Last quarter's strong demand for solar panels is making itself felt on the income statements of solar manufacturers. And as one of the world's biggest, Canadian Solar (NASDAQ: CSIQ) had more to gain than most of its competitors.
The tailwinds that helped Chinese solar manufacturers last year won't last into 2018, but for players in the industry today, it's vital to capture revenue and profits while you can. Here's why I think Canadian Solar's recently reported quarter was so outstanding, and what investors should watch in 2018.
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Canadian Solar shipped 1.831 GW of modules in Q4, down slightly from 1.87 GW in Q3, but impressive nonetheless. Revenue of $1.11 billion was helped by $404 million in solar system sales, which also helped drive net income of $61.4 million, or $1.01 per share.
What impressed me most was the 19.7% gross margin in Q4. Management said the sale of high-margin solar projects in Japan helped lift that figure, but we can assume that module sales had gross margins in the mid to high teens as well. That's likely because of elevated demand in the U.S. and China that drove prices higher late in 2017. But some of the short-term drivers of that demand won't last.
Why the future is a bit dimmer
The Trump administration has already imposed solar panel tariffs in the U.S., making imported panels more costly. As a result, U.S. demand should shrink in 2018, and potentially by a large amount. Meanwhile, China -- which installed about 53 GW of the 100 GW of new solar capacity globally last year -- will also likely slow its pace in 2018.
Based on that, Canadian Solar's management expects its 2018 solar panel shipments to be between 6.6 GW and 7.1 GW, versus 6.82 GW in 2017. The fact that shipments could drop is a bit surprising given that its panel manufacturing capacity is expected to grow by 1.5 GW this year.
Management expects $4.4 billion to $4.6 billion in revenue, but 53% of that is expected to come from solar system sales, which bring in significantly more revenue per watt than module-only sales. In 2017, just 22.8% of its $3.39 billion of revenue came from system sales.
If industry trends hold true, we'll also likely see margins on projects fall this year. In the last few years, the solar development market has become a lot more competitive, and margins are dropping broadly. Canadian Solar should feel that impact in 2018, and it's already predicting a drop in margins in Q1. "Gross margin for the first quarter is expected to be between 10% and 12%, which reflects the impact of lower margin U.S. solar projects we have already sold in the quarter," it said in its Q4 earnings press release.
How likely is Canadian Solar to go private
Hanging over Canadian Solar is the $18.47 per share buyout offer CEO Shawn Qu has made for the company. Shares haven't been trading near that price because it's a non-binding offer and he could back out if the company's financial condition deteriorates.
I think a good quarter actually makes a buyout more likely, which could be why shares jumped in trading on Monday. But until we see financing lined up, and a vote by shareholders, I'll remain skeptical that a buyout is imminent.
Long-term, Canadian Solar appears well positioned with a low-cost solar panel and an improving balance sheet. Whether a buyout takes place or not, the company looks like it should be one of the winners in solar manufacturing, even if it endures some ups and downs along the way.
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