Canadian Solar is transforming itself from a mere solar panel manufacturer to a fully-fledged energy company, with solar power plants in more than a dozen countries on five continents. Its short-term project pipeline includes utility-scale solar plants in Japan, Canada, the United States, Brazil and China. Canadian Solar’s mid-term project pipeline includes 3.1 gigawatts in the UK, France, Germany, India, Australia and South Africa. By the end of 2015, Canadian Solar should have a power-generating capacity of close to 10 gigawatts.

Canadian Solar is a hybrid in the clean energy sector: it manufactures and ships photovoltaic modules worldwide (the “rooftop market”) in addition to building solar power plants in Europe, North America and the Asia-Pacific region (the “total solutions” market). CSIQ’s total solutions business promises to continue its current growth trend in the Americas and Asia. As profit margins on photovoltaic modules decline under pressure from Chinese competition and improved manufacturing techniques, only companies that offer utility-scale solar power plants can expect revenue growth.

Demand for solar energy is growing in Asia, Europe and Latin America. North and South America accounted for 49% of total revenues in Q1 2015, while Asia contributed 33% thanks to persistent demand in Japan. Sub-$50 WTI prices have not hurt Canadian Solar’s earnings, largely thanks to growing markets in Japan, Europe and continuing tax credits in the United States. Geopolitical tensions are rising between Europe and its primary supplier of oil and natural gas—Russia—and Canadian Solar is positioned to exploit that demand with its growing operations on the Continent, which currently accounts for 18% of Canadian Solar’s revenue.

Sub-$50 WTI: Implications beyond Energy Sector

The oil price has implications not only in the solar sector but in the oil, natural gas, transportation, and any industry with a high energy cost basis.

Canadian Solar (CISQ) is About to Launch a Dividend-Paying Yieldco

Canadian Solar acquired Recurrent Energy from Sharp for $247 million in March 2015. The price was a steal. Recurrent will add 4 gigawatts to Canadian Solar’s current 4.5-gigawatt capacity and will significantly increase the company’s position in the United States. Recurrent Energy already has a large portfolio of utility-scale solar operations in the United States and more about to be completed before the federal solar investment tax credit expires in 2016.

YieldCo: Expected Launch between now and March 30, 2016

The acquisition of Recurrent Energy marks Canadian Solar’s first step to setting up a Yieldco, or yield company, which will generate revenue by selling electricity to utilities and distribute its profits as dividends to investors. The Canadian Solar-Recurrent Energy Yieldco will draw on a combined 8.5-gigawatt energy pipeline to generate consistent revenues and pay out healthy dividend distributions. The two partners will likely move over the majority of their established plants to their Yieldco and increase their focus on new projects. According to Canadian Solar, the Yieldco IPO could be auctioned as soon as Q4 2015 or Q1 2016.

Canadian Solar isn’t the only solar company that is looking to create dividend-distributing yield companies, but it is the most promising. SunPower (SPWR) and First Solar (FSLR) are both looking into the potential of dividend-distributing Yieldcos to generate equity for more utility-scale projects, either jointly or separately. In early 2014, the two companies announced a deal to form a joint, dividend-distributing Yieldco, only to cancel the IPO after disappointing Q3 2014 results. First Solar CEO said the company would “exercise patience” about setting up a Yieldco. SunPower said it had “postponed” a decision on forming a Yieldco. First Solar and SunPower revived the Yieldco idea in Q2 2015, creating 8Point3 Energy Partners LP (CAFD). Since its IPO in June, CAFD is down about 25% from its opening price of $21, despite offering a quarterly distribution of $0.21 cents per share. Neither First Solar nor SunPower had the wattage to launch a Yieldco on its own. With the acquisition of Recurrent Energy, Canadian Solar is in a secure position to launch a Yieldco by the end of 2015 or the early part of 2016.

Strong Fundamentals, Earnings and Growth Rate

Where the Business Model Truth Test Exists or Fails

Annual revenue more than doubled from $1.65 billion at the end of 2013 to $3.35 billion at the end of 2014. In its May 7 earnings conference, CSIQ reported net revenue of $860.9 million for Q1 2015, well-above its projected range of $725 to $775 million. Quarterly year-over-year revenue growth has averaged about 80% since the start of 2014, and the company’s gross quarterly profit margin stands 17.77%.

CSIQ’s PEG ratio stands at 0.009. In an equities market defined by inflated valuations and sub-par earnings, it’s hard to find a lower—or more attractive—number anywhere in the energy sector. Clearly, CSIQ is one of the few undervalued stocks left in this vigorous and over-valued bull market. The only downside to its impressive growth rate and revenues is a rather heavy debt-to-equity ratio of 1.56. CSIQ is currently ranked a “Hold” by Zacks and “Buy” from The Street. These strong fundamentals will be essential when Canandian Solar launches its Yieldco IPO later this year.

Canadian Solar is an Industry Leader in Clean Energy

Let’s see how Canadian Solar ranks up against other players in the clean energy sector. First Solar (FSLR) is the largest North American solar company with a market capitalization of $4.3 billion. Like Canadian Solar, FSLR is heavily focused on large projects that generate consistent revenue through electricity sales. Like Canadian Solar is planning to do later this year, FSLR (together with SPWR) has set up a Yieldco that distribute dividends from electricity sales revenue. However, FLSR’s growth rate and profit margins have not kept up with its northern competitor. Its earnings and revenues are highly sporadic, with profit and loss alternating on a quarterly basis. In Q1 2015, FSLR’s profit margin collapsed to -13.3% following the dropdown of some of its assets to 8Point3. Quarterly year-over-year revenue growth was at -50.62% in Q1 2015, compared to Canadian Solar’s 84.61%. FSLR’s PEG ratio is sitting at 1.96, suggesting this company has peaked. Its annual revenue of $2.91 billion trails behind Canadian Solar’s $3.35 billion, despite the latter’s lower market capitalization.

YieldCo Comparison from Sector Peer Group

SunPower Corporation (SPWR) launched its own Yieldco, TerraForm Power (TERP), in late Q3 2014. TERP is attractive with a $1.30 annual dividend distribution; however, its total power generation capacity is less than 1 gigawatt. First Solar and Sunpower’s 8Point3 (CALD) offers an $0.84 annual dividend and has a total power generation capacity of only 500 megawatts.

First Solar and SunPower’s premature declaration and cancellation of 8Point3 in 2014 hurt their share price and damaged investors’ confidence in the dividend vehicle. The underlying assets of CALD and TERP are relatively weak, and without aggressive building and acquisition programs by their parent companies, these Yieldco’s will not be able to sustain their promise of year-over-year dividend growth.

By waiting to launch its own Yieldco, Canadian Solar 1) benefits from the market experience of its competitors and 2) the increased gigawatt capacity from its acquisition of Recurrent Energy he completion of its near- and mid-term project pipeline.

When CSIQ launches its Yieldco IPO, investors may feel confident much of the company’s 8.5-gigawatt capacity will dropdown and power the new company’s dividend distributions.

Canadian Solar will gain from solar advancements; Federal requirements for an increasing amount of solar usage; and a cost effectiveness business model.


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