Canadian Solar turns to Japan to drive shipment growth

Tue May 28, 2013 12:54pm EDT

(Reuters) - Canadian Solar Inc (CSIQ.O) reported a smaller-than-expected quarterly loss and said it was ramping up exposure to high-margin Japan as it reduces dependence on China, where intense competition has driven down panel prices.

Shares of Canadian Solar, which has most of its manufacturing operations in China, shot up as much as 24 percent. Prices of other solar stocks also rose.

Solar manufacturers turned to China for new business after trade disputes threatened to shut them out of the United States and Europe but heavy competition has squeezed already-weak margins, forcing them to seek new markets.

Japan has become more attractive for solar companies as the country moves away from nuclear power following the Fukushima disaster in 2011.

Canadian Solar's panel shipments to Japan jumped 75.9 percent in the first quarter from the fourth quarter, accounting for nearly 25 percent of the company's shipments.

The company said it expected panel shipments of between 380 megawatts (MW) and 420 MW in the current quarter, with Japan accounting for 35-40 percent of those shipments, Canadian Solar said. It shipped 340 MW of panels in the first quarter.

Japan is expected to grow about 120 percent to become the No. 2 solar market behind China this year, according to business information provider IHS.

Canadian Solar said its high-margin residential rooftop kit business was growing in Japan. It also has a strong presence in the heavy-volume commercial project market in the country, and is steadily building a pipeline of utility projects.

"We are taking a very conservative approach to the China market," Chief Financial Officer Michael Potter said on a conference call with analysts.

Apart from Japan, the company is focusing on emerging markets in Asia as it gets squeezed out of Europe, traditionally the world's biggest solar market.

The European Commission accuses Chinese firms of selling solar panels at below cost in Europe — a practice known as "dumping" — and has decided to impose duties on China-made solar panels from June 6 for a trial period.

To get around the tariffs, Canadian Solar has been shipping modules to European customers from its factory in Guelph, Ontario. But production costs in Canada are far more expensive in Canada than in China.

The company expects Europe to account for about 10 percent of second-quarter shipments. Europe accounted for about 25 percent of first-quarter revenue.

NEW MARKETS

"We have well-developed other markets like Japan, India and Thailand. The volume from these markets more than compensate for the volume reduction in Europe," Chief Executive Shawn Qu said on the call.

Wedbush Securities analyst Min Xu said that while emerging markets offered potential for volume growth, margins were lower than in Europe. "They are not going to completely cover the gap that the European tariff is creating, but it definitely helps a little bit," he said.

Canadian Solar said it expected its second-quarter gross margin to be between 9 and 11 percent, compared with 9.7 percent in the first quarter.

The company recorded an operating margin of 6.8 percent in the first quarter, up from negative 31 percent in the preceding quarter, after reversing a $30 million non-cash provision for an unfavorable arbitration award. The reversal also led to a 80 percent drop in operating expenses.

The company's net loss narrowed to $4.4 million, or 10 cents per share, from $21.3 million, or 49 cents per share, a year earlier. Revenue fell 19 percent to $263.6 million.

Analysts on average expected a loss of 78 cents per share on revenue of $236.5 million, according to Thomson Reuters I/B/E/S.

Canadian Solar shares were up 19 percent at $10.29 after touching a nearly two-year high of $10.65. The stock has nearly doubled over the past month, making it the highest price performer among its peers.

(Reporting By Kanika Sikka and Patturaja Murugaboopathy in Bangalore; Editing by Joyjeet Das)