Canadian Solar (Nasdaq: CSIQ) was one of the best performers of China’s rebounding solar sector last year, and now it’s testing investor appetite for its comeback story with a plan to raise about $200 million by issuing stock and bonds. Investors gave the plan a lukewarm response, sparking a sell off that saw Canadian Solar’s shares drop 7.5 percent after the announcement. Of course it’s also worth noting that Canadian Solar stock rose more than 10-fold last year, as it became the first major player to return to profitability after a prolonged sector downturn.
Canadian Solar probably expected a negative reaction to its fund raising plan, which is why it concurrently released some preliminary fourth-quarter results that looked quite upbeat. From a broader perspective, it will be interesting to see if other solar panel makers follow suit with their own similar fund-raising plans. All of them certainly need new money after reporting big losses for the last 2 years, and I would expect we’ll see announcements of a few similar plans in the next few months.
All that said, let’s take a look at Canadian Solar’s new fund-raising plan, which would see it issue $100 million in convertible bonds and another 2.6 million of its ordinary shares. (company announcement) Those shares would be worth about $95 million, bringing the total amount of funds raised to about $200 million. The company could raise another $30 million if overallotment options are exercised on both the bond and stock issues.
That kind of fund raising would have been unthinkable just over a year ago, when Canadian Solar’s market value had sunk as low as $100 million as the solar panel sector struggled under the weight of a major industry downturn. This kind of fund-raising looks risky even now since Canadian Solar only returned to profitability in last year’s third quarter, becoming the first major player in the sector to do so.
Canadian Solar sought to reassure investors that its return to the black wasn’t a fluke, and that it could continue to post profits on a sustained basis. In a separate announcement, it said it expects its fourth-quarter shipments to total 605-620 megawatts, or well ahead of its previous guidance for 480-500 megawatts. (company announcement) It said its gross profit margin would also come in at 16-18 percent, also ahead of its previous guidance for 13-15 percent. And it reiterated it expects to post a profit in the fourth quarter and for all of 2013.
Canadian Solar and many of its peers have been surviving up until now on a steady trickle of new loans, many of them provided by Chinese state-run banks that are under pressure from Beijing to provide such funding. This new fund raising marks the first major move to tap overseas capital markets, meaning sector players are beginning to feel confident enough about their future that they can attract funds from these more market-oriented investors.
Canadian Solar joins a long queue of US-listed Chinese firms that have recently tapped western financial markets through this kind of fund raising. The last year and a half saw many of China’s top Internet companies also tap the markets by issuing convertible bonds, with names like Baidu (Nasdaq: BIDU), Ctrip (Nasdaq: CTRP) and Sina (Nasdaq: SINA) all making major offering that collectively raised billions of dollars. (previous post) But all of those companies were highly profitable, unlike Canadian Solar.
I do expect that Canadian Solar will be able to sell all of its bonds and newly issued shares, though I have doubts about demand for the overallotment. I do also expect we’ll see 1 or 2 other major players try a similar fund-raising exercises in the first half of the year, with names like Yingli (NYSE: YGE), Trina (NYSE: TSL) and Shunfeng (HKEx: 1165) the most likely to make offers for similar amounts of money.
Bottom line: Canadian Solar’s new fund-raising plan is likely to get moderately warm response, and will be followed by 1 or 2 similar plans by its rivals in the first half of this year.