Canadian Solar's 2Q14 sales and earnings flout expectations

Net sales were the biggest treat.

Canadian Solar’s 2Q14 sales and earnings were meaningfully ahead of Nomura’s Street-high expectations as shown below.

According to a research report from Nomura, the key surprise came from net sales of USD623.8mn (12.5% ahead of our estimates) primarily backed by 2Q14 shipments of 646MW (5% ahead of our estimates) and higher-than-expected ASPs.

In addition, for 3Q14F, the company guides for sales of USD760-810mn, gross margin of 19-21% and shipments of 720-750 MW.

With the company also noting that it is evaluating a YieldCo-like vehicle sometime next year, Nomura sees CSIQ is well ont rack to monetise its project pipeline with strong earnings momentum ahead.

Here’s more from Nomura:

China target at 13GW likely – project order inquiries are strengthening.

US shipments would continue, with CSIQ now supporting US shipments from modules produced in China. Slightly lower margins but still profitable.

3Q14F guidance includes four project sales in Canada vs. one in 2Q14. We believe this is the key reason for the strong gross margin guidance for 3Q14F despite our and market expectations of weaker ASPs and margins in 2H14F.

Based on management’s guidance, we estimate that 2H14F sales contribution from projects should be more than 50% of sales.

Japan project pipeline at end-2Q14 is 405.5MW, up from 343MW as at end-1Q14. The company reiterated its expectations to increase this pipeline to 600MW by end-2014F.

CSIQ is evaluating a YieldCo-like structure to get higher pricing for its projects globally and will likely reach a conclusion on the structure and timeline by 1H15F.

Management seemed inclined towards a global portfolio in its YieldCo; albeit this is still under deliberation as per management.

Inventory situation: While overall inventory did rise q-q, management noted that it built inventory anticipating a seasonally strong 2H14F. That said, management noted CSIQ does not have lot of inventory in the US or Japan.

ASP situation in 3Q14F: Management agreed that pricing in China has come off, but it reiterated that CSIQ only sells into China if the credit terms are attractive.

On US pricing, management noted that it has increased pricing following the US anti-dumping announcement.

Japan pricing for CSIQ is coming off, but the declines are small unlike its peers which mostly sell white-label in contrast to CSIQ’s own-brand modules.

Capacity expansions: No plans to incease capacity except for a 60MW proof of concept line on equipment purchased from Spectrawatt for high-efficiency (19%+) using multi-wafers.

Management noted that it is evaluating its strategy for capacity expansion via M&As or greenfield but has not yet arrived at a final decision