Canadian Solar Will Follow Industry Recovery
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the world’s leading solar panel manufacturers, Ontario based Canadian Solar Inc. (NASDAQ: CSIQ) released Q2 2012 results on August 15th. Its revenues increased slightly by 6.9% from the previous quarter to $348.2 million but declined 27.7% from Q2 2011. In the past year, Canadian Solar’s shares have fallen 50.3%, compared to the SPDR S&P 500 ETF (NYSEMKT: SPY) which is up by 26.1%.
Canadian Solar missed analyst’s estimates of a loss of $0.29 per share posting a $25.5 million loss, $0.59 per share. The business missed their expected module shipment target by 18MW selling only 412MW. The company tried to soften the blow by releasing pre-earnings guidance of 410-420MW on 31st July.
Falling from the Sky
Based on the company’s reported revenues and module shipments, its average selling price (ASP) comes out to $0.84 per watt. In the conference call, management said that manufacturing costs touched $0.67 per watt, coming down from $0.73 which will continue to drop. Management is confident they will reach their year-end target of $0.60 per watt. Most of Canadian Solar’s Chinese competitors have not released their Q2 results yet; however, their cost per watt is expected to be around $0.70. U.S. based First Solar (NASDAQ: FSLR), released their 2nd quarter results earlier this month, reporting a cost per watt of $0.72 and not competitive with Trina Solar (NYSE: TSL) and Suntech (NYSE: STP) who both had hit the $0.65 per watt level when the U.S. government slapped the 31% anti-dumping tariff on them earlier in the year.
The significant decline in revenues over one year is endemic to a solar industry struggling to make it without government subsidy as average selling prices continue to fall on massive over-supply and falling demand. Dozens of firms have filed for bankruptcy, including Germany based Q-Cells, once the largest solar panel manufacturer in the world.
This clearing out of the smaller manufacturers, however, will eventually allow the survivors to improve margins, especially at these ASPs, where the cost of modules at the retail level can begin to make solar-augmentation for the average household a cost-effective reality.
The China Syndrome
Canadian Solar announced earlier in August that it had signed a $94 million loan agreement with China Development Bank (CDB). The latter is a state-owned financial institution headed by Chen Yuan, a senior member of the Communist Party of China. There aren’t many North American solar companies that can secure a line of credit from a government owned Chinese bank.
In the current tumultuous environment for the industry, with U.S.-imposed tariffs on Chinese solar panel manufacturers and the E.U. considering similar action after SolarWorld AG’s complaint, Canadian Solar seems to be very well placed. An Ontario based company that is listed in NASDAQ but manufactures practically everything in China, its operations are threatened neither by U.S. nor by E.U.’s actions.
It is China’s plan to put in 50GW of installed by 2016. Japan has recently implemented a FIT (feed-in-tariff) of $0.50 per KWhr to accelerate deployment of massive solar and other renewable energy sources to lessen the country’s reliance on nuclear and petroleum power. FIT’s are all the rage now but with the winding down of them in Germany we can see that the industry is still producing energy at costs that cannot adequately compare to other thermal solutions. Regardless, production costs are dropping quickly and cell efficiencies are rising so the trend is moving in solar’s favor as petroleum and natural gas will only increase in price per BTU extracted.
At present, however, the global solar industry continues to struggle and most firms are expected to report further losses in the future. However, there have been signs of a bottom being put in. Canadian Solar’s gross profit margins have improved to 12.4% from 7.7% in Q1 of 2012. The company expects them to fall to 2%-5% in Q3 due to excess inventory.
The U.S. firms protected by the tariffs, First Solar and Sunpower both posted profits in their most recent earnings but they will likely be shut out of the coming huge push by China due to the trade war with the U.S. Japan’s industry is well-established with a number of major players ready to supply locally.
For Canadian Solar their competitiveness in price along with their extensive ties with China place them in a good position for when the solar industry has its supply and demand fundamentals more in balance. There will be short to medium term weakness but the long-term fundamentals are finally looking like investment in solar energy production will be worth a look.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.