Blowing up a storm
American Superconductor's quarterly results show that companies who invest in RD&D can generate superior returns to shareholders
Download PDFAmerican Superconductor Corp (AMSC) is a world leading developer of new wind turbine technologies. AMSC particularly focuses on the use of superconducting electronic componentry and advanced engineering to allow ever larger multi-megawatt turbines, with a key focus on lightweighting. AMSC is also utilising its knowledge of superconductors to drive innovations in grid efficiency, a key requirement for the development of a smart grid.
The AMSC quarterly results reported on February 1 show how corporates that invest heavily in a very focused approach in RD&D (Research, Development and Deployment) can drive an industry forward while also generating superior returns to shareholders. AMSC’s RD&D focus in wind turbines is proving instrumental in getting on- and offshore wind farm technologies to grid parity relative to fossil fuels.
Revenues for the quarter to December 2010 were up 42 per cent year-on-year (YOY) to $US114 millio. Net income tripled YOY. AMSC guided that, relative to its forecast $US400 million of revenue in the year to March 2011, revenues should reach $US1 billion by the year ended March 2014. This represents a forecast 36 per cent compound annual growth rate (CAGR) for the next three years. While this is clearly a bullish number, it is supported by AMSC’s delivery of plus 58 per cent CAGR over the last three years.
AMSC supplies core turbine electronic componentry technology to Sinovel Wind Group of China, now one of the top three wind turbine firms in the world. However, a key promise of AMSC is that revenues to non-Sinovel customers should grow exponentially over 2011 and 2012. Key emerging players in the wind turbine market now licensed to AMSC include Doosan Heavy Industries and Hyundai Heavy Industries (both of Korea), Inox Wind (India), plus Dongfang Turbine Company, XJ Group, Beijing Jingcheng New Energy and Shenyang Blower Works (all of China).
AMSC has also been investing aggressively in the development of superconductors, critical for the development of supergrids. AMSC has developed high temperature superconductor (HTS) wire that carries ten times the power load of conventional power cables and boasts a two-thirds improvement on the electricity lost during transmission. Commercialisation of this product is now under way in 2011, after AMSC won a world-first order from LS Cable of Korea in December 2010. The State Grid of China has recently announced its intention to install is first superconductor power cabling in China’s grid by the end 2012.
The Tres Amigas transmission project is likewise looking to use AMSC HTS cabling in its project to link America’s three power grids for the first time ever. In our view this is a key hurdle for the continued development of renewable energy in America, given the current state-based utility system that significantly curtails the further development of intermittent power projects, specifically wind and solar. As in Australia, the development of a HTS cable-based smart grid and nationally linked power system would dramatically normalise the wind and solar power generation rates across America, it being windy and sunny in different parts of the country at different times.
AMSC invests some $US36 million annually on wind turbine technology research and development, equal to 8 per cent of revenues or 56 per cent of reported profits. This is a key investment driving revenue growth. AMSC is rapidly progressing the commercialisation of the 10 megawatt (MW) offshore wind turbine, the Sea Titan and we expect to see deployment of this maritime giant within the next five years. To gain an appreciation for the step-change involved, the Sea Titan represents a four-fold jump in scale compared to the current deployment of 2.5 – 3 MW offshore turbines. The latter, in of itself, is a doubling of power generating capacity per turbine over the last four years.
A final highlight of the AMSC result was the confirmation that net cash on the AMSC balance sheet doubled to $US260 million, assisted by a well timed equity raising in November 2010. This very conservative financing stance is eminently sensible in light of the huge operational leverage AMSC is delivering, allowing management to invest aggressively in further capex in the development of a range of superconductor applications.
Further confirmation of the massive growth underway in the Chinese wind sector was reported on 1 February. China Ming Yang Wind Power (which listed on the New York Stock Exchange in October 2010) won 20 per cent of 5.5 Gigawatts of new wind turbine orders tendered in China in the month of January 2011. Ming Yang reported new orders of 1.1 GW, including 200 MW of orders for its new 2.5/3.0 Super Compact Drive (SCD) turbines. Developed in-house, these SCD turbines will be used for on and offshore wind farms. This is the second commercial-scale order for Ming Yang’s SCD and highlights China’s emerging world leadership in the wind turbine technology commercialisation race, where they are going head-to-head against AMSC, Vestas, Siemens and GE.
On February 3, Power-One Inc. reported revenue growth for the 2010 year of 142 per cent YOY to $US1,047 million. In just one year, Power-One has leapt its key solar power inverter competitors to become the number two supplier globally. We estimate Power-One’s market share has doubled to 13 per cent, albeit well behind global solar inverter leader SMA Solar of Germany at 40 per cent. To manage a doubling of market share in one year is quite a feat, given the global solar market itself more than doubled to an estimated 18 GW of installations in 2010. Power-One reported a 500 per cent growth in solar inverter units produced in 2010, with average selling prices falling some 10 per cent YOY. Solar inverters represent 5-7 per cent of the total cost of a solar module and we expect 10-15 per cent pa unit price falls going forward – all of which drives solar ever closer to grid parity on a distributed energy basis. The inverter converts the Direct Current (DC) generated by a solar unit to the Alternating Current (AC) needed by the electricity grid.
Despite reporting a fourth quarter earnings result 20 per cent ahead of market expectations, Power-One shares fell 22 per cent immediately post announcement. This anomalous result reflects Power-One’s leading market share in Italy, where a solar boom saw installations grow 600 per cent YOY to 5.9 GW in 2010 (an capital investment of some €20 billion in one market in one year). The market is expecting a rather drastic cut to Italian solar feed-in tariffs in response (say down 30 per cent), and hence we expect installation levels in Italy in 2011 are likely to fall some 50 per cent YOY.
From an Australian government policy perspective, this Italian situation is reminiscent of the Spanish solar market in 2006 to 2008. Yet another reminder that, for the sustained development of renewable energy, TLC is required – transparency, longevity and certainty! A boom-bust outcome is a destructive result of a poor regulatory framework.
Further to our article last week, we note Johnson Controls Inc. will be a major beneficiary (along with the environment!) of US President Obama’s announcement on February 4 to provide loan guarantees and enhanced tax incentives to drive improved energy efficiency via commercial building retrofits. Obama cites the JCI refit of the Empire State Building as targeting a 38 per cent reduction in the building’s energy use.
Tim Buckley is a Managing Director and Portfolio Manager at Arkx Investment Management
Disclaimer: Arkx Investment Management (Ark – x) focuses its investment approach on a small portfolio of high conviction stocks in the listed global cleantech universe. It looks for proven performers with world leading technologies backed by strong balance sheets and priced on sensible valuation metrics. While Arkx holds long positions in American Superconductor and Johnson Controls, nothing in this article should in any way be considered as investment advice.