Canadian Solar Plans Sino IPO

After years as a public company in the U.S. market, Canadian Solar (CSIQ:  Nasdaq) has filed documents for an initial public offering in China of common stock in its subsidiary CSI Solar Co., Inc.  The stock will be listed on the Science and Technology Innovation Board of the Shanghai Stock Exchange.  The plan was first announced in July 2020, but the coronavirus pandemic may have slowed progress because of travel restrictions.

To be certain, the CSI Solar subsidiary is no trivial appendage.  It contributed 10.3 million megawatts of Canadian Solar’s total 10.9 million megawatts in total solar power products sold in 2020.  In value terms, CSI Solar accounts for about 79% of net revenue.

The offering will consist of over 500 million shares, which will trim Canadian Solar’s ownership of the CSI Solar subsidiary from the current 80% share to about 64%.  Thus, Canadian Solar will retain control over its subsidiary entity and get new capital to expand CSI Solar’s capacity for solar power project development and operation.  Besides electricity sales in China, CSI Power manufactures a variety of solar power products, including solar modules, solar system kits and battery energy storage solutions.  CSI Power’s solar modules are used in power projects in China as well as projects undertaken in Canadian Solar’s global power segment.

Public offerings in China may not be as straight forward as in other countries.  In 2020, the Ant Group was forced to postpone its offering after public comments by its leadership drew the ire of government officials.  Even when offerings make it to market, the government hand weighs heavily on pricing and valuation.  Price-to-earnings caps have been imposed on numerous occasions over the three decades China has had a domestic stock market.  Consequently, offerings are often subscribed many times over by both institutions and individuals. 

Issuers in other markets navigate the rocky shoals of initial public offerings by limiting the size of potentially undervalued initial shares and later staging follow-on offerings at higher prices.  Unfortunately, in China minimum float size requirements for the initial public offering makes such practical maneuvers difficult if not impossible.

Canadian Solar has chosen the new STAR market to list CSI Solar.  Just two years old, the STAR market does not subject initial public offerings to a price-earnings limit.  So far STAR market offerings have been at higher PE ratios, holding out promise of a fair deal.  

Then there is the lengthy regulatory process followed by China’s regulatory apparatus, the China Securities Regulatory Commission.  Canadian Solar my have to wait as long as one year before it gets the greenlight for its CSI Solar deal.  It is not surprising that some China companies look carefully for struggling companies that are already listed in China and then craft a reverse merger.

Canadian Solar may have considered such the merger gambit, but has chosen an IPO instead.  Public listing of CSI Solar will present the usual exposure to short sellers who try to game the differences in accounting and reporting practices in China and the U.S. to insinuate wrong doing.  Given that Canadian Solar has at least a half dozen analysts following the company’s Nasdaq listed shares, we expect more transparency and fewer shenanigans.

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.