Canadian Solar: Underappreciated Solar Opportunity? (NASDAQ:CSIQ)

Recently I summarised some thoughts about the best solar stocks for investment in 2022. In that report I focused on First Solar (FSLR) as an interesting opportunity for US investors, with a further comment about SunPower’s (SPWR) residential solar business. I indicated that Chinese solar company JinkoSolar (JKS) was worth watching, but perhaps of less interest to US investors wary of Chinese companies. Here I address another company with ties to China, Canadian Solar (NASDAQ:CSIQ), because there are a lot of new developments with this company. Wall Street analysts noted by Seeking Alpha are mixed in their views, with four of seven ratings in the last 90 days sitting on the fence (hold), but there are two strong buys and one buy indicating that there is interest. Seeking Alpha analysis is essentially absent with only one author in the past 90 days with a hold rating. Here I consider the latest from Canadian Solar because this is a substantial company that is going places.

I like quarterly earnings transcripts because, as well as getting the numbers, you get an insight into management views. The Q4 2021 earnings transcript didn’t disappoint as there were some very encouraging statistics as well as new insights into the business.

Here I highlight some interesting developments.

Batteries

In the Q4 2021 earnings call and Q&A, there were some intriguing comments about CSIQ’s emerging battery business. Clearly at the moment the batteries supplied are Lithium ion and the battery business is booming, with 2021 shipments being for 0.9 GWh and in 2022 this is expected to at least double to 1.8 or even 1.9 GWh. Most of the battery shipments involved the US where the market is more mature, but the Chinese and UK markets are expected to grow. The point is that just about everywhere solar PV projects are expected to have at least some storage capacity, and it seems that often now this is a requirement for many solar PV projects to achieve approval.

The surprise announcement concerned Canadian Solar soon to announce its own battery product(s), with a hint that it might not be the traditional lithium ion story, although they are working with both CATL and BYD (OTCPK:BYDDF) (this was in the Q&A section and the transcript says BID). With a comment about safety this could mean lithium iron phosphate or even something more dramatic (they have a liquid cooling system and they talk about differentiation from EV batteries). In a few months, we shall see where this is going.

Below I summarise the spinout of the CSI Solar business, which includes the nuts and bolts of the emerging battery business. It is clear that batteries loom large for both CSIQ and the CSI Solar spinout. This is summarised on slide 32 in an April 2022 Investor Presentation.

In summary the two components of CSIQ’s business, CSI Solar and Global Energy, have the following storage pipeline (MWh):

	Long term Service	Contracted/ Construction	Forecast /Backlog	Pipeline	Total
CSI Solar	300	2,043	390	3,619	6,352
Global Energy	–	2,681	841	23,620	27,142

Carve-out IPO Of CSI Solar On The Shanghai Stock Exchange

CSIQ has two business segments, Global Energy and CSI Solar. CSIQ has acted on perceived lack of valuation on the Nasdaq market by commencing an IPO of its solar panel and battery business, CSI Solar, on the Shanghai Stock Exchange. Post-IPO this will leave Canadian Solar with ~64% ownership of the Shanghai listed CSI Solar company, and it will focus on the Global Energy business. It is a little complicated because as far as I can gather pre-IPO CSI Solar also included the Chinese Energy assets. These have been transferred to Global Energy to avoid any potential competition between CSI Solar and CSIQ in China. Formal CSI Solar listing is expected in 2022.

Global Energy includes CSIQ’s global project development activities for both solar and battery storage project developments. Global Energy encompasses stand-alone solar, stand-alone battery and hybrid solar plus storage projects. Monetization involves develop-to-sell, build-to-sell and build-to-own configurations, with the goal to maximise returns, accelerate cash turn and minimize capital risk. Global Energy has one of the world’s largest and most geographically diversified utility-scale solar and energy storage project development platforms across six continents. It has a 24 GWp total solar pipeline and energy storage projects development pipeline of more than 27 GWh. Global Energy sees three areas that will outperform : i) Project sales; ii) Investment vehicles (eg CSIF (Canadian Solar Infrastructure Fund) 15% owned by CSIQ and Japan’s largest publicly listed solar infrastructure fund), and iii) Services.

CSI Solar involves solar module manufacture, as well as total system solutions (including inverters, solar system kits and engineering/procurement/construction). CSI Solar also includes CSIQ’s battery storage integration business, delivering bankable end-to-end turnkey battery storage solutions for utility scale, commercial and industrial and residential applications (including long-term service agreements, future battery capacity augmentation).

Both Global Energy and CSI Solar have battery storage businesses, but they are different. Global Energy involves a project development business (involving land sourcing, interconnection, PPAs, and other relevant permits for a battery business), while CSI Solar involves a system integration business which delivers turnkey battery storage technology solutions.

A fuller description of the corporate structure of CSIQ is given in a Press Release of March 17, 2022.

The IPO registration process is completed with the Chinese Securities Regulatory Commission and there has been good feedback on roadshows with strategic investors. While there are differences, the process of separating the solar manufacture from project business is somewhat reminiscent of the SunPower/Maxeon (MAXN) spinout. The interesting difference is the looming importance of battery storage to both CSIQ and the CSI Solar businesses.

The ownership structure of Canadian Solar is dominated by founder and CEO Dr Shawn Qu who owns 23% of the stock. BlackRock (BLK) is the major institutional owner through a 5.6% stake via BlackRock Investment Management and a further 5.4% stake through BlackRock Global Funds. Invesco Solar ETF (TAN) has a 3.2% stake.

Conclusion

Two major Chinese solar companies, Canadian Solar and JinkoSolar have been unloved and valued at a discount to their non-Chinese peers. A close look at Canadian Solar’s business shows that this discounting of valuation may be about to change for a number of reasons including a Shanghai Stock Exchange spinout of CSI Solar, its solar panel and battery businesses. While retaining majority shareholder status of CSI Solar, CSIQ’s Global Energy business will become the core of CSIQ and this part of the business is geared for showing outstanding growth. A major aspect of new value creation in both CSI Solar and CSIQ is in the area of battery technology. US investors may continue to be cautious, but Canadian Solar seems worthy of inclusion in considerations about solar investment. The company is trading 21.4% down year on year, notwithstanding a 13.6% increase in share price over the past month. Given the pressure on exiting Russian oil and gas dependence, with emphasis on energy independence through renewable investment, and the recent confronting IPCC report on the climate emergency, this is a good time to reconsider investment in solar stocks.

I am not a financial advisor but I follow closely the dramatic change from fossil fuels to renewable energy and the opportunities for renewable investment occurring as a result. I hope my comments about Canadian Solar are helpful for you and your financial advisor as you consider your energy and transport investments.