Canadian Solar Sees Growth Ahead

Canadian Solar (CSIQ - Analyst Report) announced its un-audited financial results for the 1st quarter of 2009 ended March 31, 2009. In the reported quarter, net revenues were $49.5 million, compared to net revenues of $171.2 million for the year-ago 1st quarter of 2008 and $68.8 million for the sequential 4th quarter of 2008.

Shipments in the reported quarter were approximately 18 MW [megawatts], including 1.2 MW of solar grade e-Modules and 1.6 MW of solar cells and specialty solar application products.

The net loss for the quarter on a GAAP basis was $4.8 million, or $0.13 per diluted share, compared to net income of $18.6 million, or $0.57 per diluted share, for the 1st quarter of 2008 and net loss of $49.2 million, or $1.38 per diluted share, for the sequential 4th quarter of 2008. Non-GAAP net loss for the quarter was $0.10 per diluted share, compared to non-GAAP net income of $0.64 per diluted share for the 1st quarter of 2008 and non-GAAP net loss of $1.35 per diluted share for the 4th quarter of 2008, in all cases excluding stock based compensation costs.

For its 2009 outlook, Canadian Solar’s full year shipments are expected to be approximately 200 MW to 220 MW.

Following approximately 50% ROE [return on equity] in 2004 and 2005 due to strong operating profit margins, high asset turnover and low leverage at a low cost of debt, the company’s annual ROE declined significantly in 2006 as operating profit margins declined significantly, due to increases in cost of goods sold (particularly polysilicon) and SG&A expenses, as well as a decline in revenue per dollar of assets, substantially greater financial leverage and higher cost of debt. In 2007-08, however, ROE hovered around break-even, despite a loss at the operating level, and continued high leverage at a high cost of debt.

Looking ahead through 2009, ROE is expected to decline, primarily due to cost of debt, despite steady improvements in operating profit margins, declining leverage and bottom-line profitability.

CSIQ curtailed its expansion plans and reduced production due to a tepid demand scenario and credit risk from its customers.

In the short-run, declining margins, shrinking solar subsidies in key markets, lower shipments of modules, inventory write-offs and foreign exchange loss (mainly from the Euro) may adversely affect performance.

Going forward, however, re-insurgence of the German solar market, extension of product lines, material cost savings through the company’s more vertically-integrated production structure, higher captive generation of solar cells, long-term supply agreements and sharply declining polysilicon prices should collectively generate significant earnings growth.

Therefore, with a mixed outlook, we maintain our HOLD recommendation on CSIQ with a six-month target price of $16.00, representing 5.1% upside potential.

Canadian Solar, Inc. was incorporated in Canada in 2001. In the People’s Republic of China, the company has three manufacturing facilities CSIQ launched its initial public offering in November 2006. The company engages in the design, development, manufacture and sale of solar module products (ranging from 5 W to 300 W and using both polycrystalline and monocrystalline solar cells) that convert sunlight into electricity for various uses. Its products include a range of standard solar modules to general specifications for use in various residential, commercial and industrial solar power generation systems.