•    CSIQ's performance has been strong in the past year, with the company recording robust growth in its revenue and margins.
•    CSIQ might be able to sustain its momentum on account of higher module efficiency and a low cost per watt, which will allow it to tap more customers.
•    CSIQ has a strong and diversified customer pipeline of 9GW, with 2.4 GW in the total contracted or late stage, indicating that the company's shipment growth will continue.
•    CSIQ, however, is facing the threat of anti-dumping duties in three key markets, and this has the potential of weakening its financial performance despite all the positives.
Canadian Solar (NASDAQ:CSIQ) has appreciated strongly in the stock market in 2015, gaining close to 16% thus far. But, the stock has lost momentum in the past couple of months, losing close to 25%. This might look surprising, as Canadian Solar is fast improving its financial performance by tapping the growth in the end market. In fact, the company has been able to improve both revenue and margins in the past few months, as shown in the following chart:

 

CSIQ Revenue (NYSE:TTM) data by YCharts    
Higher efficiency and lower costs will continue driving growth
At the same time, the company is following smart strategies to increase sales, apart from improving its operational profile by increasing the efficiency of its products. For instance, Canadian Solar is focusing on a strategy of build-to-own its solar projects rather than build-to-sell. As such, the company will be able to generate higher revenue from its projects going forward by way of power purchase agreements or by selling the projects when their value increases.
Additionally, the company is manufacturing its own modules in the distributed solar market rather than purchasing from third parties. This is a good move, as it will allow Canadian Solar to save extra incentives given to the third parties or subsidies. Also, it will to be eliminate hefty premiums and transportation costs associated with third-part modules.
More importantly, Canadian Solar is focused on improving the efficiency of its modules. For instance, Canadian Solar expects ONYX I-Black Silicon to gain cell efficiency of 0.4% and watts module power of 18.5% over its baseline by the end of fiscal 2015. Likewise, the ONYX II-PERC enhances back side passivation and increases cell efficiency to 19%. The company expects this product to gain cell efficiency of 0.5% and a power gain of 5 watts over ONYX I this year.
More importantly, apart from improving cell efficiency, Canadian Solar is also focused on reducing costs. This can be clearly seen in the following chart:

 

Source: Company presentation
Improving capacity and diversification are tailwinds
In order to tap growth in the end market, Canadian Solar is fast-expanding its module capacity. As such, it is expanding its module capacity by 27% to 3.8 GW by the end of the second quarter as compared to 3 GW at the end of the previous fiscal year. In fact, its module capacity has increased at a CAGR of 32% over the last four years. More importantly, its module shipments have grown at a CAGR of 86.8% since 2006. These are shown in the chart below:

 

Source: Company presentation
Driven by capacity improvements and strong efficiency numbers, it is likely that Canadian Solar will be able to improve its financial performance further. Moreover, the company has also made moves to diversify its utility scale project pipeline across the world, and this will also contribute to its revenue growth.
Currently, Canadian Solar has a total project development pipeline of about 9 GW, out of which 2.4 GW is total contracted or late stage pipeline. The remaining 6.6 GW of its pipeline is in early-to-mid-stage development. The following chart indicates the diversity of Canadian Solar's operations in fast-growing solar markets across the globe:

 

Source: Company presentation
From the above chart, it is evident that Canadian Solar is well-positioned to tap growth in different end markets, and this will act as a tailwind for the company going forward. However, all the good moves made by Canadian Solar might not bear much fruit going forward as it is facing the threat of duties in three of its key markets.
Risks to watch
A key reason why Canadian Solar's stock price has lost momentum in the past couple of months is because the company has manufacturing operations in China. As a result, the company is facing anti-dumping regulations in North America and Europe. For instance, the International Trade Commission hadimposed anti-dumping duties of approximately 30% on a few of Canadian Solar products in January 2015.
In addition, the company could see further anti-dumping duties on its photovoltaic imports in Canada. According to the Globe and Mail, the Canada Border Services Agency found out last month that Canadian Solar and a few other Chinese solar panel makers were taking advantage of government subsidies. This was in violation of the World Trade Organization's agreements.
Moreover, early last month, the European Union also imposed tariffs on Canadian Solar as it was selling its modules below the minimum import price that was required.
These anti-dumping duties will impact the sale of Canadian Solar's products in the U.S., Canada and Europe. Now, the company gets about 50% of its revenue from North America. Hence, the imposition of duties in these two markets will make Canadian Solar's products more expensive, and this will eventually hurt its sales and margins.
Conclusion
Canadian Solar looks well-positioned on both the operational and geographical fronts. It has done very well in the past year, and could do well in the future on the back of a strong pipeline and efficiency gains. However, the company's recent decline could continue going forward due to the imposition of anti-dumping duties. Thus, in my opinion, investors should stay on the sidelines and see whether anti-dumping duties are affecting Canadian Solar's performance or not before investing in the stock.

July 4, 2015

Source: SeekingAlpha.com