The solar panel maker has received approval for an IPO on China’s Nasdaq-style STAR Market, with plans to raise more than $600 million

Key takeaways:

  • Canadian Solar is aiming to raise more than $600 million with an A-share IPO in China to expand capacity
  • Solar panel maker is expected to lose money this year, lagging its peers, after it failed to make a key transition quickly enough

By Fai Pui

“Canadian Solar doesn’t want be the biggest in the solar industry. We just want to be the last one standing.”

Many in China’s solar sector may know that famous remark from Shawn Qu, founder of Canadian Solar Inc. (CSIQ.US). There’s still hope as long as one is alive. Under Qu’s leadership, his company is still standing today in a capital-intensive, fast-changing solar sector plagued with intense competition. But the going hasn’t been easy lately.

After three rounds of questions in response to its application, Canadian Solar has finally received the green light to list on China’s Nasdaq-style STAR Market, where it will attempt to raise 4 billion yuan ($627 million) in its upcoming IPO.

China’s solar market has been humming at full tilt in recent years. Riding favorable government policies for development of renewable energy sources, shares of solar companies have been on a recent uptick. Canadian Solar, one of the top five Chinese panel makers, were expected to benefit from the trend. But the company’s financials tell quite a different story.

Negative cash flow

Canadian Solar’s IPO prospectus (link in Chinese) shows it realized operating revenues of 24.4 billion yuan, 21.7 billion yuan and 23.3 billion yuan, in the three years from 2018 to 2020, respectively. Its profits over that time totaled 1.92 billion yuan, 1.75 billion yuan and 1.61 billion yuan, compared to a loss of 363 million yuan in the first half of this year and an expected loss of 319 million to 430 million for the entire year. According to Wind data, solar companies traded in China’s domestic A-share market posted average revenue growth of close to 50% in the first half of the year, with an average profit growth rate of around 67%. That appears to show its rivals have been eating Canadian Solar’s lunch this year.

The company blamed its loss on a number of factors, including rising silicon material prices, rising offshore transportation costs, lower raw material stocks compared with the industry average, and a relatively high dependence on foreign revenue compared with its peers. But the whole industry had to cope with sharp rises in polysilicon prices, as well as high transportation costs, and Canadian Solar’s peers appeared relatively less affected.

Its results look particularly disappointing when compared with sector peers Longi (601012.SH), Trina Solar (688599.SH) and JA Solar (002459.SH), which all registered year-on-year profit growth in the first half this year to 4.99 billion yuan, 706 million yuan and 713 million yuan, respectively.

Making matters worse, Canadian Solar’s net operating cash flow swung from a positive 6.74 billion yuan last year to a negative 1.39 billion yuan by the end of June this year as it had to replenish raw material stocks at a premium. Such a shift could point to a need to raise new funds.

So, why is all this happening to the once-mighty Canadian Solar? It all boils down to the company’s failure to follow an industry shift from polycrystalline to monocrystalline products quickly enough. The company started out in the polycrystalline products business and previously dominated the market by virtue of its low cost and energy-efficient manufacturing processes. But with improving efficiency of monocrystalline products with technological upgrades, the market has switched to bigger, thinner and more energy-efficient monocrystalline products.

Last year, monocrystalline products took nearly 90% of the market, allowing Longi, which specializes in monocrystalline production, to become the most lucrative solar enterprise in the A-share market. Trina and JA Solar also focus on monocrystalline solar panels.

Industry laggard

Canadian Solar, like its peers, is also making the transition, but has been slow in the endeavor. The revenue contribution from monocrystalline products increased from 45.3% of its total last year to 62.3% at the end of June, but still lags the industry average. Its relatively slow transition has put big strains on its gross margin, which fell from 26.2% in 2019 when it was ahead of the curve, to 18.5% last year and further still to 6.2% by the end of June as polysilicon prices skyrocketed. Such a steep decline to below the industry average in just two years is concerning, to say the least.

The company is also entangled in multiple domestic and foreign lawsuits, including five anti-dumping and countervailing lawsuits in the U.S., three pending ones where it is the defendant and another seven involving disputed amounts of more than 10 million yuan.

It should come as little surprise that the Chinese Listing Committee asked the company for additional information on the lawsuits, the amount of compensation involved and estimated impacts of possible outcomes on the company.

Qu knew the transition was needed and that it would cost a bundle, making it crucial to find a way to raise steady new funds. The company reported an asset-to-liability ratio of 72.2% at mid-year, and 20.3 billion yuan in liquid liability, which made up 86.3% of its total liability. It had 2.9 billion yuan in cash and cash-equivalents midway through the year, down from 5.9 billion yuan at the end of last year. To boot, the company derived nearly half of its net revenue from government subsidies.

Canadian Solar was also up front in acknowledging it has expanded its capacity at a slower pace than its best-performing peers due to limited financing and high financing costs. It added that most of the 4 billion yuan it aims to raise in the IPO would be used for production and research, as well as for cash replenishment.

But some relief could soon be in sight, at least in terms of high material prices. In early December, companies like Longi and Tianjin Zhonghuan Semiconductor (002129.SH) slashed their silicon wafer prices by up to 10%, which, when combined with expected increases in silicon wafer production capacity next year, are leading to expectation for further price declines next year in a typical boom-bust bubble.

Such concerns were on display last week when shares of Xinyi Solar (0968.HK) and Xinyi Glass (0868.HK) fell 9.4% and 6%, respectively, after announcing their entry into the crystalline silicon sector with a new joint venture.

Meanwhile, the fading Canadian Solar is floundering behind its faster-moving peers, and Qu face a tough road ahead to turn the tide for his company. Its main task in his stated goal to be the last one standing now looks like simply surviving the sector’s fierce competition.

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