Canadian Solar: A Rare Bargain Hiding in Plain Sight

Canadian Solar: A Rare Bargain Hiding In Plain Sight - Canadian Solar Inc.
(NASDAQ:CSIQ) | Seeking Alpha 9/21/17, 9:07 AM
Canadian Solar: A Rare Bargain Hiding In Plain Sight

Sep.20.17 | About: Canadian Solar (CSIQ)
Summary
Contrarian deep value investment with significant upside.
Multiple near-term hard catalysts.
Compelling expected return underpinned by tangible asset value and multiple

independent call options with material upside.
Opportunity to buy a best-in-class and debt free company at 1.7x EBITDA versus
peers trading at 3.2x-10x.
Textbook example of a company that is a victim of the sell sides and market's
reluctance to untangle and stand behind a complex situation in an unloved sector.
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Executive summary
We believe Canadian Solar (Nasdaq: CSIQ) shares are worth north of $35 in our base
case, $21 in our downside case and almost $50 in our upside case (representing return
opportunities of ~30,120 and 200% for each of the cases, respectively) over a 12-18
month investment horizon. Several catalysts over the next twelve months should reveal
and unlock the implied bargain valuation of the companys assets.
Our valuation is based on a SOTP approach, evaluating each of the companys main
sources of value:
A large portfolio of operating and utility scale solar projects on balance sheet
$9.30/share;
A global development company the pipeline of projects not yet operating that CSIQ
will derisk and sell over time to third parties, generating a developer margin
$6.60/share;
A hard to replicate, derisked pipeline of solar power projects in Japan $14.20/share;
The companys solar module manufacturing business the third largest in the world
(to which we assign almost no value despite the material upside potential); and
Proceeds from a potential settlement of the ongoing Section 201 trade case and
Deferred Tax Assets $4.70/share.
Several factors have conspired to cause the stock to fall out of favor. Investor apathy
towards the sector, balance sheet complexity, incomplete disclosure and a small market
cap have created an attractive risk-reward opportunity for fundamental, contrarian
investors armed with the willingness to conduct detailed due diligence and the
temperament to withstand daily vagaries of a trading driven market.
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Canadian Solar: A Rare Bargain Hiding In Plain Sight - Canadian Solar Inc. (NASDAQ:CSIQ) | Seeking Alpha 9/21/17, 9:07 AM
temperament to withstand daily vagaries of a trading driven market.
In our opinion, Canadian Solar is a textbook example of markets throwing the proverbial
baby out with the bathwater a company that is a victim of the sell sides reluctance to
untangle and underwrite a complex situation in a sector that caused investors billions in
losses as a consequence and in the wake of SunEdisons bankruptcy.
In this lengthy write-up, we deliberately erred on the side of providing too much
information by including details collected over eighteen months of due diligence. Our goal
is to help investors not only fill the gaps but also refute the notions on which bears have
based their (dated) thesis.
We think of Canadian Solars intrinsic value as standing on a bedrock of tangible asset

value demonstrably in excess of todays public market valuations, further enhanced by a
bundle of cheap call options with material upside. We believe CSIQ is a compelling
investment because these call options have limited downside risk and need not be all in
the money to yield a satisfactory return.
We do not have any affiliation or relationship with the CSIQ or management. We do own
stock and long dated call options.
The Company
CSIQ generates revenue from two main lines of business: a solar power plant
development business (DevCo), and a solar module manufacturing business
(ModuleCo). DevCo is akin to a real estate developer, which buys or leases land,
develops it for solar power plant use, builds and operates a solar power plant that
generates revenue under long term power purchase agreements (PPAs) and later sells
the plant to a third party, usually an investor or a utility. The manufacturing business
produces solar modules and solar kits, used for the production of electricity in residential
or large (utility scale) power plants.
Background
Canadian Solar has, since its inception in 2001, been a manufacturer of solar wafers, cells
and modules, and today is the third largest producer of modules by shipments with a
capacity of ~7GW in a global market that saw global demand of 80GW in 2016. In the
early 2010s, as reduction of Feed-In-Tariffs (FIT) in Italy, Spain and Germany wreaked
havoc for solar module manufactures globally, many of the module manufacturing
companies realized that the stability of cash flows generated by power plants with long
term contracted revenues could provide a reliable base of earnings to offset the cyclicality
of the module business.
The rapid technological developments leading to lower and shrinking unit costs, coupled
with the availability of cheap and long duration capital, spurred many manufacturing
companies to expand into owning and operating solar assets either through captive
separately held entities (so called yieldcos) or directly on their balance sheet.
As part of this process, in early 2015, CSIQ acquired Recurrent Energy, a well-known U.S.
utility scale solar developer. Only months after this purchase, the liquidity crisis and
subsequent bankruptcy filing of SunEdison laid bare the fragility of the sponsored yieldco
model and quickly dried up funding for the sector, permanently damaging public investors
perception of these vehicles. As a result, in 2016 CSIQ cancelled plans for its yieldco and
instead committed to building projects requiring over $2 billion in capital, to be reflected on
its balance sheet. The exit plan was to sell those assets once operational, delevering its
balance sheet.
Why this is the right time to invest in CSIQ
Despite broad based and pervasive skepticism, Canadian Solar has over the last year
consistently and profitably been disposing of operating solar plants across numerous
geographies including Canada, the U.S., China, Brazil and Japan. Importantly, we believe
the company is close to announcing the sale of its largest operating asset, its Recurrent
Portfolio, with a reasonable likelihood to generate gains above this assets carrying book
value of $1.35 billion.
We believe this sale, and the monetization of additional power plants in operation currently
underway, stand to generate proceeds in excess of $2.0 billion within the next six months,
versus a current total enterprise value of $2.9 billion. Such transactions would flip CSIQs
capital structure from a net debt to a net cash position, and reveal the implicit bargain
valuation of the companys remaining assets: a global solar plant developer with over
8GW of pipeline, and a hard-to-replicate, very valuable Japanese project pipeline and the
third largest solar module manufacturing business in the world.
In our base case, the implied multiple at which investors currently purchase CSIQs
module manufacturing business, the development business and the entire Japanese
pipeline, is approximately 1.7x 2018 EBITDA. This multiple compares favorably to comps.
Lower quality, levered and cash burning pure play solar module manufacturing peers like
JASO and most relevantly JKS (given its global distribution) currently trade around 3.2x
and 9.9x 2018 EBITDA, respectively. Higher quality developers/operators, like Scatec
Solar ASA, trade around 6.5x 2018 EBITDA.
Why this opportunity exists
1. Bloomberg and Capital IQ overstate the net leverage and Enterprise Value of the
company by mistakenly excluding Restricted Cash from net debt calculation. The
majority of restricted cash is in fact secured against short term debt (as indicated in the
companys 20F, page F-49) and should therefore be netted against gross debt to
calculate net debt. This change alone increases equity value by almost $5.00 per
share;
2. The coexistence of a cyclical/low margin/low multiple business (ModuleCo) and a

contractually stable high ROE/high multiple solar power plant portfolio
(DevCo/Operating assets) within the same company increases complexity and
obscures these assets true value because investors simply apply a single earnings
multiple;
3. Insufficient and unclear disclosures make any SOTP analysis a daunting task.
Moreover, the company has not had an analyst day since 2015 and is a foreign filer;
4. The Company has to date experienced delays for both its US asset sale process and
Japanese assets (JREIT);
5. Fundamental investors feel proverbially burnt after having lost in excess of $30 billion
because of the SunEdison debacle (and sell side fear of investing time and pitching
these companies for the same reason);
6. Fast-money and day trading accounts are not taking the long view on key valuation
drivers of this company but rather concentrate on ModuleCos immediate datapoints
and the companys quarterly guidance/results;
and the companys quarterly guidance/results;
7. We believe Mr. Market has too narrow an understanding of potential outcomes and
scenarios stemming from Suniva and Solarworlds Section 201 Petition;
8. The head of CSIQ IR took an indefinite sabbatical leave in mid-2016.
Operating Assets ($9.30/share): contracted and stable cash flows

generating idiosyncratic and uncorrelated equity returns
Canadian Solar owns ~1,260MW of operating assets that are currently being marketed in
ongoing and independent sales processes.
In spite of recent statement by the company, there seems to be considerable skepticism

and confusion in the market about the intrinsic value of CSIQs operating plants. On
August 25, 2017, CSIQs CFO Huifeng Chang cogently articulated (during a call with
broker Coker Palmer) why the value of CSIQs operating plants on its balance sheet has
recently increased (emphasis added by us):
The thesis of interest normalization towards 4-5% has not played out. Interest rates
have remained at 2.2%. In addition, the credit spread for risk assets has decreased
from 9% to 4%. That has increased the value of our assets.
Secondly, the quantity of large portfolio assets available for sale has decreased quite
a bit, while the supply of private capital in the space has increased several times.
We see it from the likes of Blackstone and Blackrock and JP Morgan and other
renewable infrastructure funds. Overall we enjoyed good timing after the frustration
and disappointment at the time we dropped the yieldco. Significant positive for us.
Third, competition has reduced. SUNE is gone. They were the leader in the space.
The space is less crowded now and we enjoy support from upstream operators and
are a global player which means we can move with the market when sometimes
[the] market moves around.
Fourth, the entire power business is changing. Demand is not coming just from
OECD markets anymore but also emerging markets. Even the traditional places
where utilities dominate are moving towards renewables assets.
where utilities dominate are moving towards renewables assets.
[As a result of these factors]We have seen investors putting in bids at lower IRRs
compared to a year ago, [they] were willing to pay unlevered 8-9 and now they pay
6%. [] A year ago some people on Wall Street were doubting of our ability to
monetize our assets but that simply has turned out not to be true. [] There are
plenty of projects buyers for our assets. I can say that we still have plenty of buyers
competing for our assets. The IRR on TQ8 is sky high. [On the Recurrent Portfolio:]
no problem finding the buyer or trouble having the right valuation.
At Solar Power International (SPI) last week, Canadian Solars CFO quantified the
impact of the above factors on large utility scale projects like our Recurrent Portfolio,
indicating that equity values of those projects have increased by a staggering 70-100%
over the last twelve months.
Numerous conversation with industry participants, and even comments from FSLRs
management during their Q2 2017 earnings call, corroborate these comments. FSLR
recently indicated that they are currently able to sell projects at significantly higher prices
than their captive yieldco ((NASDAQ:CAFD)) is able to pay because of CAFDs
uncompetitive 7.00%+ distribution yield. FSLR also clarified that, to match the yield at
which they are selling projects to private parties, CAFD should trade around its IPO price,
nearly 30% above its current share price.
We believe this corroborates our view that equity values realizable from selling operating
projects have materially expanded over the last few months, and the sell side and
markets use of yieldco trading multiples/yields to value CSIQs operating portfolio is likely
to result in a significantly lower valuation than the current (higher) private market implies.
To confirm these data points and anecdotes, we have worked with developers to research
publicly available PPAs and other operating data to value most of CSIQs operating
projects bottoms up with DCFs, and even visited some of the plants ourselves. Our
conclusion is that the companys disclosed resale value ($1.8 billion) materially
understates the consideration that the company may realize from the pending sale of
these assets.
Recurrent Portfolio
As part of the Recurrent Energy acquisition in 2015, CSIQ also purchased a large portfolio
of seven projects ready for construction in California and Texas (Recurrent Portfolio).
These assets represents a very meaningful part of CSIQs operating portfolio and we
believe they are being incorrectly valued by the market: i) this portfolio has significantly
increased in value over the last few months; ii) market participants are incorrectly
extrapolating the value of these assets from recent company transactions, and iii) the
market has interpreted the perceived slippage of the sale process as an indication of
disappointing sale price. We have a differentiated view on each of these points.
1. The Recurrent Portfolio has increased substantially in value over the last year
As per CSIQ CFOs comments at SPI, included earlier in this write up, the value of the
Recurrent Portfolio has benefited from a decline in credit spreads over the last twelve
months, an increase in available capital seeking long-dated contracted cash flows, and a
dearth of large utility scale projects for sale.
The company has also indicated publicly that the above factors have induced investors to
lower the unlevered IRRs they are willing to pay for large utility scale assets in the United
States from 7.5% to 5.5% currently. In CSIQs words, equity values of large utility scale
projects like our Recurrent Portfolio have increased by a very significant 70-100% over
the last twelve months.
2. The extrapolation of declining valuation by market participants is incorrect
We believe sell side analysts recent downgrades predicated on risks of lower valuation is
based on incomplete information and incorrect arithmetic. The two main data points that
have been used as a basis for this stance are the seemingly lower value of the assets as
disclosed by CSIQ and the recent sale of Tranquility 8 to Sempra Energy.
The way CSIQ calculates and reports the operating capacity of the Recurrent Portfolio has
created confusion and led to the incorrect conclusion that the value of these assets
declined after the company sold majority stakes in three projects to Southern Power. A
precise reading of the companys filings and presentation makes it clear that Canadian
Solar does not own 1,260 MW of operating assets. It owns and consolidates 896MW of
projects and, in addition, owns three 49% minority stakes in projects (Tranquility, Garland
and Roserock) that on a gross basis add up to 742MW.
CSIQ in its press release prorates the MW of these minority-owned projects and includes
them in its operating portfolio. Accounting wise, those MW are not consolidated and only
the book value of the minority equity stakes appears on CSIQs balance sheet in
Investment in Affiliates. Per CISQs disclosures, the Recurrent/Southern minority stakes
book value is approximately $350 million.
We believe some sell side analysts have incorrectly calculated the expected $/MW
liquidation value by dividing the resale value disclosed by the company by the total MWs
of the portfolio, including the pro-rated MWs. More appropriately, the valuation should
divide the resale value of only the consolidated projects by the number of consolidated
MW, which yields a more reasonable number that is closer to, but still meaningfully lower
than, what we believe the company may achieve in a sale. A similar result can be obtained
if we repeat the same calculation for the Recurrent Portfolio, of which the company
discloses the book value.
We also believe that the method of using the sale of Tranquility 8 (T8) to Sempra as
evidence that project values have come down is flawed and highlights the danger of using
EV/MW multiples in the absence of DCF valuations to back them up.
It has been argued that Sempras $124 million purchase of T8 (estimated $90 million of
invested capital and $34 million of profit) implies a significantly lower value than Tranquility
1s 49% stake, which has a $144 million book value (equivalent to $288 million for 100%)
as per the companys 2016 20-F.
What this analysis ignores is that i) in the case where CSIQ had kept T8, it would have
had to inject more equity into T8 (which Sempra assumed the future obligation to do), ii)
there was almost no construction in progress and no debt at the time of the sale and iii)
T8s PPA is lower than that of Tranquility 1s. Thus, with all else being equal and assuming
a lower PPA, the equity value of Tranquility 8 must be lower than Tranquility 1s when
discounted at the same IRR. Here is what the correct math should look like:
3. The lengthy Recurrent Portfolio sale process is not inconsistent with an attractive
valuation
We believe a longer time to announce a sale of assets is by no means a certain indication

of a poor conclusion to come. Actually, the opposite is likely in this case. CSIQ hired
Scotiabank and Bank of America to sell the Recurrent Portfolio (Roserock will be sold
separately after modules were damaged during the construction phase and a subsequent
hailstorm). We understand that only a handful of bidders were expected, but apparently
the auction drew many more bidders. We believe that this strong interest, including by
foreign buyers, has slowed down the sale process, but also increases the chances of a
favorable sale price.
We also believe CSIQ is using the strong buyer interest to mitigate any risks from
regulatory review by FERC and CFIUS, possibly pairing up parties with different CFIUS
risk profiles to maximize probability of closing.
Consistent with some sell side analysts, our market checks indicate that CSIQ is highly
likely to recoup the entire book value of the projects with potential for upside from there.
Notably, last week, the Head of Recurrent Energy indicated at a group investor lunch with
over 30 attendees that the sale price of the 1GW of Recurrent Portfolio (excluding
Roserock) is likely going to be more than $2 billion, a lot more than $2 billion. While it is
difficult to exactly determine what a lot more than $2 billion, we tried to bound the
possible outcomes and their meaning for CSIQ:
Under the scenarios above, after netting unconsolidated debt, tax equity and Southerns
majority stakes, CSIQ stands to recoup all its book value and likely generate a significant
profit from the sale of this portfolio. These scenarios translate into material additional
upside above our $2.2 billion operating asset base case valuation
The Other Operating Plants (UK, China, Japan)
As confirmed by CSIQs CFO and other market checks, we believe CSIQ is also in
advanced stages of selling the remaining operating assets and may complete the process
by the end of this year or in the first quarter of next year. As to the Chinese power plants,
which have, justifiably, generated a healthy amount of skepticism, we note that CSIQ has
been able to sell these plants at gross margins approaching 20% and has recognized
value even from the unpaid subsidy receivable.
CSIQ explained that the state owned enterprises who have purchased these assets were
comfortable with the credit risk of their very same owner, the Chinese Government, which
owes the subsidy to plant owners. We discuss the Japanese assets later in this write up.
Project Development Company - DevCo ($6.60/share): a

sustainable and hard to replicate global power business
After the disposal of the operating assets discussed above, the second main asset that
the pro forma CSIQ will retain (in addition to the module co and the Japanese operating
assets) is the development company (aka global energy business). The value of this asset
to CSIQ shareholders is equivalent to the discounted risk-adjusted cash flows (net of
opex, interest and tax) generated by selling projects other than those already in operation.
CSIQ has previously indicated that they expect to sell approximately 1GW of assets per
year. Excluding the Japanese pipeline projects (dealt with separately below), this means
CSIQs development company aims to sell approximately ~900MW per year. With a global
pipeline of approximately 8GW in mid to early stages of development, industry contacts
have confirmed that CSIQ can sell well north of 900MW of projects per year.
Corroborating this view, the head of Recurrent Energy (CSIQs U.S. project development
arm) indicated last week at SPI that Canadian Solar, just in the U.S., has 5 - 6GW of mid
stage pipeline projects and several hundred MWs with PPAs signed, which in his view
make selling 1GW of projects (NTP, in construction or COD) as very doable.
CSIQ has also pledged to sell projects before or during construction where possible,
effectively increasing ROIC and IRR. For example, Tranquility 8 was sold at an estimated
~40% gross margin, as detailed above. This profit was realized in less than a year,
highlighting how CSIQ can indeed realize attractive pre-tax returns on equity without
having to carry the project through construction, limiting leverage, lowering interest
expense, and speeding up development and monetization of projects.
CSIQ recently indicated on a recent group investor call with Coker Palmer that their global
energy business employs approximately ~400 people (~100 of whom are in Japan), and
former employees we have found via expert networks have indicated that this businesss
opex is approximately $70 - 80 million per annum.
To appropriately reflect the riskiness of the cash flows, we use a 20% discount rate
(sensitized up and down 500bps). Conservatively, we also assume that CSIQs DevCo will
build 50% of the assets it will sell on its balance sheet, incurring interest expense (at an
average construction facility rate of 5%) and that no development will be carried out after
2027. Note further that we are separately valuing the Japanese assets below given their
different risk profile.
A commonly posited bear argument is that CSIQ doesnt have the ability to successfully
develop and monetize assets since it is primarily involved in module manufacturing, a
cyclical and highly competitive industry segment. While this is true for other manufacturers
like Jinko and JA Solar, which have shown that development on global scale is hard to
execute (JKS just announced last week they were stopping development activities
globally), we note that CSIQ i) started selling projects exclusively to high quality third
parties about five years ago, ii) did so across multiple geographies and iii) as recently
disclosed, has made money on each sale, even on the Canadian projects previously
bought by KKR in 2015 at the height of the yieldco craze.
Year to date, CSIQ has sold over 570MW of projects at NTP, whether in construction or
fully operational. This doesnt include sales of assets in the UK or China, the Recurrent
Portfolio and the Japanese assets earmarked for the pending JREIT structure that we
think are likely to fall into place over the next six months.
We believe selling 900MW of assets per year is very doable and that concerns about the
sustainability of CSIQs development business are overblown. This is evidenced by the
success of Scatec Solar ASA (SSO NO), a Norwegian pure play solar developer that has
employed essentially the same model as CSIQ in their development business. Finally, we
note that the market ordinarily values FSLR and SPWR almost exclusively on the basis of
their project development businesses, while ignoring CSIQs large, growing and
consistently profitable DevCo. In our view, this is an obvious market asymmetry that
creates an excellent investment opportunity.
Rounding up the value of DevCo: tangible construction/development in process on

balance sheet
In the ordinary course of business, CSIQ capitalizes development costs and incurs
construction cost for projects that can be sold in the future. CSIQ finances these costs
with equity or debt, but in either case, at the moment of sale of a project it will receive
back the invested capital. If a profit is realized, CSIQ will receive cash in excess of its
invested capital. The difference between capital invested and the sale price will be the
gross profit recorded by CSIQ. Since we are using a SOTP valuation, we also include the
invested capital currently on balance sheet, i.e., the COGS spent to date on projects that
will be sold in the future.
This is simply the book value of assets CSIQ has already recorded on its balance sheet
separate from assets in operation or Japanese assets (separately accounted for below).
The logic behind this adjustment is that, as CSIQ confirmed, when DevCo sells a project,
it recoups the capital invested. Conversely, we also need to net out the debt used to fund
such construction/development, which yields the below net value:
Why CSIQ is not another SunEdison
Before making this investment we spent a great deal of time dissecting why CSIQ is not
another SunEdison. Our conclusion is that Canadian Solar, as currently structured,
presents significantly lower risks than SunEdison, its peer module manufacturers and
even FSLR and SPWR.
First, CSIQ does not have a yieldco requiring an ever greater pace of project dropdowns
(and the JREIT has no right of first offer (ROFO)). This means that Canadian Solar i) can
freely maximize the value of the projects it develops without having to count on a related
party with conflicting interests (hoping that CSIQ will sell for a lower price), ii) is not a slave
to the timing of project dropdowns to sustain yieldco growth rates and iii) can sell projects
before they are operational.
Second, Canadian Solars module business is independently durable because it

generates demand from third party customers. This is very different from SPWRs and
FSLRs subscale module businesses, which to date have not been profitable and, in our
view, would struggle to survive without the demand generated by their captive developers
(SUNE did not have any material module manufacturing operation).
Finally, the module manufacturing business and the development business are natural
hedges: lower module prices reduces ModuleCos profitability but also improve the
economics and demand for projects (favoring DevCo), while higher prices of modules
increase the profitability of ModuleCo (while reducing demand for projects resulting in
lower project IRRs).
Finally, we would also highlight the refreshing lack of non-GAAP adjustments and the high
quality of CSIQs earnings versus FSLR and SPWR, and even JKS, which just started to
add back stock comp to its reported EPS. Consistent with CEO Shawn Qus attitude,
CSIQ interprets accounting standards in a conservative fashion: for example, the
company did not exclude $5 - 7 million of one-off professional fees per quarter over the
last few quarters, and their diluted EPS figure is understated (by more than 5%) because it
uses the most conservative interpretation of the if-converted method of accounting for
convertible debt (which assumes full conversion despite being deeply out of the money).
The Japanese Assets ($14.20/share): hard-to-replicate assets with

low execution risk and attractive equity returns
The Japanese power plant pipeline has historically, and for good reason, been one of the
foundations of the bear thesis dating back to 2014. CSIQ started talking about these
assets in early 2013 and for about four years it barely converted any portion of this
growing pipeline into tangible value for shareholders. As we found out in late 2016, the
primary reason behind these delays was a historically unfocused, understaffed and
inexperienced local development team headed by a leader commuting bi-monthly from
Europe to.
Because Canadian Solar was able to scoop up projects in the aftermath of the Fukushima
disaster, most of its pipeline assets enjoys some of the highest FITs ever awarded in
Japan. As indicated in their 2015 analyst day slide deck (page 82), CSIQs Japanese
pipeline average FIT is 36.2JPY/KWh. In addition, over 90% of CSIQs pipeline has in their
PPAs no provision allowing curtailments, making these projects more valuable, all else
being equal, than projects with the same FITs but allowing for curtailment.
While the delay in converting the Japanese pipeline into operating assets dented CSIQs
credibility, it also had a very favorable but less appreciated effect on the intrinsic value of
this asset. As is well known, capex/MWp of solar projects has consistently declined across
the globe thanks to ever cheaper module prices and continuous price reductions of
balance-of-system costs. However, the FIT awarded to CSIQs pipeline projects did not
decline (once awarded it is secured as long as an interconnection agreement is obtained
which was the case for CSIQ).
Lower capex/watt, coupled with the easing of labor shortages caused by the early 2010s
Japan real estate resurgence, has significantly brought down the capital investment
required to generate the same revenue and cash flows from a solar project. Put another
way, the returns CSIQ stands to generate from these assets have significantly increased.
way, the returns CSIQ stands to generate from these assets have significantly increased.
To add to CSIQs luck, the value of these assets has further increased because interest
rates in Japan have collapsed, with Japan 15y government yields declining from ~1%
three years ago to ~25bps currently, more than compensating the JPY 10% decline over
the same period (CSIQ does not hedge JPY project exposure).
What has changed to ensure execution on the Japanese assets
Enter Jeff Roy and his team. Jeff Roy was previously the head of CSIQs Canadian project
development team, which in the early 2010s developed from scratch and delivered 100%
of the Canadian pipeline that CSIQ was able to sell at gross margins consistently at or
above 20%. Jeff Roy and a handful of Canadian execs on his team (and their families)
relocated to Japan in late 2015 to bring best practices to the Japanese development team
and accelerate the conversion of CSIQs pipeline.
In the span of a few weeks, the team was reinforced to comprise approximately 100
people, 70 of whom are local Japanese, and in the following quarters CSIQ started to
build and connect several tens of MW of operating Japanese projects. In the two years
since Jeff Roy and his team joined CSIQs Japanese team, the company has gone from
practically a standing start to having 137MW of projects currently in operation, 159MW of
projects in construction (which we believe present no significant risk before becoming
operational), and an additional 203MW of projects with FIT and interconnection agreement
secured (also low risk).
Conservatively, we assign no value CSIQs 210MW of projects without interconnection

agreements, currently subject to auction. However, given the downward trajectory of
capex/w, we believe these projects could also be very valuable and represent a cheap call
option to realize additional and significant value.
Valuing the Japanese Assets
We think the market is making two fundamental mistakes in assessing the value of CSIQs
Japanese assets. The first one is to believe that the assets in CSIQs pipeline are at risk of
losing their high FIT. At the end of April 2017 Japan did indeed cancel several GWs of
projects that had previously been awarded a high FIT.
The cancelled projects, in addition to having low probability of meeting certain regulatory
milestones ahead of the April 2017 deadline, could not be built by the deadline METI had
set (a few years ago) because the developers owning these projects did not have the
necessary financial resources to jumpstart construction. In contrast, CSIQs pipeline did
not change substantially after that deadline (actually it increased overall) because it had
firm interconnection agreements and land secured for a very large portion of its projects.
The second mistake we believe the market is making is to ignore assets that are currently
producing cash flow just because their monetization is (in the markets view) not imminent.
To monetize several smaller Japanese projects, late last year CSIQ initiated the process
to IPO what is informally called a JREIT, which similar to U.S. REITs, is a listed entity
exempted from income tax as long as 90% or more of taxable income is distributed as
exempted from income tax as long as 90% or more of taxable income is distributed as
dividends. Crucially, and differently from a traditional sponsor/yieldco model, we
understand there will be no assumption of growth for the JREIT and no ROFO.
CSIQs CFO indicated during group investor meetings held at SPI last week that CSIQ
has earmarked 75MW for inclusion in the JREIT by the end of the year and that they are
in advanced discussions to privately sell additional 35MW of projects currently in
operation. Using the company COD schedule (currently on track), this means that after
selling 75MW to the JREIT and 35MW to a private buyer, CSIQ will have over 60MW of
operating assets on balance sheet as of the end of 2017.
Inexplicably, conversations with investors and sell side analysts indicate that the market
ascribes value only to the assets currently earmarked to the JREIT. In other words, assets
that produce cash flows and present no operating or financial risk are being ignored
simply because they may not be sold in the next few months. To demonstrate the fallacy
of this approach, we take this argument to an extreme: should the value of a companys
highly cash flow generative division be ignored just because this division is not for sale?
Obviously not.
Because of the lower risk profile of the Japanese assets, derisked substantially after the
April 2017 METI deadline, we value CSIQs Japanese pipeline separately from the other
DevCo projects. We include in this valuation the plants in construction and with
interconnection agreements (and include a haircut for some unforeseen regulatory risks)
and discount the equity value so obtained by 12.5% per annum to today. From this value,
we then subtract the equity yet to be invested (CSIQ IR discloses how much equity has
already been invested so far).
While the equity required seems low, CSIQ confirmed that they have been able to use
proceeds from Japanese green bonds as equity invested in construction of projects,
effectively using cheap and abundant leverage to significantly reduce the total equity laid
out to develop the Japanese pipeline.
We worked with Japanese developers to validate our assumptions of operating metrics of

projects similar to CSIQs and their current resale value. The resulting valuation yields an
EV/MW of approximately $4.5 - $5.5 million per MW at 6% levered IRR. This valuation is
squarely in the ballpark indicated by CSIQ last week during investor meetings at SPI: the
company indicated that they expect over $300 million in proceeds from the sale of the
75MW to the JREIT, net of both a 15% equity IPO discount and any stake in the JREIT
retained by CSIQ (10-20% to market cap). This implies values/MW of at least $4.5 million.
We believe private JREIT valuations to be even higher than public ones. CSIQ last week
indicated that they expect to sell the 35MW they are currently marketing privately for a
higher consideration than the implied JREIT valuation. We are also aware of a number of
smaller private assets that have changed hands at 4% levered IRR, implying an EV/MW
well above $6 million/MW. CSIQ is currently targeting an EPC cost of less than $2.1
million/MW, implying a gross profit (net of development costs) approaching 40% at the
above $4.5- $5.5 million/MW sale price.
The JREIT
While conceptually the JREIT does not impact the pipeline valuation because the JREIT
would purchase the assets from CSIQ similarly to a third party buyer of projects (and will
buy only a portion of the pipeline assets), we think it is important to address the concerns
raised by market participants and sell side analysts on the trading and valuation of the
three public JREIT peers and whether listing a JREIT would expose CSIQ to the dangers
of the US sponsor/yieldco model that caused SUNE to fall from grace.
The stock prices of the only three publicly listed solar JREITs (9281, 9282, 9283 JT) have
declined materially after their IPOs and only recently have partially or completely
recovered their previous underperformance, as shown below:
Even at the current levels, these JREITs stock prices imply highly attractive asset
valuations closer to $4 - $4.5 million in EV/MW.
The markets view is that the poor performance of these stocks is due to lack of interest by
institutional investors. We have asked the proponents of this thesis for evidence
supporting the conclusion and have received nothing in response. After some research,
we have identified what we think is a believable explanation behind share performance,
which further sheds light on the JREIT IPO delay that CSIQ has encountered.
A large Japanese bank, Daiwa, participated in each of the currently existing JREIT IPO
process. We understand Daiwa may have sold most of the shares to retail investors, many
of whom were looking for an IPO pop and bought on margin. As retail investors sold
of whom were looking for an IPO pop and bought on margin. As retail investors sold
on/after the first day of trading in anticipation of a pop, the share price drop triggered by
the simultaneous attempt to capture the IPO pop was exacerbated by the low liquidity
(institutional investors got their allocation as part of the IPO) causing margin calls for
individual investors.
We believe this technical overhang is now behind us and institutional investors have
indeed started to warm up to these stocks, as indicated by the recovering shares prices of
other JREITs. If indeed there was no investor interest in these JREITs, it would be hard to
explain why all JREITs stock price have recovered since their lows, and one (9282) is
currently trading above its IPO price without any structural difference from its peers.
Nevertheless, after becoming aware of this situation, we believe CSIQ has replaced
Daiwa by hiring Mizuho and Macquarie.
Further, as indicated by the Tokyo Stock Exchange itself in this article (Link here), CSIQs
JREIT will be much larger and liquid than the small and retail-oriented existing JREITs,
with a market cap of $150 200 million and 2 - 3x the MW in operation of the smaller
peers (see table above). We understand this makes CSIQs JREIT significantly more
attractive to institutional investors, both inside and outside Japan.
In addition, to allay any concern about a JREIT being a repeat of the U.S. yieldco failure,
CSIQ is preserving the ability to sell projects privately, as they alluded to during the latest
earnings call. This is also what FSLR started doing recently after having realized it can get
better value by selling projects privately rather than dropping them into CAFD. Notably,
CSIQs Japanese projects will distribute cash to shareholders only after debt amortization,
which essentially transforms each of these plants into a bullet bond with a determined rate
of return.
Finally, CSIQ indicated at SPI last week the process of JREIT listing is proceeding faster
than expected and that the probability of an IPO being executed in 2017 has increased.
CSIQ continues to target solely institutional investors who desired JPY exposure and able
to implement a carry trade by borrowing in JPY at cheap rates to enhance the realized
return of the JREIT.
We believe the risk adjusted equity NPV of CSIQs Japanese assets (not currently in
operation) is approximately $14.20 per CSIQ share (Base Case) or about 90% of current
market cap of the company, as highlighted below:
The module manufacturing business: negligible equity value, but

significant upside potential driven by cyclical and structural
significant upside potential driven by cyclical and structural

tailwinds
CSIQs manufacturing business primarily makes solar modules used for the production of
electricity in residential or large (utility scale) power plants. Differently from FSLR and
SPWR whose products have burned through several hundred million dollars and are
rarely sold to non-captive third party developers, CSIQ sells most of its modules to third
parties at consistently positive gross margins and is widely recognized as one of the
lowest cost producers in the industry.
Over time, Canadian Solar has become more and more vertically integrated to reduce
costs and isolate itself from upstream supply chain price volatility. While the industry
acknowledges that CSIQ is one of the highest quality producers among the so called Tier
1 manufacturers, the module manufacturing business has nothing sustainably proprietary:
modules are largely commoditized products and the best industry strategy is to be the
lowest cost producer.
This industry is notoriously cyclical due to the historically common practice of government
subsidies to incentivize solar power adoption. While over 90% of COGS is variable,
approximately 80% SG&A is fixed, creating significant operating leverage. 2012 and 2015
are examples of this phenomenon in practice (negative and positive, respectively).
The manufacturing business has historically generated little free cash flow. Therefore, to
ascribe any meaningful equity value to this asset one has to get comfortable that returns
will grow above the cost of capital, or that one would be able to find a buyer today for this
operating capacity (liquidation/replacement cost, see below valuation table).
Our thesis does not rest on calling the module cycle and we have ascribed negligible
equity value to this asset. If borrow is available, investors may also hedge this exposure
by shorting expensive pure play peers like JKS, SPWR or HQCL (JASO and DQ are too
cheap and therefore risky hedges), or make an informed guess on the module cycle
progression.
Using EV/EBITDA as a valuation metric and carving out the DevCo opex (included in the
NPV of cash flows of that asset, above) we obtain a base case EV of $570 million or less
than $35 million in equity value (in our base case). This compares with a $1.2 billion
estimated replacement cost. Adding debt, cash and other liabilities that belong to this
business, we get to a negligible equity value of ~$30 million or ~$0.60 per share. Note that
the tables below do not include any possible ADCVD restitutions, which we include
separately in the SOTP and we detail in the Section 201 discussion further below.
Where the module business stands and where it could go
Quoting Howard Marks: You know where you are. You cannot predict. You can prepare.
The last twelve months have been a very challenging period for solar module
manufacturers, and there remains limited visibility (arguably improving) over the next
twelve months. However, we believe CSIQs module business is a cheap call option with
significant upside.
In the second half of 2016, after the reduction in Chinese FITs, the global market has been
in oversupply, causing steep price declines which moderated only in late 2016, without
improving gross margins. As a result, Tier 1 manufacturers have invested capital to lower
their cost base and restore gross margins, further increasing global capacity headline
figures. This year, similarly to 2016, Chinese FITs stepped down at the end of June, and
ahead of that deadline the market expected a repeat of the 2016 price implosion. But this
scenario was not repeated.
There are several reasons for this. Some Chinese projects previously scheduled to be
connected by the end of June were moved to July. The Chinese Top Runner program, with
a September deadline, may have also supported demand in Q3. Additionally, some limited
volume of modules may have been sold in the U.S. at higher prices because of stockpiling
ahead of a Section 201 decision (more on this below).
Finally, China increased the 2020 PV installation target to 150GW. As of today, prices are
still firm even in the face of demand reportedly softening in China. From the JKS Q2 2017
earnings call: We expect ASPs to remain stable during the second half of the year.
We believe the markets bear arguments ignore a number of points:
1. After the near death experience of 2011, and more recently 2016, manufacturers
have suffered so much that they have started to be more disciplined on prices to
preserve gross margin. This article from the Mint describes price renegotiations by
module manufacturers in India, one of the lowest priced markets globally. We inquired
of Canadian Solar and other market participants about this phenomenon and we were
told in no uncertain terms that this behavior has been increasingly common across
told in no uncertain terms that this behavior has been increasingly common across
other geographies (CSIQ did not comment on its practices). Commentary from JKS
during their Q2 earnings call indicates a marked strategic shift towards profitability (on
which CSIQ and JASO had already started to focus) rather than volume: We are
currently reviewing our strategy in order to improve profitability and further cut down
the use of OEM going forward. [] . This is particularly notable because JKS (and
TSL) was primarily responsible for dropping prices to achieve ever greater sales
volumes. To be clear, we are not arguing that a sudden shift by manufacturers to
perfectly rational pricing is underway. Rather, we believe another round of
indiscriminate price cuts is unlikely.
2. Partially integrated manufacturers can produce internally at costs that are 20 -

30% below module costs made with purchased cells. Recent conversations with
South East Asian based cell manufacturers revealed that on a fully integrated basis
producers like CSIQ can internally produce cells for approximately $0.14- $0.16/w in
those locations, implying a current module cost of 0.24 0.26/w, which equates to
gross margins of 20%+ on modules manufactured using internally produced cells
(assuming $0.32 market price). This explains why despite upstream costs inflation,
partially integrated manufacturers, and CSIQ above all, have been able to maintain or
improve gross margins, as the company has guided. CSIQ indicated that it expects its
module manufacturing gross margin to be at least in the mid-teens for Q3, which is
consistent with 50-60% of annualized module output using the lower cost of internally
manufactured cells.
3. Effective supply is smaller than believed, which reduces real oversupply. Supply
and demand models used by the sell side and a large swath of investors include all
announced capacity expansions (some eagerly include even those never
materialized). However, these models need to be adjusted for technological
obsolescence. Trips to Chinese module factories and conversations with Tier 1
manufactures indicate that, counter-intuitively, cost effective supply gets smaller as
larger manufacturers invest capex to increase efficiency, thereby steepening the
industry cost curve. JKS and CSIQ have openly talked about effective supply being
around 80GW versus the 100GW+ that we have seen often mentioned as available
supply. BNEF has recently started to highlight this issue, and in their PV Outlook from
May 11, 2017, they highlighted how smaller manufacturers with less than 2GW in
capacity have capacity utilization of less than 40% while Tier 1s have been constantly
at 100% or more for the last few years. Tier 1 manufacturers continue to take
increasing share from smaller producers and concentrate further the industry because
smaller players cannot economically make products that the market would willingly
buy. In a group investor meeting earlier this year, CSIQ indicated that they had
received inbound inquiries by manufacturing companies offering to sell themselves.
More recently, at SPI, JinkoSolars CFO said he expects capacity shut downs due to
technological obsolescence to increase next year. Chinese banks increasing
reluctance to extend financing to Tier 2 and 3 manufacturers is further accelerating this
consolidation process.
4. The U.S. has a large underappreciated growth opportunity from corporates and
4. The U.S. has a large underappreciated growth opportunity from corporates and
Texas. As cogently shown by the Barclays team, a) there are numerous corporates in
the US who have pledged to build solar plants by 2020 and 2022 as a result of
Corporate Renewable Portfolio Standards (C-RPS) for a total of at least 6GW and b)
currently Texas generates only 0.7% from solar PV while solar radiation and lower
labor costs make solar project IRR among the most attractive in the U.S. even at
current PPA levels. Industry participants agree that leading up to the expiration of the
ITC in 2019, we are highly likely to see increased activity in Texas.
5. Grid parity is indeed a reality in emerging markets and some developed markets.
In the Middle East, Spain, Mexico and other emerging countries, it is clear that at
current prices, even without solar subsidies, solar power is more economical than
combined cycle plants (see also this LCOE study by Lazard, updated every six
months). It is also true that the value of solar energy diminishes when solar energy
becomes a significant portion (closer to 20%) of the overall energy mix. Recent
examples of solar producers successfully winning competitive power auctions (without
subsidies) provide evidence that grid parity for solar energy is indeed a reality in many
places where solar energy share is much below 20%. JKSs commentary during the
Q2 2017 earnings call also confirmed these trends: It is expected that EU demand
continue to be [strong] in Germany, Netherland, France, especially after the new
business in Spain, which inspires a new business model of grid parity. []. We expect
emerging markets to be an explosion of demand in 2018 in Egypt, Jordan in Middle
East and Mexico, Argentina, Brazil in Latin America.
No discussion of module sales in the U.S. would be complete without a discussion on the
Section 201 trade case, which we turn to next.
Section 201 and the possibility of settlement an underappreciated call option
In April 2017, a Section 201 Petition was filed with the U.S. International Trade
Commission (ITC) by Suniva (the petitioner), a bankrupt U.S. solar cell manufacturer.
The requests made by Suniva (and more recently by Solarworld) in this petition essentially
call for safeguard measures under which the U.S. solar manufacturers could operate
profitably. In practice, this would likely require a minimum import price and an import tariff
yielding a module price significantly above current market levels (excluding Anti-Dumping
and Counter Vailing Duties, ADCVD). Based on the strength of the case to demonstrate
injury, presented at the August 15th ITC hearing, we believe the ITC will indeed find injury
(i.e. rule in Sunivas favor) by the September 22nd injury investigation deadline. The stock
prices of CSIQ and its peers seem already to reflect the worst possible case scenario.
However, we believe the safeguard measures under Section 201 would be very unlikely to
have the near apocalyptical consequences that many U.S. developers and foreign
manufacturers have argued.
First, U.S. developers are currently buying limited volumes of modules at $0.45 - 0.50/w
(we have heard of a developer offering to pay $0.58 for 1 GW recently). This disproves the
argument, made by most market participants, that prices even marginally above the
current mid $0.30s would destroy developers pipelines. Modules only represent 30-40%
current mid $0.30s would destroy developers pipelines. Modules only represent 30-40%
of total development cost/w. Even in the very unlikely outcome of a hypothetical 100%
price increase, this would translate into a mere 15% increase in total capex/w, before any
savings obtainable on other balance of system costs, which have also been consistently
declining.
Second and more importantly, we believe current security prices assign nearly zero
probability of a settlement. There are few historical precedents for what a settlement
would look like but the precedent that does exist is highly encouraging.
In April 2006, under the Bush administration, the U.S. soft lumber industry reached a
settlement with its Canadian counterpart where $6 billion of accumulated ADCVD was
distributed as follows: $5 billion was returned to foreign manufacturers, $500 million was
distributed to domestic companies and the remainder was used as a fund to promote the
U.S. industry and provide support to domestic manufacturers. In exchange for these
distributions, ADCVD were lifted for a number of years, and only a tariff quota system was
used.
A similar situation may play out in the Section 201 trade case. First, there is a large sum of
money that could be distributed and used to consummate a settlement. In a series of
actions with the ITC in 2011/2012, the U.S. subsidiary of Solarworld AG petitioned to
impose ADCVD on solar modules and cells imported from and made with components
produced in China and Taiwan.
Over time, these import tariffs paid by Chinese and Taiwanese importers have grown to an
estimated $1.3 billion deposited in segregated accounts at the U.S. Customs, under the
responsibility of the U.S. Department of Commerce. What is more, the $1.3 billion in
deposits cannot be released to the US Treasury General Revenue Fund until all litigation
by Chinese manufacturers who opposed the ADCVD actions have been resolved.
If past precedent would guide the current situation, it would result in a cash distribution to
both the petitioners and foreign manufacturers, making the possibility of a settlement an
unexpected and underappreciated source of value for CSIQ. In fact, we believe the
possibility of settlement is not farfetched at all. First, a senior attorney who took part in
crafting the softwood lumber settlement referenced above is now working for CSIQ on the
Section 201 trade case.
Second and to the point, in mid-2016, Solarworld and CSIQ (as representative of its
Chinese peers) agreed to the contours of framework similar to the soft lumber 2006
agreement. The proposed settlement was a result of negotiations involving the companies
and the US/Chinese governments, with support from all involved parties. However, the
settlement was never ratified as the process was interrupted by a change of the proverbial
guard among the representatives overseeing the negotiations for China and the transition
of the U.S. White House Administration.
Applying a similar framework of settlement to the current Section 201 case, a portion of
the $1.3 billion in accumulated ADCVD would be restituted to Chinese manufacturers pro-
rata for their ADCVD payments to date. We estimate that under this settlement construct,
which attorneys following the case confirmed is legally feasible, CSIQ could receive $200 -
$250 million (equal to $3.40 $4.20 per share), which is a material portion of the ADCVD
paid to date.
Notably, these funds have already been expensed as COGS by CSIQ (~$270 million
based on the companys disclosures), and are not capitalized on its balance sheet. The
Section 201 petitions quick process, near term deadlines, and broad impact across the
industry make it a powerful near term catalyst to incentivize all parties to reach a new
settlement in the coming months. Such a settlement would constitute yet another
significant and underappreciated call option for CSIQ.
Deferred tax assets

In addition to all of the assets above, CSIQ also has approximately $221 million in net
DTAs that it can use to offset taxes that it will realize as it generates taxable income.
Grossed up at the total Ontario tax rate of 26.5%, these losses are equivalent to almost $1
billion of undiscounted usable losses (generated over time by ADCVD and other factors).
Even in the rosiest of asset sales scenarios, CSIQ is unlikely to use all its DTAs which
should therefore be included in our SOTP (appropriately discounted to account for time
value of money) since they will reduce cash taxes payable in the future.
The pro-forma Canadian Solar

Pulling all of this together, we believe the market has failed to appreciate the implied
bargain valuation of the remaining CSIQ assets - the manufacturing business, the
Japanese assets and the development company pro forma for the operating asset sales.
We believe this 1.7x multiple is irrationally low given the net cash position, the better
durability and cash flow generation of these three assets as a whole, compared to highly
cyclical and low free-cash-flow module manufacturing businesses like JKS (best comp)
and JASO, which trade at 9.9x and 3.2x 2018 EBITDA, respectively.
Management
Over time have, we have observed how CEO/Founder Shawn Qu, who holds a 23% stake
in CSIQ (his sole source of wealth, value at ~$250 million) has aligned his interests with
those of shareholders, setting CSIQ apart from other Tier 1 manufacturers. For example,
CSIQ has:
Explored ways to unlock shareholder value when the market did not ascribe
appropriate value to the companys assets (i.e. hired bankers to examine tax-free spin-
off to shareholders of development business);
Executed on cost cuts while reducing capex commitments from $400 million at the
beginning of 2017 to $200 - 250 million;
Continued to execute on operating asset sales (including profitably selling its asset in
China, which many did not think possible);
Focused on reducing leverage to ensure durability of the business;
Focused on profitability rather than sales volume;
Offered broader and deeper disclosures than peers on the companys structure and
assets; and
Focused solely (at the expense of reported EPS) on GAAP accounting.
Question for shorts or sell side analysts with Sell ratings

We respect contrary views, including shorts and analysts with sell ratings. As investors
work on CSIQ, we encourage them to ask proponents of bear arguments any of the below
questions and demand evidence underlying their answers.
Operational assets
What is the evidence to conclude that the Recurrent Portfolio is indeed worth less or
as much as the company indicates?
Can you articulate why our numbers on Tranquility 8 are incorrect?
Can you provide evidence that asset sales of U.S. operating assets are being closed
at lower prices than a year ago?
Do you value each project with a DCF? What is the DSCR assumed? What is the
source of the PPA data?
Do you use the current market levered IRR of 6-7%?
Japanese assets
Can you provide evidence that plants that had a signed interconnection agreement
and land as of May 1 2017 have been abandoned or not developed for reason other
than lack of financing?
Why do you not value the operating assets that are not earmarked for the JREIT? Do
these assets provide cash flows?
Have you done due diligence on CSIQ Japanese FIT contracts?
Can you articulate (and provide evidence) disproving the retail investor thesis on the
JREITs?
Can you explain why one of the JREITs is trading above its IPO price (and the others
recovered)?
Can you provide evidence of Japanese operating assets sold materially below our
valuation numbers?
Module business
Can you explain why module manufacturers are raising prices in numerous countries?
Why have module prices not declined as expected so far?
What was your forecast during Q1 about the expected module prices trajectory in
What was your forecast during Q1 about the expected module prices trajectory in
July/August?
Thank you for reading this Seeking Alpha PRO article. PRO members received early
access to this article and get exclusive access to Seeking Alpha's best ideas. Sign up or
learn more about PRO here.
Disclosure: I am/we are long CSIQ.
I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it (other than from Seeking Alpha). I have no business relationship with
any company whose stock is mentioned in this article.
Additional disclosure: We own CSIQ stock, long dated call options and call/put spreads.

Canadian Solar: A Rare Bargain Hiding in Plain Sight - Canadian Solar Inc. (NASDAQ:CSIQ) - Seeking Alpha

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Canadian Solar: A Rare Bargain Hiding In Plain Sight - Canadian Solar Inc.

(NASDAQ:CSIQ) | Seeking Alpha 9/21/17, 9:07 AM

Contrarian deep value investment with significant upside.

Multiple near-term hard catalysts.

Compelling expected return underpinned by tangible asset value and multiple

Seeking Alpha PRO subscribers received early access to this article

A hard to replicate, derisked pipeline of solar power projects in Japan $14.20/share;

temperament to withstand daily vagaries of a trading driven market.

We think of Canadian Solars intrinsic value as standing on a bedrock of tangible asset

or large (utility scale) power plants.

Why this is the right time to invest in CSIQ

Why this opportunity exists

2. The coexistence of a cyclical/low margin/low multiple business (ModuleCo) and a

and the companys quarterly guidance/results;

8. The head of CSIQ IR took an indefinite sabbatical leave in mid-2016.

Operating Assets ($9.30/share): contracted and stable cash flows

In spite of recent statement by the company, there seems to be considerable skepticism

where utilities dominate are moving towards renewables assets.

2. The extrapolation of declining valuation by market participants is incorrect

We believe a longer time to announce a sale of assets is by no means a certain indication

The Other Operating Plants (UK, China, Japan)

Project Development Company - DevCo ($6.60/share): a

Rounding up the value of DevCo: tangible construction/development in process on

Why CSIQ is not another SunEdison

Second, Canadian Solars module business is independently durable because it

The Japanese Assets ($14.20/share): hard-to-replicate assets with

What has changed to ensure execution on the Japanese assets

Conservatively, we assign no value CSIQs 210MW of projects without interconnection

Valuing the Japanese Assets

We worked with Japanese developers to validate our assumptions of operating metrics of

The module manufacturing business: negligible equity value, but

significant upside potential driven by cyclical and structural

Where the module business stands and where it could go

We believe the markets bear arguments ignore a number of points:

2. Partially integrated manufacturers can produce internally at costs that are 20 -

Section 201 and the possibility of settlement an underappreciated call option

Deferred tax assets

The pro-forma Canadian Solar

Focused on reducing leverage to ensure durability of the business;

Focused on profitability rather than sales volume;

Focused solely (at the expense of reported EPS) on GAAP accounting.

Question for shorts or sell side analysts with Sell ratings

Can you articulate why our numbers on Tranquility 8 are incorrect?

Do you use the current market levered IRR of 6-7%?

Have you done due diligence on CSIQ Japanese FIT contracts?

Why have module prices not declined as expected so far?

Disclosure: I am/we are long CSIQ.

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