Canadian Solar Surging on Sales of Power Projects

Canadian Solar Inc., this year’s second-best performer on the Nasdaq Stock Market, has surged more than sevenfold as a shift toward selling power plants led to its first profitable quarter in more than two years.

More than 41 percent of the Guelph, Ontario-based company’s third-quarter revenue came from developing solar farms, especially in Canada, up from 22 percent a year earlier. That led to net income of $27.7 million.

Most of Canadian Solar’s manufacturing facilities are in China, where it’s also building solar farms -- power plants comprising rows of photovoltaic panels. Its operations in Canada, where provincial incentives help it sell solar projects for as much as twice what it gets in Asia, set the company apart from Chinese panel makers, said Jenny Chase, an analyst with Bloomberg New Energy Finance.

“The Canadian pipelines were far more profitable,” she said in a phone interview Dec. 3.

Canadian Solar has surged more than 700 percent this year, giving it a market value of $1.29 billion. That makes it the best-performing solar company and second on the Nasdaq after network-gear maker Zhone Technologies Inc., which has climbed 87 percent. Canadian Solar’s price-to-sales ratio is about 8.7 times that of peers in the 15-company Bloomberg Industries Global Large Solar Energy Index, indicating investor confidence.

Canadian solar climbed 4.7 percent to $28.03 at the close in New York.

Panel Prices

A global glut of solar panels has pushed prices down almost 60 percent since the start of 2011, according to data compiled by Bloomberg. Canadian Solar found it more lucrative to shift to building power plants in addition to selling panels, mirroring the strategy used by Tempe, Arizona-based First Solar Inc., the only profitable company in the past year in the Solar Energy Index.

Canadian Solar is developing about 327 megawatts of projects in Canada on its own and has contracts to build four more for other companies with 169 megawatts of capacity. That pipeline is worth at least C$1.7 billion ($1.6 billion), Chairman and Chief Executive Officer Shawn Qu said on a Nov. 13 conference call with analysts.

“Our success is being mainly driven by our total solutions business,” which develops and sells solar farms, Qu said on the call. “We are making major progress in our business transformation from a module manufacturer into a one-stop shop and provider of solar power solutions.” A company executive was not available for an interview, according to Suzanne Wilson, a spokeswoman.

Canada Deals

Canadian Solar sold two utility-scale plants in Ontario to TransCanada Corp. in the third quarter and two others to a firm managed by BlackRock Inc. in deals that totaled more than C$200 million.

In China, the company expects to complete construction on 40 megawatts worth of projects this quarter and it has 278 megawatts of “late-stage projects” in Japan, Qu said on the call.

Demand for solar power has surged in Ontario since the province introduced in 2009 a feed-in tariff, which ensures above-market rates for electricity from photovoltaic panels and other renewable sources.

“There was no solar PV industry in Canada to speak of before the introduction of the Ontario FIT program,” John Gorman, president of the Canadian Solar Energies Association in Ottawa, said in an interview. The program “was a success by any measure in creating quite a robust manufacturing and development industry here.”

Incentive Program

About 870 megawatts of utility-scale projects were built from 2009 through mid-2013, Gorman said, and an additional 1.2 gigawatts is approved and expected to be completed by mid-2014. Demand was so strong that the program was closed in June to projects larger than 500 kilowatts. Canadian Solar has a panel assembly plant in the province to meet Ontario’s local-content requirements.

The incentive is part of the reason “Ontario has the most solar capacity of any jurisdiction in Canada,” Bob Chiarelli, the province’s energy minister, said in an e-mailed statement.

The incentives drove up profit for Canadian Solar. At least one of its projects sold in Canada this year for about $4 a watt, double the price it’s getting in China, Chase said.

“These pipelines came at a really good time -- 2012 was one of the toughest years ever for solar companies, and the first two quarters of 2013 were pretty tough too,” she said. “It certainly got them through a very tough time.”

‘Best Positioned’

That pipeline makes Canadian Solar “the best-positioned solar company for growth in profitability” Nitin Kumar, a Singapore-based analyst at Nomura Holdings, wrote in a Nov. 26 note to investors. “We think valuations are still very attractive and investors’ confidence should continue to grow.” He rates the stock a buy with a 12-month price target of $42.

The company has three buy ratings from analysts and one sell, according to data compiled by Bloomberg.

The entire solar industry is surging this year after a two-year slump. The Large Solar Index has more than doubled this year led by Canadian Solar and two other companies that have more than quadrupled: JinkoSolar Holding Co. and SunPower Corp., the fifth-best performer on the Nasdaq this year.

Canadian Solar’s profit in the third quarter was its first since the second quarter of 2011. It shipped 478 megawatts of panels and expects to ship 480 megawatts to 500 megawatts in the current quarter.

Shipment Forecast

Total 2013 shipments will be 1.75 gigawatts to 1.77 gigawatts, the company said when it released its third-quarter results last month, narrowing the range of its previous forecast of 1.6 gigawatts to 1.8 gigawatts. It has more than 1 gigawatt of solar farms under development in its “late-stage project pipeline.”

“It was a hedge that’s really worked over the last year,” Chase said. “The Chinese pipelines are coming in now, and Canadian Solar has a plan outside of China, which will help it sell solar projects in Europe.”

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