Fair wind blows for China
An exceptional set of numbers reported by turbine maker China Ming Yang spotlights China's booming wind power sector.
Download PDFAustralian wind farm development has largely been put on hold for a few years while the country yet again debates the need to move towards a low-carbon future by taxing carbon polluters. Meanwhile, in China, there is no such debate – they know the facts and the solution and just continue to get on with it. Japan’s travails should provide even greater impetus for the development of renewable energy technologies, at least in countries that worry about energy security.
In the space of just over five years, China Ming Yang has been built into a top five wind turbine manufacturer in China. We expect Ming Yang to move into the top 10 producers globally during 2011. As such, a quick look at Ming Yang’s financial profile is definitely warranted.
China Ming Yang reported earlier this month an exceptional set of earnings numbers. Revenue growth was 370 per cent year-on-year (YOY) to $US836 million. A total of 1,203 megawatts (MW) of Ming Yang turbines were installed in 2010, taking its market share in China to over 7 per cent, from only 2 per cent in 2009. Gross profit margins trebled from 6.5 per cent to 19.7 per cent.
How is Ming Yang financing this growth? A US initial public offering in October 2010 raised $US324 million in new equity capital. Like a number of its Chinese renewable compatriots, Ming Yang is very well capitalised, reporting a net cash position of $US324 million on its balance sheet as of 31 December 2010.
Ming Yang has targeted international growth as a key priority for 2011. While we would expect international endorsement to take some time to emerge, Ming Yang has flagged it is in discussions with Duke Energy, a $US23 billion US utility. Why would a US utility giant work with a wind turbine supplier that is unproven in the US market? Ming Yang can provide extremely cost competitive wind turbines, with pricing some 20 per cent below European rates. And it helps, of course, that Ming Yang can also provide very favourable financing terms. Ming Yang is also targeting emerging markets in Asia and South America where a lack of historical brand presence is less of a constraint on new business.
China’s 12th Five Year Plan requires the top five wind turbine manufacturers to have a combined market share of 60 per cent by 2015 in order to facilitate economies of scale. Reports suggest Chinese wind installations will stabilise at the rate of 15-17 gigawatts (GW) annually. In contrast, any notion of stabilisation is distinctly absent from Ming Yang’s order book. As at the end of 2010, Ming Yang had forward orders of 2,000 MW. However, in January 2011 the company won a further 1,100MW of new orders, winning 2 per cent of some 5.5GW of tenders awarded in China that month! An order book of 3.1GW certainly underpins another strong year of growth in 2011.
As an aside, another listed independent power producer, China Longyuan Power Group, reported it spent $A2.5 billion on wind capacity expansions to add 2.0 GW of additional wind power in 2010, taking its total installed wind capacity to 6.5GW by year end. China Longyuan alone anticipates adding another 2GW pa of wind capacity going forward. China Longyuan’s 2010 result outlines its long term plan to install 61GW of on and offshore wind farms. One company! And one that did not even operate in the wind industry five years ago! Indeed, China Longyang made its first move into solar in 2010, adding 12MW of capacity. Its longer term plan is to add another 1,950MW of solar as well.
Again, in contrast to the indecision over whether the antiquated Australian electricity grid system even requires upgrading, China is undertaking a huge modernisation and expansion of its grid. In January 2011 State Grid of China and China Southern Power Grid Company announced a 500 billion yuan ($A74 billion) capex program to install 40,000km of ultra-high voltage cables. A key objective is to facilitate the national flows of electricity to accommodate increased intermittent wind and solar power and smooth the regional variances.
Rare and splendid
Turning to the rare earths industry, Arkx Investment Management continues to monitor the developments in this sector due to its importance as a small but critical input into batteries, electric vehicles, magnets for wind turbines and LED lighting. Molycorp of America and Lynas Corp of Australia are the top two firms in the world (outside of China) in the area of rare earth mining. The market capitalisation of each of these firms now exceeds $A3 billion after both have delivered some 300 per cent of capital gains to their shareholders in the last year. However, with little revenue, profit or production as yet, valuing either of these firms now is a little problematic. As such, to gain an alternative exposure to this booming sector, we turned to Canadian based firm Neo Material Technologies. With a long term track record of profitable growth, Neo Material is the western world technology leader in terms of downstream processing of rare earths.
Rare earth production has been the subject of extensive commentary over the last year – particularly as a result of the Chinese government continuing to tighten controls over its rare earth exports. The Chinese strategy is in large part to dominate the world supply of rare earths, but it is also aimed at ensuring mining and processing of this group of mildly radioactive minerals is done with a reduced environmental impact. A third aim of the Chinese government is to ensure more of the downstream value-added processing is done within China. Neo Material is interesting for a number of reasons, but in part because it is one of the only western companies that is licensed to operate rare-earth processing plants in China.
Neo Material is also one of the very few companies in the world with the technical knowledge and ability to process and develop neodymium powders – or ‘neo powders’ – which are used in products such as permanent magnets and electric motors. Because of the ability of neo powders to reduce weight and size and to improve the efficiency and performance of the products they are used in, they are sought after by buyers ranging from Panasonic to the Pentagon, and everyone in between.
Rare earths are hugely important for the magnets used in direct drive wind turbines, with as much as two tonnes of rare earth magnets being required in the permanent magnet generator that sits in the turbine. Indeed, industry journals report that if a permanent magnet used in a wind turbine is two tons, then as much as 28 per cent of that weight is neodymium.
So it is against this backdrop, and in particular China’s tightening export stance, that Neo Material’s 2010 earnings result represented a new record for the company.
Revenue growth was up 81 per cent year-on-year to $US338 million; net Income rose 180 per cent to $56 million and earnings per share grew 170 per cent to $0.46 in 2010.
In addition, Neo Material has a very strong balance sheet. At year end the company had cash and cash equivalents of $87 million and total debt of just $11 million, for a net cash position of $76 million.
While we expect the medium-term squeeze in supply of rare earth ores to remain a huge boon for rare earth mining firms, we see Neo Material as providing a business with a sustainable long-term competitive advantage. This is due to the value-add of rare earths in the specialty, refined-end products, rather than in the ore. This contrast between a refined end product and physically mining the ore is a point that is not lost on Don Bubar, CEO of Canadian miner Avalon Rare Metals. Late last year Bubar commented that the extraction of rare earth ore only represents 10-15 per cent of the final product value.
In June 2010 Neo Material announced a letter of intent for it to implement a technology transfer agreement with Molycorp. Neo has the depth of downstream technical expertise needed to allow Molycorp to pursue its “mine to magnets” vertically integrated supply chain strategy. Neo Material’s relatively small size (with a market capitalisation of $C900 million), a relatively open share register and strategic value all suggest interesting developments are always possible when upstream miners are being priced at record high valuations.
Tim Buckley is a Managing Director and Portfolio Manager at Arkx Investment Management
Disclaimer: Arkx Investment Management 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 a long position in China Ming Yang and Neo Material Technologies, nothing in this article should in any way be considered as investment advice.