The somewhat confusing name stems from the fact that the company is founded by a Chinese Canadian and is incorporated in Canada. All its manufacturing is in China, however, making it privy to the lower operating costs and speedy growth that typically apply to this market.
It has been almost a year since Suntech Power raised $400 million in the largest ever IPO by a private Chinese company in the US and while its share price has come back from the highs hit a couple of months after its December trading debut, the stock remains a sector favourite among investors. It is currently trading 78% above its IPO price.
Canadian Solar, which makes solar modules and products and is active within recycling of silicon, will attempt to attract many of the same investors on the basis of it having a similarly strong growth profile and a lower cost base than its rival. But being only a tenth of the size of Suntech and less well established internationally, it will come to market at a significantly cheaper valuation.
Adding to its attractiveness, the company is in the process of moving into the manufacturing of solar cells to capture more of the value chain and thus also more of the available margins.
The company, which is being brought to market by Deutsche Bank and Lehman Brothers, is offering 7.7 million common shares, or 28.2% of the company. Of the total, 6.3 million shares, or 82% of the deal, are new shares. The remainder will be sold by two private equity investors, both of which will still hold stock in the company at the time of listing, according to the prospectus.
Five percent of the offering has been set aside for directors of the company, employees, business associates and other related parties.
The price is indicated at $13 to $15 per share for a total deal size of $100.1 million to $115.5 million. There is a 15% greenshoe that may boost total proceeds to $132.8 million.
The price range values Canadian Solar at 14 to 16 times its estimated 2007 earnings, which puts it at a discount to most other solar panel and module manufacturers, a source familiar with the offering says.
Suntech currently trades at about 21.5 times its projected earnings for 2007 and apart from a few exceptions, most sector peers are quoted at 2007 multiples between 19 and 24, the source notes. A couple of German solar module makers trade well below that at about 13 times due to their much slower growth profile.
Based on its historic earnings, this isnÆt something that is likely to plague Canadian Solar. Since it sold its first solar module products in 2002, the company has doubled its net profit every year, achieving a compound annual growth rate of 123.5% in 2003-2005.
In the first half of 2006, it recorded a loss of $4.6 million, compared with a net profit of $1.9 million in the first half of 2005 and a $3.8 million profit in the full year 2005. The set-back was related to a one-off non-cash item to account for a change in value of the convertible bonds through which the private equity firms invested in the company.
According to the source, the company isnÆt expected to make a profit after non-cash items this year, but should resume its positive net profit trajectory thereafter.
One of the key selling arguments during the roadshow, sources say, will be that the industry will grow at an equally impressive pace in the next few years supported by continued government incentives to use alternative energy sources, the decline in oil resources and a growing awareness of the advantages of solar power.
Demand is also seen to be underpinned by advances in technology that make solar power more cost-efficient to use and the large market in developing countries that currently have little or no access to electricity.
Independent research firm Solarbuzz projects that revenues in the solar power industry will reach $18.6 billion by 2010 from $9.8 billion in 2005. In the same period, worldwide installations of solar power systems are expected to grow at a CAGR of 17.4% to reach 3,250 megawatts.
In the near-term that growth could be constrained by the current global shortage of high-purity silicon, which is needed to produce the silicon wafers that are used in solar cells to convert sunlight into electricity. According to Canadian SolarÆs prospectus, however, Solarbuzz expects growth to accelerate after 2007.
People familiar with the offering note that one of Canadian SolarÆs strengths is that it is also involved in procuring silicon through its recycling business. This has helping to ensure its supply of the raw material and already the company has contracted about three quarters of its silicon requirements for 2007.
And while the shortage has obviously driven up the price for silicon wafers, the management at Canadian Solar is ôconfident that the prices they pay either for its contracted silicon or the silicon it buys through other means will make a sufficient margin,ö one source says.
The company is coming to market about two months after E-Ton Solar, a Taiwan-based producer of solar cells, was forced to call off its planned sale of GDRs after failing to secure enough investor demand. However, observers say this had more to do with the valuation of the company û which has been driven up as the price on its locally listed shares has gone through the roof since the domestic IPO in March this year û than any actual sentiment for the sector.
More importantly, they stress, Canadian SolarÆs IPO is coming at a time when the US market is trading at record highs and amid a pickup in enthusiasm for new listings since the summer break. The average first-day return for new US listings in October is 17.3% compared with 13% during September. And the 30-day return for companies that listed during the month of September has reached 40%, which is the highest monthly return so far this year.
The interest in Chinese companies is also extremely strong at the moment with the two most recent Mainland companies to come to market having seen their share prices shoot up sharply after their debut. New Oriental Education & Technology Group, the first Chinese education company to list in the US, is currently up 65% since its early September debut. Medical equipment manufacturer Mindray Medical International, which started trading a couple of weeks later, is up 40%.
A clear sign that this interest isnÆt waning is the overwhelming demand for Chinese mid-range hotel operator Home Inns, which was due to price its Nasdaq IPO after the US close last night. The up to $95 million offer is reported to be well over 20 times covered and according to sources it is expected to price above the $10 to $12 indicated range.
Canadian Solar is expected to fix its price and start trading on Nasdaq in the week of November 6.
Shawn Qu, the founder and CEO, will hold 50.14% of the company at the time of listing. Another 21.6% will be held by the three original private equity investors, including a fund wholly-owned by HSBC Holdings.
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