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Canadian Solar to 'come out stronger' from PV industry downturn

Canadian Solar is taking significant steps to prepare for an anticipated PV industry downturn, including slowing its module capacity expansion and scrapping its plans for a yieldco, but the solar giant expects to weather the market headwinds better than its rivals.

“One thing I’ve learned since founding Canadian Solar 15 years ago is that the market has gone through many cycles, and in each of the past cycles we’ve come out stronger,” chief executive Shawn Qu said Thursday morning on an analyst call.

The company, one of the world’s largest solar manufacturers and developers, intends to "play it safe" during any downturn that may materialise, with the aim of maintaining its market share rather than growing it, Qu says.

Ontario-based Canadian Solar, which does most of its manufacturing in China but is building factories in Southeast Asia and Brazil, reported a quarterly net income of $40.4m, or $0.68 per share, compared to a profit of $18.6m in the year-ago quarter.

Canadian Solar's New York-listed shares rose by more than 18% in early trading Thursday after the company topped its own quarterly guidance for shipments, revenue and gross margin.

But the company’s shares – like those of nearly all solar manufacturers – are down heavily in the year to date, amid fears that the industry is once again tipping into a state of oversupply, as it did earlier this decade.

Yieldco plans scrapped once and for all

Canadian Solar first floated the idea of launching its own yieldco in early 2015, having acquired the US-based development company Recurrent Energy from Japan’s Sharp. Shortly afterward, however, the yieldco market hit heavy turbulence, due in part to the bankruptcy of SunEdison.

While some yieldco stocks have recovered significantly in 2016, allowing a few players to return to the equity markets, solar stocks remains weighed down by fears of a near-term market slowdown, leading Canadian Solar to scrap its yieldco plans once and for all.

“In order to provide improved visibility into our operating plan, we made the formal decision to no longer launch a yieldco,” says chief financial officer Huifeng Chang. “We are instead implementing a flexible, localised strategy with respect to our solar project asset monetisation.”

Canadian Solar owns 472MW of operating solar capacity today, and will own an additional 900MW by the end of the year. That nearly 1.4GW of capacity will have an estimated resale value of $2.1bn, the company says.

Despite the market headwinds, caused in large part by an anticipated slowdown in Chinese demand, Canadian Solar continues to expand its internal cell capacity, and will have 3.1GW of capacity online by the end of the year.

But the company has decided to “slow down” its module expansion, Qu reveals, with its in-house module capacity to reach 5.8GW by the end of the year, instead of 6.2GW as previously planned.

The company’s module-assembly plant in Brazil remains on track, he adds.

Inventory control 'key' during a downturn

One lesson Canadian Solar learned from the last industry downturn – which led to numerous bankruptcies in the sector – was the importance of inventory control, Qu says. In preparation for another possible downturn, the company shrank its inventory levels by $100m in the last quarter alone.

“Our whole Q2 theme was inventory control,” Qu says.

“In previous downturns, even in the worst quarters, let’s say in 2011-12, if you didn’t have inventory problems – if you buy the materials today and make them into solid orders today – you still made money.”

“This is the situation we observe today as well,” he says.

“Although [average selling prices for modules have] trended down since July, if I buy the wafers or even buy cells today and turn them into modules, my cost is still way below the quote of modules in the market today.”

“If you can maintain a good control on inventory, you’ll still be able to make money, even in a downturn,” he says. 

Canadian Solar maintained its full-year guidance of 5.4-5.5GW for module shipments and $3.0-$3.2bn in revenue, and reiterated that its sales could be even higher if it concludes deals for some of its big projects.

Despite the generally bearish outlook for solar manufacturers, Qu maintains a high degree of optimism about the future of the solar industry and Canadian Solar’s place in particular.

The industry faces near-term headwinds, Qu acknowledges, but they’re “never quite as bad as investors may think”.

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