Rotth Capital reaffirms Canadian Solar (Nasdaq: CSIQ) with a Buy rating, but cuts its price target from $40 down to $28 following the company's Q4 results and outlook issued on Thursday.

Analyst Philip Shen offered the following commentary: Heading into the quarter, street expectations for margins were 16-17% for 2016 (vs. ROTHe of 14.9%). The company likely spooked investors with its Q1 guide of 12-14%. A key driver of the lower margins is the company’s inverted pyramid structure (400-MW of wafer, 2.7GW of cell, and 4.3GW of module) coupled with the recently rising wafer and cell prices.

While our checks suggest we could see wafer and cell ASPs declining nearterm potentially offering some relief in Q2, the stock took a hit yesterday (down 13%) as the market lowered its margin expectations for the company. Combining this with threat of overcapacity in H2’16 potentially pushing ASPs lower/faster, there is arguably more than less uncertainty around the economics of CSIQ’s core module business. Additionally, management provided two sets of 2016 revenue guidance—one with minimal project sales and the other with $300-500mn of project sales—reflecting the uncertainty around if/when a yieldco could be launched. Notably, both were weaker than consensus estimates.

A source of confusion on the street, in our view, includes how much project sales should be included in estimates, which we believe can greatly swing EPS. For example, post-Q2 results, we issued 2016 EPS of $1.29 with a modest volume of project sales.

Following a successful partial project sale to Southern Company, we increased our 2016 EPS to $2.80 on nearly $1 billion of project revenue post-Q3 results. We are now cutting estimates and our latest 2016 estimate has round-tripped back to $1.29 as we’ve meaningfully lowered our project sales contribution. All in, while we are somewhat concerned by the weaker margins, we continue to believe that CSIQ has a substantial amount of value creation ahead with its downstream business. Management highlighted that its 2GW late stage pipeline could drive for $4.5 billion of revenue representing $850mn of gross profit. While we have lowered our 2016 EPS aggressively for conservatism, we believe management could drive attractive earnings in 2016 given its late stage pipeline.

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