Tom Konrad CFA
Sinovel’s recent refusal to accept shipments from American Superconductor (AMSC) may be due to more than just a slowdown in the Chinese wind market.
Many of my best ideas come from readers. When American Superconductor (AMSC) announced that their largest customer, the Chinese Wind Power company (and the world’s second largest wind turbine manufacturer) Sinovel (601558.SS) had refused shipments, and not yet paid for some previous deliveries, my first thought was that Sinovel’s reasons would likely remain an enigma for several months. I did not write anything, knowing that anything I said would be mostly guesswork. However, a couple persistent readers pointed out that AMSC had been one of my Ten Clean Energy Stocks for 2011, and so I should really follow up on this important news.
The result was my attempt to decipher the news announcements and press releases from Sinovel and AMSC last week. While I felt I was able to provide a good picture of the background, I could only guess at the most important question: Is Sinovel just trying to work off excess inventory due to a slowdown in the Chinese Wind marke, or are they beginning to shift some of their business to other suppliers?
This question is crucial because Sinovel accounted for about three quarters of revenue in 2010, although the AMSC has been moving to lessen its dependence on the Chinese wind giant. The worry is that if Sinovel were to find another supplier for the power converters AMSC sells, AMSC’s considered goal of reducing their dependence on Sinovel may become a premature fait accompli. Then Sinovel’s share of revenue might drop not because AMSC has other sources of revenue, but because they lose Sinovel as a major customer.
That brings me back to my readers, among whom were a hedge fund analyst and fund manager in Palo Alto. Their fund is short AMSC, so they have two important incentives: They have an incentive to dig through the Chinese press to figure out what is going on, and they want US investors to find out about any bad news. If they found any good news I don’t know about, they kept it to themselves.
They found that Sinovel affiliate Dalian Guotong Electric (GT Electric) started producing frequency converters in 2010, and is ramping up production at the typical Chinese breakneck pace. Sinovel owns a 22.5% share in GT Electric, giving them a strong incentive to prefer their frequency converters over AMSC’s.
GT Electric’s product website (Chinese only) is here, and much of the other information they found is in the August 2010 China Wind Power newsletter, which said GT’s factory will be “capable of import substitution.”
GT does not have the capacity to replace AMSC yet, and Sinovel will likely want to have more field experience with GT converters before abandoning AMSC. But the contract Sinovel signed with GT electric for 2011 gives them 4% of their total… in GT’s second year of operation.
I still believe that Sinovel will resume purchases from AMSC later this year, but I think it is unlikely that those purchases will grow in coming years. Further, AMSC still needs to raise $100-$200 million to complete the (revenue-diversifying) purchase of “The Switch” I discussed in the previous article. The fear of dilution will likely depress AMSC’s share price over the next couple of months, meaning that I no longer think that AMSC is a good speculation where it currently stands in the $11.50 to $12 range.
These events are unlikely to bankrupt AMSC, and I think many of the company’s other businesses have great potential for growth, but from a very low base. For now, I’ve sold my stake, but I will be looking for opportunities to buy again at lower levels.
I may not be the only one looking for bargains. I shot a quick email off to John Segrich, whose Gabelli SRI Green Fund (SRIGX) holds “a little” of the stock. He thinks AMSC is a lot more interesting now that it has fallen so far, and speculates that it could be a buyout target for someone wanting to own the technology.
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