Canadian Solar: strong Q3 sales growth prompts capacity expansion

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The burst of growth currently underway in the global solar market is continuing to result in announcements of significant manufacturing capacity expansions. Chinese vertically integrated manufacturer and project developer Canadian Solar’s Q3 results, released earlier today, is the latest example of this, with shipments for the company totaling 1.198 GW for the quarter, up from 809 MW in Q2.

The results are a strong showing from Canadian Solar and it has surpassed market revenue expectations for the quarter. However the company’s relatively robust manufacturing expansions and plans to make major investments in Brazil, expose it to both currency and geopolitical risks.

Canadian Solar’s net revenues were up 33.5% Q/Q from $636.7 million to $849.8 million, delivering a pre-tax profit of $30.4 million, up Q/Q from $17.9 million. Canadian has also unveiled ambitious manufacturing expansion plans that, if executed, will see module capacity increased from 4.33 GW at the end of this year, to 5.63 GW at the close of 2016.

“Our strategic decision to build inventory levels in the second quarter helped us to seamlessly meet anticipated higher demand levels in the third quarter and has positioned us well entering the fourth quarter,” said CFO Michael G. Potter in announcing the Q3 results. “Gross margin of 14.9% was above the high end of our guidance.”

In terms of markets, Canadian Solar has reported strong demand in the U.S., Japan, China and India. On the project front Canadian now boasts a three-year project pipeline of around 2.5 GW, which it values at $5 billion. It anticipates booking a profit of $850 from developing these projects.

While last week Canadian filed the registration for a Yieldco IPO, it appears the company is keeping its options open in this respect.

“We continue to work hard on a potential YieldCo, while keeping all options open given recent market volatility," noted Potter.

Project pipeline grew in Q3, with China and Brazil responsible for the bulk of the growth. In Brazil, Canadian picked up projects totaling 185 MW in the quarter, that will be developed under 20-year PPAs worth R$298.85/MWh (US78.79/MWh). This pipeline and plans to assemble modules in Brazil shows the company’s ambition in the country, however with Brazil’s ongoing financial turmoil some analysts have posed questions to the risk the strategy might pose.

Canadian Solar subsidiary Recurrent Energy closed the sale of a controlling stake in its 200 MW Tranquillity solar plant in California in Q3. “Higher than expected average selling prices for our modules helped offset the lower gross margin from the partial Tranquillity project sale, noted Canadian CFO Potter.

Manufacturing expansions

In a sign that Canadian Solar expects to continue to increase shipments through 2016, the company is embarking on a $401 million program of production capacity expansions. Canadian will grow its wafer (1 GW), cell (3.4 GW) and module (5.64 GW) production capacities by the end 2016. Cell and wafer production is going to remain largely in China, with module assembling remaining relatively geographically diverse. The exception to this, reports the company, is a new 400 MW cell production facility to be located in an undisclosed Southeast Asian nation.

That the location of all of Canadian’s production in Southeast Asia has not been revealed, is evidence of fears among Chinese manufacturers that manufacturing in the region may eventually attract legal challenges from SolarWorld and potentially duties.

By the end of 2016, Canadian plans to operate 4.1 GW of module assembly in China, along with production sites in Canada (500 MW), Brazil (400 MW), Vietnam (300 MW), and Indonesia (30 MW), along with a further 300 MW in an undisclosed Southeast Asian location.

Canadian will have spent $1.04 million in the second half of 2015 on adding manufacturing expansions, with a further $297 million set to be spent in 2016. It plans to finance the expansions through capital leases and borrowing from local financial institutions.

Looking forward, Canadian expects to ship 1.3 to 1.35 GW of modules, including 170 MW to its own PV power plant projects in the final quarter of the year. Revenues are expected to fall in Q4 to between $930 million to $980 million, achieving gross margins between 13% and 15%.

Canadian Solar ended Q3 with cash, cash equivalents and restricted cash of $1 billion, down from $1.04 billion the previous quarter.