Canadian Solar's Cash Flow Issues Likely to Remain; Investors Should Look Elsewhere

7/14 - "Canadian Solar (CSIQ) announced plans to sell 3.5 million common shares, raising the company’s expected fully diluted share count to nearly 36 million shares (32.3 million shares as of last report + 3.5 million shares from the announced secondary) and its enterprise value to nearly $1.4 billion...we think it’s important for investors to realize that this latest financing nowhere meets the actual financing needs of CSIQ, and as such we expect continued financings for CSIQ over the next year."

"CSIQ’s financing needs are a direct result of the company’s astounding $1.7 billion in purchase obligations (page 64 in CSIQ’s 20-F). Interestingly, this number may in fact be conservative considering the company’s recent initiatives. Since the company will have to pay the vast majority of these obligations up-front to suppliers in cash, and will not receive adequate cash receipts from customers prior to the necessary payments to suppliers, CSIQ will be in need of serious cash in order to meet its production goals. Ironically, the more CSIQ pursues contracts at any price, the more cash it will need to fund its supplier obligations, and the more dilution shareholders should expect."

"Our low-ball estimate is that CSIQ will need at least an additional $200 million in financing to support operations in the coming year. This cash may come from the Chinese banks (short-term loans) and/or Wall Street. In either case, the company’s enterprise valuation will increase even without a corresponding increase in the share price, leaving investors with little in the way of capital gains."

"...since we remain reasonably certain that the suppliers of polysilicon-based solar modules (an extremely low barrier to entry business), will vastly exceed the suppliers of the raw material (e.g. polysilicion) for these modules (a very high barrier to entry business) for the foreseeable future, we believe that the suppliers of polysilicon-based solar modules will constantly be squeezed from both their customers and their suppliers of materials. As such, we do not believe that these companies will be self-funding any time soon and the future free cash-flow (if any) will not justify the current enterprise valuation."