• LSESU Trading Society

Canadian Solar (CSIQ): Time to buy?


By Shaun Ang, Nikos Motsis and Parthav Maheshwari, Analysts at the LSESU Trading Society


Industry Analysis








The Solar Energy industry has shown impressive growth in the last few years, with valuations estimating its market value at about 52.5 billion in 2018. There are multiple ways to segment the industry, with the most popular being by application. There are three areas of applications, namely residential, non-residential, and utilities. All three are primarily used for power generation, but heating is an alternative use, while they are both complementary and supplementary to fossil fuels in those uses, depending on the progression of technology in that region of the world.

Utilities have seen the most growth recently, with a great example being Amazon’s announcement of the creation of 5 utility-scale solar projects in May 2020. Residentials account for about 33.6% of the market but are seeing strong growth due to increased consumer awareness and reduction in initial costs. Regarding the geographical breakdown, Asia seems to be taking the lead in solar energy production, with China being the country with the biggest market share. The rapid growth in China is due to high solar irradiance levels and low manufacturing costs. Europe comes in second place, with the growth in this region being driven by availability of land for solar farms and favorable regulations, which include subsidies. Key players in the industry include Canadian Solar Inc (CSIQ), First Solar (FSLR) and Trina Solar (CNY). Canadian Solar is a company founded in Ontario in 2001. It has subsidiaries in 24 countries and employs about 9000 workers. The company has seen impressive growth, experiencing a 31.4% sales growth even in the turbulent quarter of Sep-Dec 2020, while its positive R&D spending suggests we will see more efficient energy uses and hence potentially increased revenue.

The overall trend of the solar energy industry is undoubtedly upwards, with many analysts estimating the market value of the industry reaching 222.3 billion by 2026. This growth is fueled by two main factors, increased investment demand in solar power and supportive government initiatives. Investment demand has seen a rise because the stringent government regulations and increased public awareness is forcing companies to revert to cleaner energy production methods, with solar energy being a popular choice. Supportive regulations and initiatives are seen worldwide, with an important example being Biden’s 2 trillion dollar “green spending” bill, but other factors such as investment tax credits and net metering are also supporting this growth. The two main constraints to the growth of the industry are the availability of land and solar radiation. The former is necessary to create large-scale and efficient power farms, while the latter is the imperative input for this energy to be produced, something that not all geographical regions have had the luck to be endowed with.

Key Reasons to Invest In order to justify why CSIQ is a good equity to invest in, we have selected a few key reasons highlighting why the company will gain more traction and increase in value in the near future. First, we want to bring attention to the renewables and solar energy industry altogether, which has boomed in recent times. The solar energy market was valued at $52.5 billion in 2018 and is​ projected to reach $223.3 billion by 2026, growing at a CAGR of 20.5% from 2019 to 2026. This general market trend will hugely aid in the growth of Canadian Solar in the next few years.

Second, CSIQ has been gaining a lot of traction over the last year. The stock’s price has rocketed 199.16% over the last year and its current SMA200 (distance from its 200-day simple moving average) is greater than 90% currently. This shows huge upward trends for the price and shows that CSIQ will use this current momentum and keep increasing in value.

Third, when we compare CSIQ’s financials with other companies in the same industry, it becomes clear why it not only has good bullish momentum but is also better value than others. For example, its P/E and P/B ratios currently are about half of that of the industry average showing its better value.

Last, along with all these reasons, what also makes Canadian Solar a good investment is its long history and global existence in comparison with other industry leaders. ​The company’s key markets are the United States, China, Japan, the U.K. and Canada and emerging markets like Brazil, India, Mexico, Italy, Germany, South Africa and the Middle East. This shows the company's potential to grow not only in limited countries but around the globe and meet global demands for solar energy and hence increase in value and provide good returns to investors over time.

Valuation

This comparable company analysis will compare with 11 comparable public companies of middle and large market capitalisation that offer solar energy solutions. Given the capital intensive nature and high depreciation costs of the industry, CSIQ outperforms its peers in its Book Value/Share and EBITDA, which shows its healthy balance sheet and strong ability to generate profits. However, comparing trading multiples, CSIQ stands near the lowest, which makes it very undervalued as illustrated by the firm’s relative share price. Using the median of the comparables’ TEV/EBITDA as the target multiple, CSIQ has a target price of $123.4 and a ​104.1%​ upside.

Technical Analysis In this section, we have outlined some key Technicals of CSIQ and shown the basic chart pattern over the time and explain how technical analysis also hints towards a rise in the stock price in the near future.



This chart shows the two different channels. The channel shown in green color starts from mid-2020 till present day and the channel shown in yellow color shows nearly 5 years of stock movement before that period. As you can observe, the growth of the stock in the previous 5 years before the ‘green shaded’ period has a fairly low but positive gradient and compared to it, the stock’s current rise is reflected by the steep growth of the stock since mid-2020 (growth by 161.51%) as it reaches new higher highs and lows. This trend is also supported by different technicals of CSIQ. For instance, it’s the momentum indicator, which measures the rate of change of an equity, for the last 1 month has a value of 44.49 highlighting a buy position. Also, if you look at the moving averages of CSIQ (both exponential and simple) for the last month, it clearly suggests a buy position. The summary of the moving averages is shown below (source- TradingView).



​In addition, the following graphs below show the RSI and MACD values and trends for the last 1 year.

The MACD trend over the last year has seen a few dips below the baseline, however, on average has had positive values shown by the green histograms on the graph. Since ​the MACD crosses above its signal line following a brief correction within a longer-term uptrend, it qualifies as bullish confirmation. However, the RSI value over time shows more of a neutral standpoint on the stock. Even though it ranges between the 30.0 to 70.0 range as shown on the graph, it stays on the higher end (close to 70.0) signalling that the stock may be overbought and hence raises some caution. Although other indicators as explained above do strongly justify buying CSIQ stock.

Key Risks

  1. If the COVID-19 vaccine’s efficacy against more virulent strains are which extends the current global pandemic, the ongoing market recovery may wane due to demand-side factors for energy and, subsequently, the underlying commodities. However, its high book value and access to liquidity indicate a strong ability to finance current debt and other liabilities through the pandemic.

  2. The solar power market is still at a relatively early stage of development and future demand for solar power products and services is uncertain as compared to more established industries where market data and trends are more reliably assessed from data gathered over a longer period of time. In addition, demand for solar power products and services in their targeted markets, including Europe, the U.S., Japan, China, Brazil and India may not develop or may develop to a lesser extent than they anticipate. They may be adversely affected by volatile solar power market and industry conditions; in particular, the demand for our solar power products and services may decline, which may reduce our revenues and earnings.

  3. Governments might reduce or eliminate subsidies for solar energy, this may cause a decrease in demand and considerable downward pressure on solar systems and therefore negatively impact both solar module prices and the value of their solar power projects. The reduction, modification or elimination of government subsidies and economic incentives in one or more of their markets could therefore materially and adversely affect the growth of such markets or result in increased price competition, either of which could cause their revenues to decline and harm our financial results.

Conclusion We rate CSIQ with a strong buy recommendation with a time horizon of ​3 years​. The target price is $123.4 and current share price (close of Jan-26-2021) is $60.46, displaying a ​104.1%​ upside. CSIQ is heavily undervalued despite its healthy liquidity and cash holdings to continue tiding through the pandemic and ride the strong upcoming industry tailwinds. As a key player in this infant solar industry with a relatively high profit-generating and productive-efficient business model, CSIQ is gaining a strong strategic foothold in developed and developing countries. However, the firm is susceptible to continued volatility in prices of solar-related products and services as well as administrative and policy changes​.

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