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We maintain our recommendation on Canadian Solar Inc. ( CSIQ - Analyst Report ) at Neutral. The company is a low cost, vertically-integrated solar module producer with predominantly China-based manufacturing assets.
Canadian Solar caters to a geographically diverse customer base spread across its key markets in Germany, Spain and the U.S. as well as emerging market opportunities in France, the Czech Republic, Italy, South Korea, Canada, Japan and China. Its crystalline silicon solar module product line is more diversified than its peers with modules made of medium power, low cost, upgraded metallurgical-grade silicon, or UMG-Si, as well as high efficiency, high power output monocrystalline modules and a range of specialty products.
Canadian Solar remains focused on expanding its engineering, procurement and construction (EPC) and solar systems kits business to more than 25% of total revenue in fiscal 2012 and greater than 40% of revenue in fiscal 2013.
Canadian Solar witnessed a steady rise in its revenue base over the years from a mere $18.3 million in fiscal 2005 to approximately $1.9 billion in fiscal 2011. Despite the challenging global financing environment that leads to customer demand uncertainty, the company anticipates flat revenue year over year in fiscal 2012.
The optimism stems from the company’s ambitious product shipment target range of approximately 1,800 MW to 2,000 MW in 2011, bounding from 1,323 MW shipped in 2010. Shipments for the full year 2011 were up 65%, with a 23% increase in the fourth quarter. The strength was widely distributed, with positive growth in the U.S., Europe, China and India in 2011.
On the flip side, however, Canadian Solar has been reeling under weak prices owing to the supply glut. Due to a steep drop in average selling prices, the company’s gross margin fell to 9.6% in fiscal 2011 compared with 15.3% in fiscal 2010. Gross margin was 8.7% in the fourth quarter of 2011, compared with 17.0% in the fourth quarter of 2010. Looking forward, the company expects gross margin to decline further in the first quarter of 2012 coming in between 5% and 8%.
Federal, state and local government bodies in many countries have provided subsidies in the form of feed-in tariffs, rebates, tax incentives and other incentives to end-users, distributors, systems integrators and manufacturers of photovoltaic products. Faced with struggling economies, regulators in Europe and the U.S. may opt to be tight-fisted over spending on alternative energy projects. This will not be welcome news for Canadian Solar, which generated approximately 65.0% and 17.5% of its fiscal 2011 revenues from the European and the American markets, respectively.
Furthermore, adjusted loss per ADS of $1.42 in its fourth quarter of 2011 was way below the Zacks Consensus Estimate for a $0.40 loss. Given the industry-wide high inventory level, we do not foresee any short-term improvement in margins of the company.
We advise investors to remain on the sidelines for now. Our Neutral recommendation is supported by a Zacks #3 Rank, which translates into a short-term rating of Hold. The company competes with First Solar Inc. ( FSLR - Analyst Report ) and SunPower Corporation ( SPWR - Analyst Report ) .
Based in Ontario, Canada, Canadian Solar, together with its subsidiaries, engages in the design, development, manufacture and marketing of solar cell and solar module products that convert sunlight into electricity for various domestic and international uses.
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