China's Wind Energy Causes Stir

NEW YORK ( TheStreet) -- China officially passed the U.S. as the world's largest wind market, but reaching that milestone had little affect on shares of China's leading wind-power companies.

Along with Sinovel, whose shares fell 10% in debut trading on the Shanghai Exchange Thursday, there has been weakness across the Chinese wind power sector.

Sinovel's decline brought its stock price to 81 yuan, after pricing in its IPO at 90.

Among other major Chinese wind-market players, Goldwind and the U.S.-listed Ming Yang Wind Power Group ( MY) also saw their shares come under pressure in recent sessions.

Another negative headline for Sinovel this week came the day before its shares began trading: three of its workers died while installing a wind turbine. Even before the tragic mishap, Chinese authorities had been investigating saftey in the industry in the wake of several accidents involving turbine makers.

While a case can be made that Sinovel's IPO valued its shares too richly, the bigger data point out of China was the release of the annual wind-turbine installation number in 2010: the industry grew by 16 gigawatts, bringing the total wind market in China to 41.8 GW.

The U.S. market, which by all accounts experienced a disastrous 2010, totaled 40.2GW.

Despite capturing the world record, China's wind-energy business now faces the standard concerns that come with scale: Slowing growth. Indeed, the 16GW figure may have disappointed some investors, according to Ardour Capital analyst Jinming Liu, who had targeted 18GW for the year, among the most bullish of projections.

"This 16GW was a very good number, but it didn't put to rest the fears of a slowdown in China," Liu said, noting that in previous years the rate of growth in China's wind market had doubled. The 16GW came on top of an existing market of 25GW at the end of 2009.

"Is it a positive that China has finally passed the U.S., or a negative that the growth rate slowed down?" Liu said. He believes installations should reach 20GW in 2011, which would represent 48% growth, down from the prior year's 64%.

To expect a doubling every year isn't reasonable, according to Carter Driscoll, an analyst at Capstone Investments. He pointed to the performance of American Superconductor ( AMSC) shares. The company generates most of its revenues from its relationship with Sinovel, and yet, its shares barely budged with the release of the Chinese annual wind-power installation number.

"If people were really disappointed, American Superconductor would have sold off heavily," Driscoll said.

American Superconductor did sell off heavily last month after a Barron's report questioned Sinovel's rate of growth. American Superconductor shares have already declined by more than 22% in the past three months, taking the biggest hit after the report.

Further, Reuters noted that Sinovel's shares were much more richly valued in its IPO than shares of the biggest wind companies in the world, such as Denmark's Vestas and Spain's Gamesa.

Sinovel shares were valued at a forward price-to-earnings ratio of 25.2 times projected 2011 earnings, while Vestas trades at roughly 15 times, and Gamesa at 21 times. Yet Vestas and Gamesa have been much bigger players in the European and U.S. markets.

Meanwhile, the onshore wind market in both regions fell off significantly in 2010. Vestas, for example, announced recently that even after sacking a large number of workers, its profits would be flat in 2011.

Captsone analyst Driscoll argued that Sinovel's higher valuation relative to its European rivals was only natural: "Vestas and Gamesa both had disappointments in 2010 and that it placed them in the penalty box with investors and when that happens, stocks get assigned a lower multiple."

Driscoll, who also covers Tesla ( TSLA), another high-profile recent IPO, urged investors not to focus on an IPO's first day of trading. "Sinovel has a better cost structure than the European wind companies," he said. "And, for me, when a new stock comes off its IPO valuation, I don't care. Talk to me in three to six months."

Analysts say that Sinovel needs to diversify away from its home market, or fears of a slowdown in China will continue to weigh on it shares. Sinovel is richly valued even when compared to other Chinese wind companies, including Goldwind, analysts say, which trades at 17 times earnings.

Still, Sinovel has been gaining market share in China, reaching 25% of the market at the end of 2009, according to Jinming Liu, the Ardour analyst. He expects Sinovel to command 28% as of the year-end data for 2010, though no final number has yet been released.

For his bullish forecast, Liu pointed to data released by the Chinese Renewable Industries Association this week that grid-connected wind power in China should reach 50GW by the end of 2011.

It's a rough formula, but the analyst explained that it takes six months to hook a turbine into the grid after its initial installation. For grid-connected wind power to rise from 41.8GW in 2010 to 50GW in 2011, at least 8GW of wind power would need to be installed in the first half of this year. The typical cycle in the wind power business is for a majority of installations to be completed in the second half of any given year, meaning that the second half of 2011 will likely see more than 8GW installed, according to Liu.

Growth for the Chinese wind market could come in between 14GW and 19GW in 2011, according to Capstone's Driscoll. He thinks the difference makers will be grid connectivity and the development of offshore wind turbines in China.

In the end, analysts say, market growth of 18GW to 19GW would seem to depend on how quickly the existing unconnected wind farms are linked to the grid. As of November, 25GW of Chinese wind farms were grid-connected.

The question for investors remains the same: China may be dominant, but will its growth rate remain speedy enough to merit current valuations.

-- Written by Eric Rosenbaum from New York.


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