U.S. listed photovoltaic (PV) companies based in China are experiencing a significant sell-off after the Shanghai Composite index tumbled 9% on February 27. Many analysts believe that the (seemingly unjustified) drop in these shares has brought valuations back to attractive levels, creating a buying opportunity. They point out that the fate of China-based PV companies is not directly tied to the economic future of China. The bulk of sales of China-based PV manufacturers (>80%) are to Europe and the U.S.
One stock I’d avoid during this time of bargain hunting is Canadian Solar (CSIQ – Last trade $10.70). CSIQ is incorporated in Canada and conducts all of its manufacturing operations in China. The company is a standard solar module and specialty solar module and product company. In the aftermath of the drop in Chinese shares, CSIQ’s stock price went from $12.80 to $10.80 in a single session. Given that the company generates the vast majority of their revenue from markets outside China, some may think that the drop has been overdone and that the share could rebound ahead of earnings on March 14.
The company disclosed in their recent IPO filing that German customers accounted for 75.3% and 76.3% of their net revenues in 2005 and for the six months ended June 30, 2006, respectively. Solar demand is already dropping in the German market. The government-guaranteed price for solar electricity drops by 5% each year, yet solar module prices have stayed high, reducing the return made by homeowners and business owners. For this reason, risks are to the downside when the company reports earnings on March 14.
We have already started seeing the impact of the German slowdown on reported earnings of other PV companies. ESLR (65% of revenues from Germany) reports their December quarter EPS -$0.08 vs. -0.07 expected, with revenues disappointing at $32.4M vs. 34.4M expected. (Note that the company did boost revenue guidance for Q1). ENER (about 50% of revenues from Germany) reports December quarter EPS -$0.07 vs. -0.06 expected, with revenues significantly below estimates at $22.9M vs. $32.6M expected. For their next quarter, STP (50% of revenue from Germany) lowered revenue guidance (sees Q1 revenue between $220M and $229M vs. analyst estimates at $247.3M).
Not only is CSIQ’s next quarter expected to be disappointing, but there are fundamentals that are likely to prevent a rebound ahead of earnings. As a basic solar panel assembler, CSIQ doesnt have any distinct advantages. In addition, the company’s revenue stream is not diversified. Its five largest customer accounted for 91.2% of revenues for six months ended June 30, 2006.
The company’s valuation is near the industry average, but shares of CSIQ should trade at a discount to the industry given execution risk of expanding into cell manufacturing. Bargain hunters should avoid CSIQ for now, but if the company provides bullish guidance on March 14 it could be worth getting on board.
Disclaimer: I do not own any stocks mentioned above. I do not give investment advice. Do your own research. Do not rely on anything in this blog to make investment decisions. Consult an investment professional familiar with your specific financial situation before buying or selling any security.