Canadian Solar - Earnings Call - Q3 2025

Transcript

Speaker 5

Ladies and gentlemen, thank you for standing by. Welcome to Canadian Solar's third quarter 2025 earnings conference call. My name is Chuck, 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 conference over to Wina Huang, Head of Investor Relations at Canadian Solar. Please go ahead.

Speaker 9

Thank you, Operator, and welcome everyone to Canadian Solar's third quarter 2025 conference call. Please note that today's conference call is accompanied by slides which are available on Canadian Solar's Investor Relations website within the events and presentation section. Joining us today are Dr. Shawn Qu, Chairman and CEO; Yan Zhuang, President of Canadian Solar Subsidiary CSI Solar; Ismael Guerrero, Corporate VP and President of Canadian Solar Subsidiary Recurrent Energy; and Xinbo Zhu, Senior VP and CFO. All company executives will participate in the Q&A session after management's formal remarks. On this call, Shawn will go over some key messages for the quarter. Yan and Ismael will review business highlights for CSI Solar and Recurrent Energy respectively, and Xinbo 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, I would like to 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 protection under the Safe Harbor for Forward-Looking Statement 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 risks and uncertainties can be found in the company's annual report on Form 20F, 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 non-GAAP basis. By disclosing certain non-GAAP information, management intends to provide investors with additional information to enable 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 like to turn the call over to Canadian Solar's Chairman and CEO, Dr. Shawn Qu.

Speaker 7

Thank you, Wina, and thank you for all for joining our third quarter earnings call. Please turn to slide three. In the third quarter, we delivered 5.1 gigawatts of solar modules in line with our guidance range. In our energy storage business, we achieved a record quarterly shipment of 2.7 gigawatt-hours. Total revenue reached $1.5 billion, landing at the high end of expectations. Gross margin was 17.2%, exceeding guidance, primarily due to strong contributions from energy storage shipments. We also achieved a higher share of module deliveries to the profitable North American market. Our solar module factory in Mesquite, Texas, which has now successfully ramped up, contributed meaningfully to both shipment volume and margin.

Absent non-recurring expenses for the previous quarter, operating expenses normalized, and we reported net income attributable to shareholders of $9 million or a net loss of $0.07 per diluted share due to the impact of fate in kind of a preferred shareholder of Recurrent. Now, please turn to slide four. The solar industry is at an inflection point. Anti-evolution policies in China are gradually taking effect, and market conditions have stabilized following the most challenging phase of the solar downturn. A complex macro environment presents both challenges and opportunities. This year, during the anniversary celebration of Canadian Solar's 24th birthday, I reflected on how we have grown with technology innovation, business model evolution, and global diversification. Today's shifting geopolitical landscape allows us to once again differentiate ourselves through a resilient combination of strategy and execution. Most notably, we are making strong progress in our U.S. manufacturing investments.

Phase one of our solar cell factory in Indiana is expected to begin production in the first quarter of 2026, while phase one of our lithium battery energy storage factory in Kentucky is on track to start production at the 2026 year-end. These factories will strengthen our U.S. supply chain, support domestic energy security, and reinforce our long-term commitment to the American market. At the same time, we are planning adjustments to our U.S. business to comply with the One Big Beautiful Bill Act. We are progressing smoothly and remain confident we will be able to successfully position ourselves to continue servicing our U.S. customers. The rise of AI-driven data centers is fueling unprecedented global electricity demand. As I have emphasized in my public speeches over the past two years, the most flexible and cost-effective solution for powering data centers is solar plus storage.

In contrast, traditional energy sources such as natural gas and nuclear power require long construction cycles and have limited scalability. We are now working closely with multiple data center customers to develop deeply integrated solutions. This requires advanced system engineering where our technical expertise provides a strong competitive advantage. I'm also pleased to share the significant progress we have made in our emerging business segments. Residential energy storage is on track to become profitable in 2025. We have seen strong growth for our residential energy storage product in Japan, Italy, and the U.S., and we are expanding into new markets like Germany and Australia. This marks a major milestone for our energy storage strategy and demonstrates how we are successfully broadening our revenue base beyond utility-scale applications.

Recurrent, our solar and energy storage project developer and operator, will continue to balance the growth of our operational project fleet to generate recurring cash flow and selective sales of project asset ownership to manage near-term cash flow. Given the current market conditions, I have asked our team to tip the balance a little bit more toward sales of project assets in order to accelerate cash recycling and reduce debt. With that, I will now turn the call over to Yan, who will provide more details on our CSI Solar business. Yan, please go ahead.

Speaker 8

Thank you, Shawn. Please turn to slide five. In the third quarter of 2025, module shipments totaled 5.1 gigawatts, in line with expectations. Earlier deliveries to two energy storage projects shifted volumes from the fourth quarter into the third. This led to our largest quarter to date, with 2.7 gigawatt-hours of storage shipments. Revenue was $1.4 billion, and gross margin decreased by 730 basis points to 15%. The sequential decline was driven by margin changes in both the solar and storage businesses. In solar, incremental upstream price increases and under-utilization raised unit costs. While module pricing in most global markets remained low, in storage, second-half margins reflect contracts signed at more normalized levels, and a volatile tariff environment drove incremental cost increases. Without last quarter's impairments and benefiting from internal cost controls, operating expenses decreased sequentially from 15.3% of revenue to 12.3%, and we delivered $39 million of operating income.

Please turn to slide six for an update on our e-STORAGE businesses. In the third quarter, we recognized revenue on 2.7 gigawatt-hours of storage solutions. Our deliveries reached countries across North America, Europe, the Asia-Pacific, and Latin America. As of October 31, our contracted backlog, including long-term service agreements, increased to $3.1 billion, supported by newly signed projects in North America and Europe. We continue to build momentum in our established markets while entering new ones. In Canada, we signed supply and 20-year long-term service agreements with APA Power for the Elara and Hadley projects. Together, they total more than 2.1 gigawatt-hours and are among the largest energy storage facilities under development in Ontario. Also in Ontario, we contracted to deliver a fully integrated energy storage solution and turnkey PT services for the 1.6 gigawatt-hour Skyview 2 energy storage projects. This marks our largest solar bank delivery to date.

Once completed, Skyview 2 will be one of the largest battery storage facilities in the nation. As a proud Canadian company, we're honored to help drive our country's clean energy transition. Across the Atlantic, we just signed a best supply agreement and 20-year long-term service agreement in Germany with Kion Energy, a leading storage developer. As demand expands across both our existing and newly entered markets, we expect to continue scaling our backlog and diversifying its global footprint. In addition to our established utility-scale storage solutions, we continue to expand our offerings and strengthen our capability in both CNI and residential storage. Notably, the residential storage segment is spinning momentum and has turned profitable this year. Building on the strong growth we have already achieved in Japan, Italy, and the U.K., we will be launching our new three-phase solution to drive further expansion in markets such as Germany.

We also plan to enter Australia in the first half of next year. In the U.S., we have successfully introduced the second generation of our residential energy storage solution, which better caters to the needs of the market and is demonstrating strong initial performance. In the CNI storage segment, where we see promising market growth potential, we continue to refine and diversify our portfolio to better serve emerging opportunities. Though smaller in scale, these segments have proven to be profitable, and we expect them to contribute more meaningfully next year. With that, I will hand the call over to Ismael, who will provide an update on Recurrent Energy, Canadian Solar's global project development business. Ismael, please go ahead.

Speaker 5

Thank you, Jen. Please turn to slide seven. In the third quarter, we generated $102 million in revenue. We monetized over 500 megawatts of projects, including two high-margin sales, a battery storage project in Italy and a hybrid project in Australia. Gross margin was 46.1%, a sequential increase of 137 basis points, primarily driven by the contribution of more profitable project sales. During the quarter, we closed $825 million in construction financing and tax equity for the 600 megawatt-hours Desert Bloom storage and 150 megawatt APAGOS solar projects, both parts of our multi-project partnership with Arizona Public Service. These assets are under construction and are expected to begin operations in the first half of 2026. In the U.S., in addition to what we have in construction, we have already safe harbored one and a half gigawatt peak of solar and two and a half gigawatt-hours of battery storage projects.

By the summer of next year, we expect to have safe harbored at least 3 gigawatt peak of solar and 7 gigawatt-hours of battery storage projects, giving us significant visibility over our execution pipeline for the next four years. Until our IPP business scales further, near-term profitability will continue to depend primarily on global project sales. As maintaining financial discipline remains our top priority, we will balance the growth of our operating portfolio and project assets with selective project ownership sales to prudently manage cash flow and debt levels. Looking ahead to 2026, we expect to increase the level of project ownership sales to enhance cash recycling and reduce leverage. Now, for an update on our pipeline, please turn to slide eight. As of September 30, we have interconnection rights for approximately 8 gigawatts of solar and 15 gigawatt-hours of storage globally, excluding operating projects.

Our total development pipeline now includes 25 gigawatts of solar and 81 gigawatt-hours of storage capacity. The reduction in solar pipeline reflects a natural rebalancing. Some projects progress into more advanced stages, while others were removed. At our current scale, our focus is increasingly on executing our high-quality pipeline rather than expanding it. For example, in the U.K., we recently received government approval for our Tilbridge Solar and Battery Storage projects in Lincolnshire, U.K. This project is planned to be an 800 megawatt PV plus 1,000 megawatt-hour battery energy storage systems project, making it the largest co-located project in the U.K. to date. We are proud that Tilbridge will connect to the grid through a substation that was previously used by a decommissioned coal plant, continuing to support the U.K.'s decarbonization goals while providing reliable and sustainable energy to the communities it will serve.

Over time, energy storage continues to emerge as a key growth driver. Not only are battery energy storage systems becoming increasingly cost-effective, but they are also profoundly reshaping energy markets, from grid stabilization and peak shaving to enabling renewables to integrate at scale. Notably, data centers are now placing ever-greater demands on power infrastructure, requiring round-the-clock reliability and often cleaner integration. In response, the opportunity set for longer duration, higher specification BESS is expanding rapidly. We have started to dip our toes into the data centers business through regional JVs with data center experts, mainly in Spain and the U.S. We see significant synergies with our core expertise as land acquisitions, interconnection processes, permitting, and community engagement are four of our core competencies that are crucial to the successful and timely deployment of data centers.

Furthermore, powering data centers with clean and reliable electrons is one of the key bottlenecks to data center development, where we have significant expertise to bring to the table. In Spain, we already have 112 megawatts of projects with interconnections and land secured in Barcelona, Bilbao, and Madrid, plus an additional 40 megawatts with interconnections in Madrid waiting to secure land. Finally, our operations and management or O&M business also continues to grow healthily. This quarter, we earned two internationally recognized certifications from two frameworks: ISO 9001:2015 and ISO 45001:2018. These certifications affirm that our power services meet globally recognized standards for quality and workplace safety. Today, the company has over 14 gigawatts of solar and storage projects under O&M contracts across 11 countries. Now, I will hand the call to Xinbo to review our financial results. Xinbo, please go ahead.

Speaker 9

Thank you, Ismael. Please turn to slide nine. In the third quarter, we delivered 5.1 gigawatt of solar modules and 2.7 gigawatt-hours of energy storage systems. With contributions from accelerated storage shipments, total revenue reached $1.5 billion. Gross margin was 17.2%. The sequential decline primarily reflected the absence of one-time benefits recorded in the second quarter and the normalizing margins in both solar and storage manufacturing businesses. Operating expenses decreased sequentially to $222 million, reflecting lower shipping costs from reduced module volumes and ongoing internal cost reductions. Net interest expense declined to $29 million, driven by higher interest income. We recorded a net foreign exchange loss of $17 million, primarily driven by the appreciation of Chinese yuan. Net income attributable to shareholders was $9 million, or a net loss of $0.07 per diluted share.

This result included a positive $35 million HLBV impact, equivalent to $0.51 per share, from tax equity arrangements tied to certain US projects. The $0.20 per diluted share preferred dividend impact brought the total diluted loss per share to shareholders to $0.07. Please turn to slide 10 for cash flow and the balance sheet. Net cash used in operating activities was $1,112 million, compared with an inflow of $189 million in the second quarter. The difference was primarily driven by change in working capital, notably a decrease in inventories during the prior quarter. Total assets grew to $15.2 billion, with project assets rising to $1.9 billion. Solar power and battery energy storage systems remained steady at $2 billion, as we paced construction activity to manage leverage at the group level. Capital expenditures totaled $265 million, primarily related to US manufacturing investments and existing capacity expansions.

This implies a larger CapEx outlay in the fourth quarter, and we expect to end the year slightly below our full-year guidance of $1.2 billion. Looking ahead to 2026, we continue to refine CapEx plans amid an uncertain policy environment, but currently expect spending to remain at levels similar to this year. Most investments will continue to target the US market. Total debt increased incrementally to $6.4 billion, mainly due to new borrowings tied to project development assets. We closed the quarter with a cash position of $2.2 billion. Now, let me turn the call back to Shawn, who will conclude with our guidance and business outlook. Shawn, please go ahead.

Speaker 7

Thank you, Xinbo. Please turn to slide 11. For the fourth quarter of 2025, we expect module shipments to be in the range of 4.6-4.8 gigawatts, as we continue to maintain disciplined volume management. For our energy storage business, we expect shipments between 2.1-2.3 gigawatt-hours, which include approximately 600 megawatt-hours delivered to our own projects. This guidance reflects the shift of certain volumes from the fourth quarter into the third. With Recurrent delivering its largest quarter of project sales this year, we project fourth quarter revenue to range between $1.3-$1.5 billion. We expect the gross margin to be between 14%-16%. For the full year of 2026, we project total module shipments of 25-30 gigawatts, including approximately 1 gigawatt to our own projects. Energy storage shipments are expected to range between 14-17 gigawatt-hours.

We will continue to focus on profitable solar markets and drive growth in our storage business. While we will continue to develop solar and energy storage projects, financial prudence remains our top priority. Accordingly, Recurrent Energy will increase project ownership sales in 2026 to recycle more capital and manage the overall debt level. With that, I would now like to open the floor for questions. Operator.

Speaker 8

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Our first question for today will come from Colin Roach with Oppenheimer. Please go ahead.

Speaker 1

Thanks so much, guys, and congratulations on all the project progress. On the project sales, can you talk a little bit about the strategy of timing and leverage that you guys are going to deploy new sales? You obviously have a great land position, nice interconnection queues, and certainly potentially can leverage some of those positions into data center deals. You potentially can monetize these things earlier in the process and generate a little bit better returns in select areas. Just want to get a better sense of where you're coming out in terms of timing and kind of relationships that are going to come out of some of these sales.

Speaker 7

Yeah. Colin, we are still working on the 2026 AOP, so I do not have the quarter-by-quarter Recurrent project sales number in my hand right now. We target to get that down by February. When we talk in March, in the March earning call, I will give you more details. However, we have enough COD operational project to sell, so we do not have to sell project early. When I say project early, sell project early, I assume you mean sometime sell at NTP or even before NTP. Before NTP, you do not get the value, right? You leave too much money on the table. If we can sell after COD, we can not only get value of the project development, but also the project financing, because Canadian Solar, especially Recurrent, is also an expert in the tax equity financing deal in the US market, and there is a value there.

We do have enough projects. We have a budget, like roughly how many projects we will, how many megawatts of project ownership we will sell each year. For next year, I guess we have enough COD project to sell. That is for the U.S. We also sell projects in other markets, for example, in Latin and also in Australia. Ismael, you have anything to add?

Speaker 0

Just say it. Thank you, Colin. Nice to talk to you. Colin, we have a very strong pipeline and very mature, so we are seeing good opportunities to sell with good margins, and we are likely going to take them. That's the overall underlying reasons.

Speaker 1

Okay. Perfect, guys. Thinking about the battery manufacturing and the supply chain, can you talk a little bit about the maturity of your relationships with suppliers to deliver input materials into the U.S.? Obviously, 70% of the supply chain is in China, and the vast majority is still in Asia. Shifting things into North America is a pretty substantial effort. I just want to get a sense of how easily that's coming along for you guys and any sort of risks that we should be thinking about as you start to ramp up that capacity.

Speaker 7

Yeah. Actually, there are a lot of supply chain, lots of suppliers outside China these days. We have good selection, good choice for both solar and for energy storage. We will, as you know, the OBBBA have some requirement of the non-material assistance level for both storage and for solar. There is also the domestic content booster, right, 10% booster for both the energy storage and solar. We have calculated that. Just by those percentage requirements, we think we will be able to meet those requirements in 2026, no problem. I think 2027, the number will go up 5% also. I think it is roughly 5% each year, and we should be able to manage that step. We will be able to meet the OBBBA requirement.

If we make both cell and module in the U.S., we will be able to meet the domestic content rule as well. As I said, we will start production of our own solar cell in the U.S. by March. Throughout Q2, we will ramp up. By the second half of next year, we should have reasonable volumes already. Those volumes will come with the domestic content, the 10% domestic content boost. For solar and for energy storage, our plan is to start the battery cell and pack manufacturing in the U.S. at the same time. I said in my speech that we expect to start production in December. In 2027, we will be able to provide the energy storage project, which also meets the domestic boost requirement, domestic content requirement, to let our customers enjoy the 10% ITC boost.

Speaker 1

Okay. Thanks so much, guys. I'll pass it on.

Speaker 8

The next question will come from Philip Shen with Roth Capital Partners. Please go ahead.

Speaker 2

Hi everyone. Thank you for taking my questions. First one is on margins. I think your A-share subsidiary reported a 7% gross margin in Q3, but you guys reported a 17% gross margin today. I was wondering if you could help us bridge that gap. Thanks.

Speaker 7

I don't think we reported 7, or do we?

Speaker 8

No.

Speaker 7

Okay.

Speaker 8

17.

Speaker 7

Seventeen percent is for CSIQ together, CSIQ, right?

Speaker 8

That's out of 15.

Speaker 7

CSI Solar have a different pack, different mix.

Speaker 6

Yeah. Ismael just commented that the project sales in Q3 were with 46% gross margin.

Speaker 1

Okay. So it was the project business that really supported and offset the manufacturing 7% gross margin. Is that right?

Speaker 7

Actually, solar may be low, but solar plus the energy storage.

Speaker 6

15% for all the manufacturing.

Speaker 7

For all the manufacturing, the gross margin in Q3 is over 15%. Now, if it's only module, it's low. It's below 10% because there are where we don't get much margin.

Speaker 2

Okay. Thank you, Shawn and team. Moving on to the next question. As it relates to your 2026 guide, you gave us some color there, which is great. You continue to talk about the ramping of US manufacturing. Can you give us color on how you're able to do that, even though there's still substantial FEOC risk as it relates to either ownership or just meeting the OBBBA FEOC requirements could be challenging? Thanks.

Speaker 7

Yeah. Philip, I answered this question in the last earnings call. Philip, we believe we can meet the requirement, the OBBBA requirement, by doing certain adjustments.

Speaker 2

Okay. Thank you, Shawn. As it relates to the 80 CBD reserve, or with the Oxen case, there could be meaningful retroactive duties. I was wondering, can you quantify how much exposure that might be? As a result, do you think you might need a reserve for that situation on the balance sheet? Thanks.

Speaker 7

Yes, it could be. I would say also could not be, right? The court process is still moving along, and there will be quite a while before there is a final decision if it goes to the appeal court. We have discussed this with our external lawyers and also the audit firms. We do not think we need to book any reserve at this moment.

Speaker 2

Great. Really appreciate taking the questions. I know some of them are a little bit touchy, so appreciate it. Thank you.

Speaker 7

Thank you.

Speaker 8

The next question will come from Brian Lee with Goldman Sachs. Please go ahead.

Speaker 3

Hey, guys. Thanks for taking the questions. Maybe just a follow-up to Phil's question. I know you guys are wanting to see the 80 CBD process through the litigation, and the case is still pretty early on. In the event that you did have to accrue a liability or reserve some amount of funds for a potential negative decision, can you help to kind of quantify the range? I guess back of the envelope math suggests it could be well over $1 billion if we estimate your US shipments over the past couple of years. I guess first, is that the right way to think about it?

How would you—again, just playing devil's advocate—hypothetically, if you had to do that, what would be your sort of funding strategy to finance that amount, just given the cash burn and the high degree of net debt you have right now?

Speaker 7

Ben, I guess you're also talking about the Oxen case. As I said when I answered Philip's question, we don't think that we have to make reserve. Therefore, there's no, no, I don't have to do any backup envelope at this moment. This is what my lawyer told me. This is what my auditing firm told me. I don't want to speculate here. Why don't you ask the petitioner to speculate how much money they can get or how much money they will be able to get for the U.S. government?

Speaker 3

Yeah. No, I mean, I think there are published research around potential value of the claim here. I do not know how accurate they are, but I do think there is a published number, which, again, counts into the billions of dollars. Yeah, I will take that offline. I guess maybe just bigger picture question. We are all just trying to gather more detail. We know there is no finite answer, but it would just be helpful if you could elaborate, let's say, on the FEOC question as well. You are obviously telling your customers the actions you contemplate taking to make sure you are FEOC compliant. Is there any insight into those conversations you can provide to give the financial community the same level of confidence around what steps you may be taking to make sure that your US manufacturing investments are going to be justified?

Speaker 7

OBBBA has very simple and clear rules, which says a big picture, it requires 75% from not from the FEOC and no more than 25% from the FEOC if there are two partners, right? If there is only one plus one partner. If there are two partners, two shareholders from the FEOC countries, then the two together should take no more than 40%. There are very clear rules there. When I said we will make adjustments to meet the OBBBA, I think it is quite clear. It is something like a five-year grade five student or no. As long as you are structured yet with these percentage numbers, then you are OBBBA compliant. What else do I have to tell you?

Speaker 3

Okay. No, that's helpful color. Then last question for me, I'll pass it on, is on the asset sales. It sounds like that's definitely going to ramp up in 2026, which is a bit of a reverse from the past couple of years as you've been moving toward this IPP model. It sounds like it's focused on cash generation and deleveraging. Can you quantify kind of what volume, megawatts, megawatt hours you anticipate monetizing through asset sales as opposed to keeping on the balance sheet for 2026, and what kind of deleveraging potential that might result in for the balance sheet next year? Thank you.

Speaker 7

As I said, we'll continue to build IPP portfolio. However, given the current market condition, we are going to tip the balance a little bit to be a little bit more cautious. Also, as I said when I answered Colin's question, I haven't let my board approve my 2026 AOP yet, annual operation plan yet. I will give you more details in March because typically our board approves the AOP in February. What I can say now is that given the current market situation, we are going to be a little bit more cautious. I also said that we have enough operational projects, high-quality projects, which we can cash in. See, every year we always sell some projects. Ismael mentioned that he sold some high-gross margin projects in Q3. That helped to boost our gross margin in Q3, right? Overall gross margin.

I don't have the number yet, but I will let you know. What I can let you know now is that we will be a little bit more cautious. We are going to recycle more cash.

Speaker 3

Okay. Understood. Thank you, Shawn. I'll pass it on.

Speaker 7

Thank you.

Speaker 8

The next question will come from Alan Lau with Jefferies. Please go ahead.

Speaker 4

Thanks, Management, for taking my question. This is Alan from Jefferies. Would like to know there's a lot of questions on U.S. policies already, so we'd like to have a more overview on the market demand on 2026. What do you think the U.S. installation on solar and energy storage separately? Thank you.

Speaker 7

Okay. I will let Yan ask to share his thought.

Speaker 8

You're asking for the installation demand in the U.S. in 2026, right, on both storage and solar?

Speaker 7

Yeah.

Speaker 8

Yeah. I think the demand is there, right? Also, the OBBB compliant, the safe harbor actually made the storage pipelines there. I think for 2026, the storage project will be there. And solar as well, the safe harbor also helped to actually preserve a lot of demand. On the solar side, I think the cell is a cell supply. It can be a bottleneck for the total demand. Although we have a good solution, that does not mean everybody has that. I hope US will continue to maintain the similar level compared to this year. That is what I hope. I do not see any significant growth. Energy storage, I think next year, US will continue to be strong. That is my view. Shawn, if you—

Speaker 4

Yes. Thanks, Yan. I think investors' focus are concentrated, overwhelmingly concentrated on ESS. We'd like to know what type of growth rate you are looking at. Is it 20%, 30% growth, or 50%, or even in China? I think people are talking about even more aggressive growth rates. Within that growth, how much do you think it's coming from AIPC demand?

Speaker 8

So you're talking about the growth globally or US, China? Sorry.

Speaker 4

Mainly US.

Speaker 8

Okay. So the data center—yeah, worldwide, you're talking about data center worldwide. More than half of the data centers are built in the US. I think we see a very strong future demand in our portfolio on data center-related storage demand. I think in terms of start installation construction next year, it's not yet. It's not yet. It's going to be you got to wait for a little longer time. For next year, the storage growth will still come from the safe harbor projects. This is a regular storage—those regular storage projects. Solar, as I said, I'm expecting flat. That's my hope. Storage, you're talking about growth rate? I don't have the number, but you can check the industry reports. They're very a lot, the industry reports. On average, I think there's a growth. I don't know. It's like 20% growth? Yeah.

I remember I saw some reports number.

Speaker 4

I see. For ESS demand related to AIPC, you think probably after 2026, right? What type of installation do you think will be more relevant? Is it two- to four-hour systems that are for clipping the peak demand, or are you seeing even longer hours acting as some off-grid solution or the main power supply for the AIPC? What type of backlog do you see or requests from clients that you're seeing?

Speaker 8

I think for regular storage, conventional storage projects, you're talking about mostly in the U.S., it's actually load shift, peak shift. It is rather like three, four hours, around four hours. For data center, to begin with, I think my knowledge, okay, it is more like two, three hours. It is mainly for smoothing out the load. That is what our study shows.

Speaker 4

I see. Of course, longer term, for longer term, the storage project for data centers will progress into longer and longer period of storage. The cost is also going up. The challenge is how do we control cost while increasing the length, the duration. To begin with, the most important application for data center storage is smooth out the load, smooth out the curve. That is the most important starting point. I see. Just to confirm, it is more like there are some rules in ERCOT, maybe like the Senate Bill 6, etc., requiring more stability on the load. The demand you are seeing, at least for now, as a start, is to cope with that request on the grid, right, instead of having long-duration ESS for supplying as the main power supply of the AIPC. Is this understanding correct?

Speaker 8

I think, as I said, right, for longer term, it will progress, right? To begin with, I told you it's more like smoothing out the load, to stabilizing the supply. That is my answer.

Speaker 4

That's good. That's good. Finally, we'd like to ask on how much of the 14-17 gigawatt hours of shipment is going to be in the US?

Speaker 8

Actually, we have well-diversified our portfolio, our backlog. I would say around two-thirds will be outside of the US, out of the total guided volume next year.

Speaker 4

I see. I see. That's pretty diversified. Thanks a lot for answering that question.

Speaker 8

Yeah. It's small in China, and mostly it's outside of China, outside of the US. So that's the kind of distribution.

Speaker 4

I see. That's very good. I'll pass on. Thanks a lot for having that level of clarity on the question. Thank you.

Speaker 8

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

Speaker 7

Thank you very much for everyone to come to our call. Also, thanks for your continued support. If you have any questions or would like to set up a call, please contact our investor relation team. Take care and have a great day.

Speaker 8

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.