I have long been bullish about China Ming Yang Wind Power (NYSE:MY), which is the largest non-state-owned wind turbine manufacturer in China. The stock has gained 9% since the last time I recommended buying the stock. The stock also returned more than 11% in the last year when the energy stocks declined sharply. Ming Yang is giving a good performance quarter after quarter and is showing an upward trend after the company received a proposal to go private. Chinese wind installations accounted for almost 50% of the total world installations of 63 GW in 2015. The country is reducing its thermal power exposure and is looking towards alternative energy sources to reduce its pollution levels. Ming Yang is in a sweet spot to leverage from this growth since it is amongst the top local companies there.
Why is MY in a sweet spot
1) Good Performance quarter after quarter – The third quarter performance was marked by a 3.6% increase in average WTG selling price when compared to the last year. Ming Yang also benefited from reduction in cost of electrical components due to acquisition of RENergy. During Q3’15, Ming Yang entered into wind power projects sales contracts approximating 434MW. Cumulative tender capacity won was 1.2GW.The wind turbine generators sold also increased 30%, as can be seen from the table below when compared to the first quarter.
|
Q3 15
|
Q2 15
|
Q1 15
|
Revenue ($ million)
|
273.6
|
252
|
215
|
Gross Profit ($ million)
|
51.3
|
39.7
|
31
|
Gross Margin
|
18.8
|
15.7
|
14.2
|
EPS ($)
|
0.09
|
0.08
|
0.05
|
WTG sold (MW)
|
530
|
470
|
406
|
During this quarter, we were glad to see an increase in profitability.” said Mr. Chuanwei Zhang, Chairman and Chief Executive Officer of Ming Yang, “Looking ahead into the next five years, we see both opportunities as well as challenges in China’s wind industry. Currently, government officials indicated that new wind power installations under the 13th Five-year Plan (“FYP”) will not be lower than that during the 12th FYP period. [Source: Ming Yang]
The financial position is also sound.
Click to enlarge
Source: Ming Yang.
2) Chinese wind market is growing, with China installing more than 50% of global wind capacity in 2015
During the past five years (2010-2014), China’s new wind power installation has increased significantly to 89GW accounting for 42% of the global total. Even during 2015, the country installed 30 GW out of the total 63 GW installed globally. The country will now focus more on efficiency and quality and Ming Yang should benefit from this trend. NDRC has set a target that 30% of China’s electricity generation should come from renewable energy sources with wind contributing 200 GW of energy by 2020.
Click to enlarge
Wind is blowing away the competition on price, performance and reliability, and we’re seeing new markets open up across Africa, Asia and Latin America which will become the market leaders of the next decade. Wind power led new capacity additions in both Europe and the United States, and new turbine configurations have dramatically increased the areas where wind power is the competitive option. —Steve Sawyer of GWEC [Source: Cleantechnica]
3) Decent Stock performance & low valuation – The stock has returned more than 11% in the last one year and is trading at $2.4 currently. The company has a market capitalization value of $372 million, with P/E of 7x which is quite cheap. The stock is highly undervalued in my opinion given the fact that it ranked third in China for H1’15, in terms of newly installed capacity. Chinese stocks generally have a lower P/E when compared to their western counterparts. This is the reason why major Chinese solar companies like Trina Solar (NYSE:TSL) and JA Solar (NASDAQ:JASO) have decided to go private because their stocks are valued much below their western peers. The P/S and P/B at 0.3x and 0.5x respectively are also lower than the industry average.
4) Good Portfolio of products – Ming Yang currently commands the largest marketshare for2 MW wind turbines in China. Its 2.0-118/121 WTG is the largest in terms of rotor diameter among 2 MW WTGs in China and is capable of generating 20%-30% more electricity when compared to the older versions of 2MW WTGs.
Its new 3.0MW three-blade super compact drive is ideal for larger power output and wind projects in low-wind onshore regions. Ming yang is also looking at developing customized WTG and wind farms for different climatic conditions and regions. The company is also gaining traction in the off shore segment, also having launched 3MW, 6MW and 6.5MW WTG products.
5) International Expansion – The company also has a JV with the Reliance Group in India and recently installed 10.5MW in the country. 2MW and other high-powered WTGs are also expected to be introduced soon in the Indian markets. The company is also developing its overseas business through its “One Belt, One Road” policy.
Downside Risks
a) The company may go private – Ming Yang had received an offer to go private in October 2015 from a consortium of investors including Chairman and CEO Mr. Chuanwei Zhang for $408 million. Each ADS receives $2.51 in cash and the transaction is expected to close in H1’16. The merger consideration represents a premium of 13.1% to the closing price of the company’s ADS as on October 30, 2015. Though many Chinese solar companies have also decided to go private, they have yet to close the transaction. While it represents a floor on the stock price, the upside is also limited till the time the matter is resolved.
b) Chinese Slowdown – The Chinese market slowdown has adversely affected major commodity markets globally. With China entering a slowdown there has been a decline in demand of commodities which has affected other major economies. Ming Yang has a large market in China and might be affected if the conditions worsen. The company derives a substantial portion of its revenue from a limited number of customers, which are primarily Chinese or large regional electric power producers.
Conclusion
Ming Yang is a strong, vertically integrated wind energy with an optimized supply chain and should benefit from the large growing wind energy opportunities in China. The company estimates net profit for quarter ended December 2015, will be in the range of RMB 95-115 million, compared to RMB 84 million during the same time last year. Wind turbines is the one industry that has seen decreasing capacity in China, which has allowed WTG companies to become profitable. The company has shown good improvement over the last few quarters and is also strengthening its product portfolio with new innovations and technologies. I think MY remains a good buy, given its strong fundamentals.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Ming Yang Is A Key Beneficiary Of Rapid Chinese Wind Energy Growth
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