Chinese Renewable Energy Company Ming Yang Wind Power to IPO in US – Should you Buy it

Ming Yang Wind Power Group is the first Chinese Wind Energy Company to list its shares in the American Stock Exchange.There are a number of Chinese Solar Companies like Renesola,Trina Solar,Suntech etc which are traded in the USA but no Wind Energy Plays.In fact the number of Wind Companies trading on US Exchanges is almost non-existent.Clipper and Broadwind are hardly big players in the global market and provide little direct exposure to Wind Energy for US investors.Ming Yang is issuing 25 million ADS at a range of $14-16 share diluting around 20% of the company and giving it a market cap of roughly around $1750 million.The proceeds will be used in capacity expansion and R&D mostly.Ming Yang is the only significant non-state owned Chinese Wind Energy Company with a 2009 marketshare of around 4%.The Company has a very short history installing its first Wind Turbine just 2 years ago and has seen an exponential growth riding on the incredible Wind Industry Growth in China.Here are the advantages and disadvantages of the Company.

Advantages

1) Fast Growing Industry – China has seen a massive growth in Wind Energy Installations with ~45% of the global Wind Energy Installations of 13 GW.The Country has set up ambitious targets for further growth with an estimated 100 GW of cumulative installation planned by 2014.Ming Yang has also seen an explosive growth albeit from a small base almost doubling its revenues in 2010

2) R&D Focus – The Company is focusing on the R&D by planning to spend $80 million from its $350 million IPO proceeds to develop Wind Turbines.It has licensed SCP technology from a German Firm and plans to develop 2.5 MW and 6 MW Turbines for offshore Wind Installations.

3) Improving Margins – The company’s margins have improved over the last 2 years with GM of 20% in the first 6 months of 2010.This has been due to falling raw material costs,increasing scale and low SG&A expenses (around 5% of revenues).

4) Huge Order Book – The company has 1776 Turbines in its Order Book which implies around $2 billion in orders or around 3 years of its annualized 2010 revenues.The Orders have been increasing sequentially as its Turbines see more User Acceptance.

5) Low Debt and Return on Capital – The company has very little debt and a very good return on capital metrics.Though Working Capital Requirements are high,it is mostly funded through payables and advance customer payments.

Disadvantages

a) Competition – The Competition in the Chinese market is intense and growing.There are almost 75 Turbine Makers in China currently and the Government has decided to stop funding the smaller players to remove overcapacity in the Wind Equipment Industry.The Bigger Players like Sinovel,Goldwind and Dangfang Electric are over 7 times the size of Ming Yang and are backed by state resources.Suzlon,GE and Gamesa are increasingly focusing on the Chinese market given its huge size.The Competition in China is leading to Price Wars forcing Chinese heavyweights in Wind to look outside of China for growth

b) Falling ASPs – The ASP has fallen by almost 22% in 2010 form 2009  to $600,000/MW which is quite drastic.As these revenues will be recognized in the future expect the GM to come under severe pressure if the company is not able to cut costs fast enough.

c) Increasing Raw Material Prices – Raw Material Prices like Steel,Glass etc have started to increase which could lead to a double whammy of falling ASPs and increasing raw material prices.This might lead to losses in the future as the company has little bargaining power with customers

d) Customer and Geographic Concentration Risk – The top 5 Utilities in China that is China Datang, Huadian, Guodian, CPIC and Huaneng account for most of the revenues and orders and the company is solely dependent on China .Thus a slowing of Chinese Economy will have a severe damaging effect on Ming  Yang

e) Increasing Capacity – The Company is set to increase capacity to around 3 GW by end 2010 which would make its capacity equivalent to the biggies like Sinovel and Goldwind.This should allow to bid for bigger orders and allow for more revenues in the future.

Summary

Ming Yang might attract a lot of investor attention given its the first Chinese Wind Power Play to list on the US Stock Markets.However given the substantial risks both macro and micro the valuation at around 20x P/E is slightly expensive in my opinion.Post IPO P/B of around 3x and P/S of 3x is also not exactly cheap.The Wind Energy Sector around the World is suffering severely in 2010 from a slowdown in the Developed Markets of US and Europe.Cyclical risks for this industry are high from the increasing competition from Korean Shipbuilders and decreasing ASPs.However Ming Yang Wind Power is a company which seems to be on the right track with its R&D Focus,Expansion Plans.Ming Yang seems a Buy despite these risks.