Earnings Call Transcript - CSIQ Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's First Quarter 2021 Earnings Conference Call. My name is Annie, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Isabel Zhang, IR Manager at Canadian Solar. Please go ahead.

Isabel Zhang, IR Manager

Thank you, operator. And welcome, everyone, to Canadian Solar's first quarter 2021 conference call. Please note, that we have provided slides to accompany today's conference call which are available on Canadian Solar's Investor Relations website within the Events and Presentations section. Joining us today are Dr. Shawn Qu, Chairman and CEO; Yan Zhuang, President of Canadian Solar's majority-owned subsidiary, CSI Solar; Dr. Huifeng Chang, Senior VP and CFO; and Ismael Guerrero, Corporate VP and President of Canadian Solar's wholly-owned Energy business. All company executives will participate in the Q&A session after management's formal remarks. On this call, Shawn will go through an overview of Canadian Solar’s strategy. Ismael and Yan will respectively review the highlights of the Global Energy and CSI Solar segments, followed by Huifeng, who will go through the financial results. Shawn will conclude the prepared remarks with the business outlook, after which we will have time for questions. Before we begin, may I remind listeners that management's prepared remarks today, as well as their answers to questions, will contain forward-looking statements that are subject to risks and uncertainties. The company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from management's current expectations. Any projections of the company's future performance represent management's estimates as of today. Canadian Solar assumes no obligation to update these projections in the future, unless otherwise required by applicable law. A more detailed discussion of the risks and uncertainties can be found in the Company's annual report on Form 20-F filed with the Securities and Exchange Commission. Management's prepared remarks will be presented within the requirements of SEC Regulation G regarding Generally Accepted Accounting Principles, or GAAP. Some financial information presented during the call will be provided on both, a GAAP and a non-GAAP basis. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the Company's performance and underlying trends. Management uses non-GAAP measures to better assess operating performance and to establish operational goals. Non-GAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP. I would now like to turn over the call to Canadian Solar's Chairman and CEO, Dr. Shawn Qu. Shawn, please go ahead.

Shawn Qu, Chairman and CEO

Thank you, Isabel. Hi, everyone. Welcome, and thanks for joining us today. We started 2021 with a strong quarter. We delivered 3.1 gigawatts of module shipments, US$1.1 billion in revenue and 17.9% in gross margin. We also achieved net income of US$23 million and a diluted EPS of $0.36. Our results came in towards the high end of our guidance while delivering a good balance of growth and profitability. I want to thank our team for their focus and execution to make this happen. While Q1 remained a challenging quarter, our team continued to execute our strategy and strengthen our long-term competitive advantage. Now, let's turn to Slide 3 of our presentations. Over the past several quarters, we have embarked on a transformational journey to accelerate the demand for our battery storage services, including the recent strategic partnership and investment agreement with Habitat Energy. This partnership will help us strengthen our capabilities in artificial intelligence and machine learning to focus and manage energy demand and execute real-time power trading and dispatch decisions for our battery storage assets. This means our battery storage solutions will deliver higher value to our customers by bringing in higher revenue. These tools will help us expand our storage solutions into non-capacity markets to offer services like frequency regulation and other ancillary services, and also market opportunities. We think these advanced capabilities will give us a significant long-term competitive advantage as better storage assets gain shares of the overall energy mix. These technologies will make merchant battery storage investable at scale and even more attractive to investors. Importantly, they will make the power grid more reliable, more efficient, cleaner, and smarter. In addition, we are rapidly expanding global storage project development efforts. We found that virtually all our solar projects under development can co-host energy storage facilities. And we have done so during the first quarter of 2021. This approach has helped us nearly double our energy storage pipeline to almost 17 gigawatt hours during the quarter. This allows us to further synergize and boost the value of our total project pipeline as solar and battery storage can utilize the same piece of land and the same interconnection point. Of our total storage pipeline, 1.2 gigawatt hour of the storage pipeline is currently under construction. So the big takeaway here is our storage initiatives in both of our business segments are growing as fast with further growth expected. Now please turn to Slide 4. Staying on the topic of technology, our new N-type heterojunction, our HJT solar cell line of 250 megawatts is now fully up and running. We produced our first HJT cell in Q1 and currently have achieved commercial efficiency of well over 24.5%, with more improvements targeted by our in-house CSI Solar HJT research institute scientists. In support of our HJT cell research and production, we brought online a new state-of-the-art 250-megawatt N-type ingot fully in line. We plan to start delivering our HJT solar modules in Q3 of this year, which will help further improve our pricing power and brand recognition. This will make Canadian Solar the first global solar module brand to deliver HJT solar modules of large wafer size and half-cut cells and will make another important innovation leadership milestone for us. Finally, let me say a few words about our supply chain and our strong commitment to human rights. Modern slavery, including forced labor, is a crime and violation of fundamental human rights. At Canadian Solar, we are fully committed to ensuring that modern slavery does not take place anywhere in our business, including our supply chain. We expect all of our third-party suppliers, contractors, and other business partners to act similarly to prevent modern slavery. We do not tolerate any parties directly or indirectly engaging in modern slavery. We reasonably believe that there is no forced labor involved in our supply chain, and we will make further efforts in auditing our suppliers. I will encourage you to review our anti-modern slavery policy, which is available on Canadian Solar's Investor Relations website under the Governance section. With that, let me turn over to Ismael, who will talk about the performance of our Global Energy business. Ismael, please go ahead.

Ismael Guerrero, Corporate VP and President of Energy Business

Thanks, Shawn. I'm proud to report that in Q1, Global Energy delivered $471 million in revenue and 24% in gross margin. We achieved nearly 500 megawatts of project sales in Japan, India, and the U.S. We also continue to grow our project pipeline, both in solar and battery storage projects, which will enforce our future success. Today, I would like to spend a bit more time to go through the Global Energy business to help the market understand better our business drivers. Please turn to Slide 5. Canadian Solar is one of the few global pure-play solar and storage project development platforms in the world. We compete with state-owned or state-backed utilities as well as small local developers, and we have built over time our own unique competitive moat. Over the past decade, we have developed, built, and connected to the grid over 5.7 gigawatts of solar projects across 20-plus countries. And by the end of this year, we expect to add another 1.5 gigawatts to our track record as these are projects currently under construction. Moving to Slide 6, please. We have also grown our total solar pipeline to 21 gigawatts, including our China pipeline, which is now part of CSI Solar. Of the 21 gigawatts of total pipeline, nearly 6 gigawatts are projects in operation, in construction, or in backlog. Of those 6 gigawatts, 95% are contracted projects, which provide significant visibility to our project development business. So far, we have a 100% track record delivering projects in backlog. Canadian Solar Global Energy is often seen as a volatile business. This is true if you only consider quarterly revenue profit. However, if you look at our global pipeline, we had a pretty stable business because we have a large and growing backlog of highly valuable clean energy assets. The value of these cash flow generating assets does not change on a quarterly basis. For example, we announced last month that we started construction on 143 megawatts of solar projects in Japan. During the earlier development phase, these projects encounter numerous challenges and experienced some delays. However, our team persevered, and now we are building one of our crown jewel solar assets, the 100-megawatt Azuma Kofuji project, which has a 20-year feed-in tariff of JPY36 or US$0.33 per kilowatt hour. This is around 10x to 15x higher than the global average solar PPA price. Meanwhile, our project is helping to revitalize a region in Japan that was devastated by the earthquake in 2011. So delays can happen, which is normal in project development, but our backlog of projects is very solid. Please turn to Slide 7. In terms of specific markets, it is worth reminding everyone that we have a strong presence in low risk, high-growth markets, such as the U.S. and the European Union. As you know, many of these markets have very ambitious goals to reach net-zero emissions, and some have passed or are in the process of passing legislation that will encourage the growth of our business. In Japan, the market has transitioned from a subsidized feed-in tariff market to an auction market. We have adjusted accordingly and continue to win in many of the recent auctions. We have a competitive advantage in the attractive Japanese market and also still have a significant portion of our projects under development that have secured very high feed-in tariffs. We also continue to make major inroads in Latin American markets, such as Brazil. Measuring our success in Japan, we recently set up the structure of the Brazilian Participation Fund for Infrastructure Projects or FIP-IE. Although there is usually some currency risk in these countries, we generally secure inflation-protected PPAs, which should shield us from most of the currency risk. Overall, our contracted projects across the world are secured by long-term PPAs with either investment-grade counterparties or robust bankable warranties. Please turn to Slide 8. My expertise spans the full solar development value chain. Historically, we have been more focused on the development and execution stages, often monetizing projects either at notice to proceed entity or commercial operation date, or COD. How we monetize or sell these projects has different implications on our financials, as you can see on this slide. Our goal has been to optimize and maximize project valuation, accelerate asset churn, and minimize risk of capital exposure. This remains our goal. In the meantime, we are also increasingly focusing on the third operation stage to capture the long-term returns of these projects, including expanding on our operations and maintenance offerings, monetizing our projects through long-term ownership of infrastructure vehicles, and increasingly working on our energy trading platforms. Please turn to Slide 9. Looking forward, our confidence in our Global Energy business comes from three growth drivers. Firstly, it is our traditional bread-and-butter development or project sales business. Our goal remains to grow our sales volume by 25% CAGR over the next five years, faster than market growth. Secondly, we are expanding our services platform, particularly in operations and maintenance or O&M. And we expect to significantly gain market share. We have over 2 gigawatts of operational projects under long-term O&M agreements and an additional 2 gigawatts of projects under contract. Our target is to operate and manage over 11 gigawatts of projects by 2025, which will include both projects developed by ourselves as well as third-party projects. Thirdly, in addition to building and selling the projects we develop, we are also looking to optimize our project monetization strategy and build investment vehicles that will help maximize the value of our project assets. Meanwhile, we intend to retain ownership of these projects over the longer term through minority stakes. We expect to reach at least 1 gigawatt of combined net ownership of solar-powered projects by 2025. Note that this is a combined net number and that the gross size of these projects should be around 3.4 gigawatts. By retaining projects for the long term and capturing additional revenues through O&M and asset management services, we expect to expand our base of stable long-term cash flows. We estimate that by 2025, recurring cash flows will account for roughly half of the cash flow generated by the Global Energy business. Please turn to Slide 10. Again, we intend to achieve this goal through establishing localized vehicles. These vehicles allow us not only to participate in the long-term value creation of these projects, but crucially, they will help us optimize and maximize the value of these assets, particularly when compared to individual project sales strategies. You are familiar with the Canadian Solar Infrastructure Fund, which we own 15% and is the largest listed infrastructure fund on the Tokyo Stock Exchange. I mentioned Brazil earlier, and another one is expected in Italy. We believe each one of those vehicles can reach more than 1.5 gigawatts of gross total assets under management within five years. Finally, turning to Slide 11, and importantly, we are doing a great deal of work on utility-scale battery storage. Our teams have been actively developing both PV plus battery storage co-located projects as well as standalone battery storage projects over the past few years, and we are now aggressively expanding our business globally. As Shawn mentioned, we now have 1.2 gigawatt hours of storage projects in construction and recently doubled our storage pipeline to nearly 17 gigawatt hours. On the technology side, we are exploring and deploying new technologies to capture more value for the storage projects through AI and machine learning tools. As power market regulation across the world adapts to the new technologies of today and tomorrow, we expect greater market participation of battery storage assets in the future. It will also become a key driver of the global clean energy transition. Most of our advanced projects are located in the U.S. market. However, we see huge opportunities in other parts of the world as well.

Yan Zhuang, President of CSI Solar

Thank you, Ismael. In Q1, in the CSI Solar division, we delivered 3.1 gigawatts of solar module shipments, $695 million in revenue, and 9.7% in gross margin. While this performance is lower than we would have liked, we managed to deliver towards the higher end of what we had expected. As we all know by now, 2021 has been the supply-side story. So let me start on some positive news. Please turn to Slide 12. Solar glass prices are not only back to normal, but right now, they're below the pre-inflationary phase. Unfortunately, this was more than offset by polysilicon prices, which have tripled over the past 12 months. This is very unusual as we can see that the total polysilicon supply in the market is more than enough to satisfy end market demand. The problem is that well over 200 gigawatts of wafer and cell capacity are competing for less than 200 gigawatts of polysilicon supply. Meanwhile, we're seeing greater speculative polysilicon trading activities by intermediaries, which is also contributing to the higher polysilicon price. In terms of foreign exchange, we continue to see unfavorable currency fluctuations, although less negative than in previous quarters. And shipping costs, while we saw a short lift improvement followed by another increase in transportation costs after the Suez Canal event. It is important to put these supply chain pressures into broader perspective. Despite the long lead times for solar glass capacity expansion, prices declined just as dramatically as they had initially increased, swinging the industry from shortage to overcapacity over the course of just a few months. This demonstrates that supply side pressures, particularly in the manufacturing industry, tend to be short-lived and are not sustainable, particularly in the case of polysilicon, as current manufactured gross margins are hitting approximately 60%. Of course, that doesn't change the fact that the short-term remains painful for module manufacturers, which is why we have taken several measures to lessen the impact of supply side pressures. Please turn to Slide 13. During Q1, we continued to raise prices. In fact, Q1 ASPs are nearly 10% above Q4 of last year, which is the largest quarterly module price increase in the recent history of our business. This is also in addition to our modest price increase in Q4. Obviously, it is still less than the poly price jump, but still a significant increase. And as long as poly prices stay high, module prices will not come down either. We will continue to take prices up, and we're willing to give up some volume to protect margins. With that said, our capacity utilization rate remains at one of the highest levels in the industry based on our channel checks. Longer term, we continue to see very strong global end market demand for solar energy. Global demand will soon exceed 200 gigawatts a year and is on its way towards the 300 gigawatts mark. Existing markets are growing and new markets are coming online. However, in the near term, we are seeing greater price elasticity of demand, and certain utility-scale projects may be delayed to next year if module prices do not come down. This is natural and should be expected of a well-functioning market that adjusts to higher prices. In the meantime, we continue to monitor supply chain developments while positioning the company for longer-term growth. With that, let me pass it down to Huifeng, who will go through the Q1 financials in more detail. Huifeng, please go ahead.

Huifeng Chang, Senior VP and CFO

Thank you, Yan. Please turn to Slide 14. We delivered Q1 revenue of $1.1 billion toward the high end of our guidance. We achieved 5% growth over the last quarter and 32% year-over-year. Gross margin came in at 17.9%. Q1 benefited from higher-margin product sales in Japan and a near double-digit percentage increase in solar module ASPs quarter-over-quarter. This was offset, however, by lower shipment volume, recognized as revenues, as well as higher raw material costs. Selling and distribution expenses increased by 31% quarter-over-quarter, mainly driven by higher international transportation costs. G&A expenses were down 4% quarter-over-quarter due to lower impairment charges and tighter cost controls. Total operating expenses were up 9% quarter-over-quarter. The foreign exchange net impact was a negative US$7 million, mainly caused by the strong U.S. dollar versus the year-end. Income tax expense was $14 million in Q1 compared to a benefit of $2 million in Q4 2020. The higher tax expenses were driven by an increase in pretax income from high tax jurisdictions such as Japan and the increase of certain non-taxable terms. Net income to shareholders was $23 million or $0.36 per diluted share. Now turning to the cash flow and the balance sheet on Slide 15. While we focus on maintaining strong working capital and conserving cash, we made an exception this quarter to build up and hold more inventories than usual. In our Q1 balance sheet, inventories elevated by $238 million as we managed our working capital to raise inventory in selective markets for short-term. As a result, we consumed $83 million in operating activities. Q1 CapEx was $110 million. We currently expect full-year CapEx to be around $650 million, slightly lower than what we previously guided. We are committed to managing our CapEx and will remain flexible to grow our business in response to opportunities. Our total cash position remained strong at $1.5 billion, giving us the flexible cash position to fund CapEx this year and other long-term investments. Total debt increased 5% to $2.3 billion, mainly due to the increase in non-recourse debt used to finance our solar projects. Net debt-to-EBITDA in Q1, excluding restricted cash, ticked up slightly, but it remains at a healthy level of 3.5x. Now, let me pass it back to Shawn, who will conclude with our guidance and the business outlook. Shawn?

Shawn Qu, Chairman and CEO

Thanks, Huifeng. Please turn to Slide 16. Factoring in everything we just covered, for the second quarter of 2021, we expect total module shipment to be in the range of 3.5 gigawatts to 3.7 gigawatts, including approximately 80 megawatts of module shipments to our own projects. Total revenue for the second quarter is expected to be in the range of US$1.4 billion to US$1.5 billion. Gross margin is expected to be between 9.5% to 10.5%. For the full year 2021, we reiterate total shipments to be in a range of 18 gigawatts to 20 gigawatts and project sales to be in the range of 1.8 gigawatts to 2.3 gigawatts. We also expect battery storage shipment for 2021 to be in the range of 810 to 860 megawatt hours. The total revenue guidance for 2021 remains unchanged and is expected to be in the range of US$5.6 billion to US$6 billion. Our guidance reflects the continuous shortage and price increase of certain raw materials during Q2 of this year, partly offset by higher shipments recognized in revenue. It also reflects a greater contribution from battery storage revenues in CSI Solar, which will be recognized more materially from Q2 onward. On the Global Energy side, our guidance reflects a lower gross margin contribution due to the expected different sales mix. Finally, please turn to Slide 17. We have submitted the listing application documents to the provincial securities regulatory authorities for the China listing of our CSI Solar subsidiary. The documents are under review as per usual procedures. So we remain on track. However, as usual, the IPO is always subject to capital market conditions, as you know.

Brian Lee, Analyst

I guess just as we think about the bigger picture here, I just wanted to understand your thought process. You're raising prices. It sounds like you had that slide up there, where you expect module ASPs to move up through the next several quarters. At the same time, you're cautioning a little bit that if module prices and other inflationary pressures are too great, you could start to see some demand slippage and you’re reiterating your guidance for the year. So just putting all that together, I'm trying to reconcile, are you seeing any projects pushing out any customer saying, we are going to do projects in a different timeline later than the original timeline? Or is that something you anticipate in the second half? And can you maybe quantify a bit like how much more would the cost of a system, let's say, need to move up from here? Is it 10%, 15% before you start to actually see some of those project delays or cancellations start to materialize? I just want to understand what the puts and takes are here.

Shawn Qu, Chairman and CEO

I will ask Yan to answer this question.

Yan Zhuang, President of CSI Solar

Brian, you brought up a question that many are eager to have answered. Looking at the broader picture, there are numerous projects currently on the waiting list. While these projects are expected to be initiated this year, specifically in the first half, they are still in limbo. Some of these may be delayed until next year, but many still need to move forward regardless. The impact of the module price increase on project returns and construction decisions varies by market and project. For instance, in China, a 20% increase in module prices over the past few months has led to a 100 basis point decrease in project returns on average. The situation differs by province, and markets outside of China exhibit their own variables. In the U.S., development phase costs are significant, creating strong incentives to continue with planned projects. In Japan, high PPA prices make the impact of module price increases less severe. Conversely, Latin America presents its own challenges, and Europe features many projects without PPAs, or where PPAs are negotiated post-construction, allowing for some flexibility. Nonetheless, not all European projects are on hold for this year. As I mentioned earlier, the installation volume for the first half is modest, but demand is expected to pick up in the second half, even with rising module prices. Regarding Canadian Solar, I want to emphasize that in terms of branding, global presence, channels, and sales force, we are competitive with our peers. Our annual volume target aligns with our capacity and is not set higher than that of competitors. I don't believe we are overly aggressive in our sales volume. Additionally, as I pointed out earlier, shipping costs could stabilize and potentially decrease in the second half as the COVID-19 situation improves, which is my expectation.

Brian Lee, Analyst

Yes, I appreciate the additional context. I have one more question before I turn it over. Regarding the model and the Q2 forecast for gross margin of 9.5% to 10.5%, can you provide insights on the breakdown? I assume the module gross margin will be lower, while the energy gross margin will be higher, averaging out to the 9.5% to 10.5%. Could you give us a rough idea of the difference? Also, regarding the revenue guidance for Q2 of $1.4 billion to $1.5 billion, what is the anticipated split between module-related revenue from MSS and SI?

Shawn Qu, Chairman and CEO

I will let Huifeng to answer this question.

Huifeng Chang, Senior VP and CFO

No, I think Yan is better to handle this question.

Shawn Qu, Chairman and CEO

No, no, no. This is about CSIQ, come on, CSIQ energy. Okay. In terms of gross margin, most of the gross margin contribution this time is from CSI Solar. The energy, Global Energy gross margin actually for this quarter is lower than this number. However, the most of the revenue contribution in Q2 is from the CSI Solar side. That’s why what you see here is more or less the CSI Solar side of gross margin. Now in terms of revenue contribution, I guess I’d answer it. Most of the revenue contribution for Q2 comes from CSI Solar. A small portion means 15%, 20% comes from the Global Energy business.

J.B. Lowe, Analyst

Shawn, those comments you just made in terms of the gross margin from the CSI Solar side, it sounds like that, if that's the case, I mean, that's essentially what gross margins were in Q1, was around that 9%, 9.5% level, right? So does that mean that you think you can hold margins flat in CSI Solar in 2Q despite all the cost inflationary pressures we've seen?

Shawn Qu, Chairman and CEO

The average selling price for the module increased in Q2. However, we anticipate that the performance from CSI Solar in Q2 will surpass that of Q1. I will allow Yan to provide more details.

Yan Zhuang, President of CSI Solar

Yes. First, we have been increasing prices, and over time, customers have started to accept this. You might be surprised at how much they can handle in terms of module price increases in certain markets and projects. In many cases, it’s just a matter of inconvenience, and it takes time for them to get approval from their managers or lenders. Therefore, it takes time for the acceptance to grow. Over time, the price increase improves the situation. Additionally, in the first quarter, we experienced significant effects from the low-priced orders we secured last year. In the second quarter, that impact will diminish. This also contributed to the situation. In the second half of the year, we anticipate that the effect of aging low-priced contracts from last year will decrease further, almost completely. This is a crucial factor in enhancing profits beyond other considerations.

Shawn Qu, Chairman and CEO

This is Shawn. You may recall that during last year's November earnings call, I stated that we anticipated achieving low-teen gross margins in CSI Solar, despite unfavorable supply side trends, and that we aimed to return to mid-teen margins by Q2. We did achieve a gross margin in Q1 close to that target, albeit after considerable effort. For Q2, it appears we will see low-teen margins instead of mid-teen margins, primarily due to unexpected price increases in the supply chain affecting polysilicon, heavy metals, and chemical materials. However, our performance in Q2 for CSI Solar is expected to outshine Q1, indicating improvement. While we haven't reached the target set in November, we did see progress, and we believe we will continue to improve in Q3.

J.B. Lowe, Analyst

Yes. Given all the costs, I think that's a win if we see improvement in the second quarter. My follow-up question is about the volumes in the second half of the year, which are projected to be nearly double what they were in the first half. How much do you expect that to help push margins up to the mid-teens in the module business during the second half?

Shawn Qu, Chairman and CEO

Well, I've explained our confidence on the volume side for the second half. On the other hand, as I said, shipping cost improvement and also pricing improvement will continue helping us to improve our margins. So silicon price we believe is not sustainable like this. And also, in the second half, we will also have more volume of 210, the bigger wafer modules that are coming online, including our HJT lines. So we also have a plan to actually increase our module sales in the second half. So those will help us improve our margin.

J.B. Lowe, Analyst

Great. And if I could squeeze one more in here...

Shawn Qu, Chairman and CEO

Yes. The increase in volume, even with the same gross margin, will assist us significantly with many of the fixed costs.

J.B. Lowe, Analyst

Yes, absolutely. I noticed that some of the capacity targets for ingots, wafers, and cells by year-end have been reduced, but your capital expenditure was only slightly decreased. I am curious if the capacity is being pushed into 2022 to come online then. What are the factors affecting that situation?

Shawn Qu, Chairman and CEO

We have lowered our capacity target for the end of the year. The capital expenditure for Q1 has already been utilized, and Q2 will involve some scheduled payments. By scaling back certain expenditures, particularly for capacity expansion in Q2, we anticipate that the total annual capital spending will be reduced. Additionally, we have chosen to invest some of the funds into strategic stockpiling of raw materials, which we believe is a beneficial decision. This approach helps mitigate the impact of rising material costs in Q2, and we are seeing positive results from this thoughtful reallocation of funds.

Philip Shen, Analyst

First one is on polysilicon. I know you guys have talked a lot about it already. But in your forecasting, when do you expect poly pricing to come down? And I think, Yan, you mentioned that there could be some kind of action by the Chinese government on the polysilicon industry. Could you elaborate more? And can you talk about if those comments are just speculation? Or do you have some insight that could be coming? And could you share some details about it in terms of timing and so forth?

Yan Zhuang, President of CSI Solar

It is my personal opinion that the information we have indicates a possibility regarding the silicon price. I cannot predict when the price will decrease, but I can state that it is not sustainable at its current level. The motivation for speculation on silicon stock has diminished because the price is too high. We expect the silicon price to stabilize, and there is a chance it may decrease under certain circumstances. That's all I can share.

Philip Shen, Analyst

Regarding module pricing, it's been discussed previously that in Q1, you increased prices by double-digit percentages compared to the prior quarter. What is the potential for raising module prices on a global average in Q3 compared to Q2? Additionally, could you provide insights on the potential module price increase from Q2 to Q1?

Yan Zhuang, President of CSI Solar

I can't provide a specific average because it varies significantly across different markets. In some areas, rising prices create more challenges, while others experience less impact. Additionally, within the same market, different projects have varying levels of exposure to these price changes. I believe there's still potential for module prices to increase, as demand remains robust. One of the main reasons is the extensive waitlist; many projects scheduled for Q1 and Q2 are unable to shift to next year, with numerous projects needing to be completed this year, particularly in markets like the U.S., China, and Japan. For example, a 20% increase in module prices in a Chinese province led to a reduction in project returns by 100 basis points. Therefore, there’s still potential for module prices to rise. While I can't specify an exact figure, I expect that in the second half of the year, more customers will be open to accepting increased module prices due to time constraints. I anticipate that demand levels will remain strong in the second half.

Philip Shen, Analyst

As it relates to the Chinese IPO process, the requirements for new listings appear to be tightening, making it more challenging to achieve listings. Shawn, you provided a slide outlining this situation. Considering the current circumstances, do you believe it is more probable that the IPO will take place in 2022, or do you have confidence that there is a significant chance it could occur in 2021?

Huifeng Chang, Senior VP and CFO

Phil, can you repeat the question again?

Philip Shen, Analyst

Do you think the IPO process for China will be more likely in 2021 or 2022, considering the difficulties and increased requirements for new listings imposed by the Chinese government or the CSRC?

Huifeng Chang, Senior VP and CFO

I haven't heard of any new requirements for listing. The process has just become slower. A few months ago, there was a report about the CSRC assigning more responsibility to third-party service providers, like financial and legal auditors, in the IPO process. As a result, some smaller companies decided to either delay their applications or withdraw entirely. In terms of listing requirements, there haven't been any regulatory changes. We are currently waiting for the review requests and questions, which will likely come in June. There will be a back-and-forth Q&A, and I believe we will resolve this by later this year. Once that is done, there will still be a waiting period for the final IPO to launch, which could take about three to five months according to the current pace of some companies that have received stock exchange approval but are still waiting for the CSRC's final go-ahead.

Philip Shen, Analyst

So just very quickly, Huifeng. Thank you. Do you think it's more likely in '21 or 2022, the IPO?

Huifeng Chang, Senior VP and CFO

I think it's more likely towards the end of 2021, but there's a possibility it may slip into the beginning of 2022.

Shawn Qu, Chairman and CEO

We don't want to speculate on the IPO process. We remain on track, and the next step will be the further application and review of questions and answers. The IPO itself will depend on capital market conditions, as you know. We'll provide the slides, and any further speculation would be excessive.

Colin Rusch, Analyst

Could you talk a little bit about the utility-scale business and how the offtake agreements are really going to end up going with? We're seeing a significant amount of interest from corporates wanting to lower their emissions profiles. I'm wondering what the dynamics are rather than targeting utilities for the offtake agreements that there might be some pricing opportunities for you guys with some of these projects to sell direct to corporations?

Shawn Qu, Chairman and CEO

Yes, hi, Colin. I believe your question is about public PPAs compared to private PPAs and possibly some project-based merchant trading. I will let Ismael respond to that. Ismael?

Ismael Guerrero, Corporate VP and President of Energy Business

Thank you, Shawn. Thank you, Colin, for making the question. I'm very happy to receive a question on our energy business. Look, I think you are touching a very good point. It truly depends from country to country and the regulation of each country. In the U.S., my personal opinion is that as time moves on, utilities are going to be retaining more projects and making fewer PPAs. And you can see that on our development and terrestrial business model that is growing there, too. So we are seeing more utilities coming, asking us for developing projects for them, than signing PPAs. And on the other hand, we see many corporations willing to sign private PPAs. Now the challenge on those, I should tell you, is that many of them still do not have the knowledge. And it's a long process to negotiate the PPAs to make sure that they are solid and bankable. So there will be a transition period, but we see them coming heavily. In Europe, for instance, it’s just starting. So we are negotiating our first ones there and starting in some of the markets like Australia, for instance, it's way more common. So I think that there is a transition coming as we’re sitting, and we see it as a very good opportunity.

Colin Rusch, Analyst

That's super helpful. And then in terms of where you've been able to raise price quickly and by business segment, obviously, the channel business has been a healthy margin business for you guys. Has that responded faster? And can you push prices in that channel a little bit more aggressively? And then are we seeing some of the larger projects kind of bring up the rear in terms of the cadence of the price increases, but just trying to get a sense of how those price increases are falling throughout the different business segments?

Yan Zhuang, President of CSI Solar

Thank you, Colin. You're correct. We were able to increase pricing more quickly in the distribution channel, as their lead time for purchase orders is much shorter, typically 2 to 3 weeks compared to the 4 to 6 months or even longer in other areas. Their business model also allows for more flexibility in pricing. As we move into the second half of the year and specifically Q2, we anticipate further improvements in this channel, especially as the COVID situation in the U.S., Europe, Japan, and Australia continues to improve. This should significantly benefit the distribution market and help enhance our margins over time this year. Did I address your question or overlook something?

Operator, Operator

I believe he is no longer in queue. Thank you. Alright. That's the end of our Q&A session. I'd now like to hand the conference back to the presenters for closing remarks. Please continue.

Shawn Qu, Chairman and CEO

Okay. Thank you for joining us today and for your continued support. If you have any questions or would like to set up a call, please contact our Investor Relations team. Take care, and have a nice day. Thank you again.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes today's conference call, and thank you for participating. You may now all disconnect.