Canadian solar designs, develops, manufactures, and sells solar power products. Canadian solar operates in 2 main segments, Module and System Solutions (MSS), and Energy. Canadian Solar operates in North America, South America, Europe, South Africa, the Middle East, Australia, Asia, and Internationally.
The MSS Segment consists of the designing, developing, manufacturing, and selling their solar power products. These products include standard solar modules, specialty solar products and other products and accessories. This segment provides energy storage systems for commercial, residential and specialty applications.
The energy segment consists of the development and sale of solar powered projects, the operation of solar power plants and the sale of electricity to consumers. Canadian Solar has a fleet of power plants that have a capacity of 880.2 MWp. Canadian Solar’s primary energy customers are distributors, system integrators, project developers, and installers.
Canadian Solar was founded in Ontario, Canada in 2001. Since then, it has been listed on the NASDAQ under the ticker $CSIQ since 2006. Canadian Solar’s mission is to power the world with solar energy and to create a better and cleaner Earth for future generations to come.
In FY 2020 Canadian Solar generated $3.476B in revenue. This revenue was split between their 2 business segments with CSI Solar bringing in $2.75B, and their Global Energy Segment producing $726M in revenue. Canadian Solar had a gross margin of 19.8%. Furthermore, 47% of the total revenue came from Asian countries which has influenced Canadian Solar to IPO in the Chinese Markets later this year. In this market their biggest competitor is Jinko Solar, JA Solar, and LONGi Solar, all of which have an 100% bankability score which will be discussed later.
Canadian Solar’s revenue has grown by 19.84% between FY 2019 and FY 2020, during this time their gross margins fell to 19.8% (from 23.7%). However, Canadian Solar’s margins still remain higher than the industry average (18.7%).
Since 2009, the Levelized Cost of Energy (LCOE) for Solar Energy has fell from $359/MWh to $37/MWh (2020). LCOE is essentially the average total cost of building and operating a solar panel per each MWh of electricity generated over the solar panel’s lifetime. If the LCOE of providing solar power downtrend continues in the future, it will contribute to Canadian Solar having a higher gross margin. Furthermore, Canadian Solar’s module prices have decreased from $2/W to $0.2/W (90% decrease) as a result of the decreasing LCOE.
Canadian Solar is forecasting a CAGR of 14.2% in annual solar installations through 2023, and their revenue CAGR to be 25%. Additionally, over the past 4 years Canadian Solar has gained market share quickly, taking their market share from 6% (2018) to 11% (2021), this has resulted in Canadian Solar becoming the 4th largest solar company in the world as of 2021 (behind the 3 Chinese competitors previously mentioned). This could be very beneficial for Canadian Solar as if they are able to amass a large market share in a high-growth sector like solar, their future potential is massive.
With many firms and governments committing to some level of renewable energy, Canadian Solar will need to continue to meet demand. This help Canadian Solar to reach economies of scale and reduce their Operating Costs/Cost of Goods Sold (COGS). Some of these companies include Amazon, Verizon, Facebook, GM etc.
The Solar penetration rate is currently at 3% and is predicted to reach 30% by 2050. (Investor Presentation)
Canadian Solar is one of five solar companies to have 100% bankability over the past 4 years, and Canadian Solar has the largest in-house module capacity (storage) out of all solar companies. This helps to differentiate Canadian Solar from the many other solar companies currently on the public markets. Bankability is essentially a measure of a solar company’s level of manufacturing and financial performance. A 100% score on bankability means that a solar company has to maintain the highest level of manufacturing and financial performance for 4 consecutive years.
Investment Valuation and Plan:
Valuation: (All valuation models linked below as images)
In order to value Canadian Solar, I used a combination of a DCF model and 2 comparable (P/S, and P/E) analyses.
The DCF model gives Canadian Solar ($CSIQ) an estimated share price of $51.69, which would translate into a potential upside of 40.07% from current prices ($36.90). This figure was achieved using a WACC of 7.25%, CAGR of 25%, Tax Rate of 26.5%, and an interest expense decrease rate of 15.23%.
Price to Sales Comparable:
I used the P/S multiple as my main comparable because solar companies are highly volatile and not all of them are profitable. This helps to get a full set of figures to compare, which would not be the case by comparing EV/EBITDA and other multiples.
The average P/S ratio of Canadian Solar’s peers (competition) in 2021 is 12.01 compared to Canadian Solar’s P/S ratio of 0.94. This implies that Canadian Solar’s fair value compared to the market is $472.59, which implies an upside of 1180.74%. This figure seemed very high in general and in comparison, to my DCF model, so I decided to analyze another comparable. One reason why Canadian Solar’s P/S ratio is lower than the competition is that since 2020, many solar company’s revenues have slowed down or decreased, while Canadian Solar’s revenue grew.
When comparing the P/E ratio of Canadian Solar in comparison to its competitors, we arrive at a more realistic fair price of $114.90. This supports the argument that Canadian Solar is in fact undervalued and presents a good investment opportunity.
Any entrance into a position in Canadian solar between $34.33-$40 is a great entry and presents a great risk to reward ratio.
I would look to sell 25% of my position if the price reaches $51.69/share, then sell the rest of my position if the share price reaches $114.90.