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Value Investing In Solar - Why I Picked Canadian Solar

In my last article, I declared that I will stay away from Canadian Solar (NASDAQ:CSIQ), as I expected lower earnings in the second quarter and a low third-quarter guidance. Canadian Solar's strategy to hold on to solar plants rather than selling them was going to take full hold of the company's income statement during this coming season. The high-value portfolio of five Ontario projects, which has about 71MW DC left, could be monetized in the fourth quarter with the potential for four plant sales. During 2014, this was a powerful engine of earnings for the company.

However, my expectations may need to be adjusted based on recent indications that the company may hold on to not just one, but to all Ontario projects.

The power of earnings for the fourth quarter will certainly be affected, and this means a change in earnings per share for this year. On the other hand, both the purchase of Sault Ste. Marie solar plants worth 60MW AC and holding on to Ontario's 50MW AC worth of projects would become advanced confirmation that the Yieldco is still the number-one objective.

I have read enough articles on Canadian Solar to conclude that the company is poorly understood by the mainstream investing community. Most articles suggest that the company has lost the earnings power, but does not offer any explanation, conveniently omitting the publicized strategy to "build and hold" projects.

Next, it is argued, because Yieldcos fell out of favor and their valuations dropped dramatically, that the Yieldco model is doomed. It appears the company has been fully aware of this condition, but it is willing to hold on to the assets and carry them on the balance sheet. The plan is to wait for a change of sentiment toward Yieldcos in conjunction with the market. I do not deny the need for cash flow, as in selling solar plants, but the preservation of the asset value and ability to create revenue at a higher margin prefers the formula of keeping assets in a Yieldco and drawing the benefit of dividends from energy sales. It makes complete sense that Canadian Solar wants to hold on to over 2GW of top-class projects rather than selling them at 15 to 20% gross margin, even though those sales would have a lucrative cash generation.

When Yieldco stocks prices fell apart, and critics finally encircled SunEdison (NYSE:SUNE), overnight, Yieldco became ominous in the eyes of investors. In my view, this is an example of throwing the baby out with the bath water. As with many other poorly made judgments, the erroneous treatment of Yieldcos will also come to pass. Therefore, the matter at hand is how long Canadian Solar will wait for the market, using the endurance of its balance sheet, or will the company decide to sell some or all assets at some point to add cash flow as needed. It is a question of timelines and the best conditions to produce returns, not loss of value, as some superficial opinions suggest.

To fully appreciate what the Yieldco can offer, one must understand revenue streams in solar. The biggest portion is made up of third-party module sales. Chinese companies are identified by manufacturing abilities and sales to third parties. The second part is a solar plant building with a fork in the road leading to sale or ownership of those assets. Finally, electricity sales, from...


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