Morgan Stanley Downgrades Canadian Solar On Short-Term Pressures

The Solar industry is facing challenges due to oversupply and a tighter regulatory environment in a number of key markets, Morgan Stanley’s Stephen Byrd said in a report. He downgraded the rating on Canadian Solar Inc. CSIQ from Overweight to Underweight and reduced the price target from $24 to $12.80, citing “significant near-term pressure on profitability.”

Analyst Stephen Byrd expressed concern regarding Canadian Solar’s performance in the back half of 2016, owing to:

• Steep declines in module prices related to industry oversupply.
• Cost reductions proceeding more slowly at Canadian Solar than its peers, due to capacity additions in China and abroad coming online in 2H.

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Pressure On Profitability

Byrd expects the company’s manufacturing profits to be adversely impacted by falling prices. He commented that Canadian Solar’s module business was likely be among the “most unfavorably positioned” in 2H16, citing the reasons as:

• The launch of the company’s new 700MW capacity outside China in 3Q16, which was later than peers, and shipment volume expected to be highly limited in 2016
• Canadian Solar is among the least vertically integrated manufacturers and is heavily dependent on outside sources for wafers.

“Based on company plans, wafer/cell/module capacity should have been 1.0/2.7/4.63GW at the end of June 2016. However, the Funing plant, which should produce 267MW of cells under normal production, or 15-20% of its requirements for 3Q16, was damaged by a tornado in late June,” the analyst wrote.

The company’s module gross margin is expected to contract from 18-19 percent in 1H16 to 15-16 percent in 2H16, with an estimated 11 percent decline in ASP, partially offset by the wafer/cell price decrease.

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