• Home
• About Us
• Contact Us

Canadian Solar (CSIQ) Announces Share Offering: Is This Just The Beginning?

Posted on July 14, 2008

After the close tonight, Canadian Solar (CSIQ) announced plans to sell 3.5 million common shares, raising the company’s expected fully diluted share count to nearly 36 million shares (32.3 million shares as of last report + 3.5 million shares from the announced secondary) and its enterprise value to nearly $1.4 billion.

Given our past discussion concerning the financing needs of several polysilicon-based module manufacturers, we were not taken aback by CSIQ’s latest secondary announcement, however we were somewhat surprised by the company’s financing method. We were expecting a larger convertible offering, instead of a direct placement of common shares. Arguably a convertible is a better means of long-term financing, since there is no immediate dilution to common shareholders.

Financing Still a Concern

Notwithstanding issues surrounding the current financing method, though, we think it’s important for investors to realize that this latest financing nowhere meets the actual financing needs of CSIQ, and as such we expect continued financings for CSIQ over the next year.

$1.7 Billion in Purchase Obligations
CSIQ’s financing needs are a direct result of the company’s astounding $1.7 billion in purchase obligations (page 64 in CSIQ’s 20-F). Interestingly, this number may in fact be conservative considering the company’s recent initiatives. Since the company will have to pay the vast majority of these obligations up-front to suppliers in cash, and will not receive adequate cash receipts from customers prior to the necessary payments to suppliers, CSIQ will be in need of serious cash in order to meet its production goals. Ironically, the more CSIQ pursues contracts at any price, the more cash it will need to fund its supplier obligations, and the more dilution shareholders should expect.

Future Cash Needs Uncertain As Cash Receipts from Customers Remain Unclear

At this point, it’s extremely difficult to project CSIQ’s real cash needs, since, as opposed to purchase obligations to suppliers, the company provides little disclosure as to its current payment terms with customers. Therefore, notwithstanding rosy revenue projections, it is completely unclear what the company’s actual cash receipts from customers are, and what the cash payment cycles looks like for new contracts.

Based upon our research, and a small dose of common sense when looking at businesses whose customers rely on government subsidies, our belief is that CSIQ currently receives little to no money up-front for customer orders and cash payments for these orders are being spread over ever longer periods of time. As such, we think that CSIQ’s reported accounting revenues and projections, greatly overstate the company’s actual cash receipts from customers, and hence significantly understate the company’s financing needs.

Our low-ball estimate is that CSIQ will need at least an additional $200 million in financing to support operations in the coming year. This cash may come from the Chinese banks (short-term loans) and/or Wall Street. In either case, the company’s enterprise valuation will increase even without a corresponding increase in the share price, leaving investors with little in the way of capital gains. Of course, if the stock price for some reason soars to irrational levels, the company’s financing issues may quickly evaporate. But, since we cannot forecast stock prices, we wouldn’t want to bet on this scenario.

Ignore Accounting Earnings and Wall Street Forecasts

Looking forward, since access to continued financing is CSIQ’s only means of survival, we would expect Wall Street analysts to continue recommending purchase of the shares based upon accounting revenue projections and paper profit (i.e. accounting earnings) valuations (e.g. P/E). At the same time, we anticipate that concerns regarding CSIQ’s serious working capital and future financing needs will receive little attention by analysts, though these are the main factors which will ultimately determine the value of the shares for longer-term investors. Therefore, we advise investors to look past these simplistic valuation models, and pay closer attention to CSIQ’s raw material and other purchase obligations, the outlook for raw material supply, and finally to the company’s actual/expected cash receipts from customers. These factors will surely play a greater role in the company’s longer-term share performance, than the other issues which may effect the nearly unpredictable day-to-day price movements.

Conclusion: Cash Flow Concerns Could Dominate for Quite Awhile and There are Possibly Better Alternatives

Ultimately, the bullish case for CSIQ rests on the assumption that because of escalating demand for polysilicon-based solar modules, the company will at some point become self-funding and will be generating more than enough cash to pay down obligations (both purchase and credit) and justify its enterprise valuation, even after dilutive actions.

However, since we remain reasonably certain that the suppliers of polysilicon-based solar modules (an extremely low barrier to entry business), will vastly exceed the suppliers of the raw material (e.g. polysilicion) for these modules (a very high barrier to entry business) for the foreseeable future, we believe that the suppliers of polysilicon-based solar modules will constantly be squeezed from both their customers and their suppliers of materials. As such, we do not believe that these companies will be self-funding any time soon and the future free cash-flow (if any) will not justify the current enterprise valuation. Investors looking to profit from the solar boom are probably best advised to research the investment potential of raw material and other suppliers to these polysilicon-based solar modules and/or stick to companies that have already proven their ability to generate operating cash-flow (i.e cash-flows prior to cap-ex).

RSS Feeds:

Disclaimer:
This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Comments