount to a total of 21 GW. Currently, Canadian Solar has approximately 500 MW of capacity installed, with 1.8 GW presently being constructed, 3.7 GW awaiting construction to begin, and 15.4 GW still in planning, permitting, or preproduction. The company’s pipeline for growth is beaming with sunny opportunities.

On top of this, they are building a massive battery storage network, with 17GWh (Gigawatt-hours) of storage capacity currently planned.

Expansion and R&D

Currently, CSIQ has a new solar cell entering production. This new cell boasts a reported 24.5% increase in efficiency, with minimal extra cost. In addition, it is available in options that allow for maximum surface area for limited space locations, a black glass option for maintaining residential aesthetics, and a large scale for solar farms.

On top of this, they have begun to significantly ramp up battery development as demand for low-downtime solar solutions increases. In 2016, there were only 6 countries with greater than 1GW markets for solar energy. Now there are 20 and projected to rise as climate targets draw near and solar spending booms.

Globally, CSIQ has a significant base of customers in over 150 countries.

In North America, CSIQ has significant tailwinds. Legislative advantages and ESG promises from US firms allow CSIQ to capture better value from solar and storage. In addition, the average PPA contract length in the United States is 12-20 years, making it an attractive market for sustained cash flows.

Latin American growth is primarily driven by public auctions and private PPAs, averaging 15 and 20 years. Brazil has 2GW of projects in the backlog, and the infrastructure participation fund FIP-IE provides an excellent expansion opportunity, with an estimated 600MW of total volume support. In addition, Chile, Columbia, the Dominican Republic all have significant expansion opportunities, with CSIQ already having projects slated there.

Europe has significant zero carbon emissions targets, with many firms under stringent regulation to reach them. On top of this, many legislative bodies in Europe (Italy in particular) have begun to significantly streamline the process of retrofitting existing buildings to support solar. However, the average PPA contract length in Europe is only 10 years.

Asia, and in particular Japan, has seen large pushes toward green energy. With PPA contracts are on the upper end of 20 years and Japan having multiple infrastructure investment funds, CSIQ has a solid fundamental base for growth. CSIQ has also begun an IPO in China of its CSI Solar division, hopefully allowing massive expansion there.

Risk

While glass prices have helped significantly reduce some of the costs of solar cells, increasingly rare and expensive resources have become more expensive: polysilicon and cobalt. Polysilicon prices have risen 183% since 2020, and while some of this is a result of COVID-19, increasing demand for the resource will drive scarcity.

CSIQ operates in numerous countries, which can lead to significant currency risk. Particularly in China, where CSIQ has a large manufacturing operation. The exchange rate between the countries CSIQ operates in, and RMB (Chinese Yuan) has not been favorable due to COVID-19 and trade tensions. In addition, Canadian Solar’s founders and some of the senior management team are Chinese, and much of CSIQ’s production is in China. This associates the risks of China with CSIQ even though the company is officially Canadian.

Metrics


Total shipments grew by 42% in Q1, to 3.1 GW, driving a 30% increase in revenue quarterly. Both of these mark records despite complex pressures in the pricing of raw materials. Growth is explosive, with 50% growth in active projects. The company has been decreasing the debt on the books. Debt is often accumulated as CSIQ finances large projects and is reduced upon the sale of the projects.

May 2021 Investor Presentation

Canadian Solar (CSIQ)

E2021

E2022

E2023

Price-to-Sales

0.39

0.38

0.36

Price-to-Earnings

14.4

11.6

11.5

EV/EBITDA

11.4

7.8

7.6

Over the remainder of the year, CSIQ expects to ship 65% more modules, to amount to a 70% increase in sales.

PROJECTED

2021

Canadian Solar

(CSIQ)

JinkoSolar
(JKS)

SunPower

(SPWR)

First Solar

(FSLR)

Price-to-Sales

0.39

0.40

2.54

3.47

Price-to-Earnings

14.4

17.2

45.2

27.9

Market Cap (Billions $)

2.50

2.72

4.37

9.82