2208.HK 002202.SHE
Goldwind's China revenue starts to contract

The leading wind turbine maker’s profit fell 83% in the second half of last year, as revenue from its core China market started to contract

Key Takeaways:

  • Goldwind’s revenue growth slowed to 5.4% in the second half of last year from 15.4% in the first half, as sales in its core China market began to contract
  • The company’s inventory rose sharply last year as the Chinese wind power market slows after several years of big growth

  

By Doug Young

Plenty of mixed signals were blowing through the latest annual results of Goldwind Science And Technology Co. Ltd. (2208.HK; 002202.SZ), whose fate is largely tied to China’s policy-driven wind power market. The company has been a major beneficiary of policies that have built China into a wind powerhouse over the last few years, with about half the world’s installed capacity for the clean energy source.

Of the roughly 70 GW of new wind power installed in the first half of last year, well over half – about 44 GW – came from China, according to Wood Mackenzie. That helped to bring China’s wind power capacity to 440 GW by the end of last year, compared with more than 900 GW globally.

But fierce competition in China has hurt Goldwind’s profits, which fell sharply in the second half of last year. At the same time, China is showing signs of easing construction of new wind farms due to the huge existing supply. That’s a big development for Goldwind not only because China accounts for more than 80% of its overall sales, but also because the company is a major developer of wind farms.

The bottom line is that Goldwind’s margins are already getting squeezed and are likely to keep coming under pressure in the year ahead. That’s reflected in the company’s net profit, which plunged 83% in the second half of the year, accelerating from a 35% drop in the first half, based on calculations using data from the latest annual results.

Goldwind’s full-year net profit fell 44% to 1.33 billion yuan ($184 million), which was quite a bit steeper than a 14% drop forecast by analysts, showing its situation may be deteriorating more rapidly than many expected.

Despite the gloom, investors may be taking some solace in knowing that no individual factor was behind the big profit decline, and instead it seems to be due to several factors. That shows the company’s business is relatively sound, and instead that it is more a victim of a turbulent market rather than company-specific issues.

Hong Kong markets were closed for the Easter holidays after Goldwind issued its latest report on Thursday. The company’s Shenzhen-listed shares rose slightly on Friday after the report’s release. But that isn’t much consolation for Goldwind’s longer-term shareholders, who have seen their investment lose more than half of its value over the last 52 weeks.

The company was once an investor darling, counting the likes of Blackrock, JPMorgan, Citigroup and Singaporean sovereign wealth fund GIC as major backers. But as of last September, many of those had abandoned the company, with only JPMorgan and Blackrock still holding reportable stakes of more than 5% in the company’s Hong Kong-listed shares.

Following the yearlong selloff, Goldwind’s stock currently trades at an anemic price-to-sales (P/S) ratio of just 0.25. Fellow Chinese wind power company Ming Yang (601615) looks slightly better with a P/S of 0.68, though anything below 1 still looks quite weak. Denmark’s Vestas (VWS.CO) looks a bit more respectable with a P/S of 1.7.

China revenue starts to contract

While Goldwind’s profit was down sharply last year, it still managed to post some revenue growth. Its annual revenue rose 8.4% to 50.2 billion yuan from 46.3 billion yuan a year earlier. But the growth slowed sharply to 5.4% in the second half of the year from 14.5% in the first half, indicating a slowdown in new wind power installations.

A geographic breakdown shows the company’s revenue from China grew 0.9% last year to 42.4 billion yuan. But its China revenue rose by a larger 6.5% in the first half of the year, meaning that segment of its sales began to contract in the second half. The company’s non-China sales did much better, rising about 81% for the year to about 7.8 billion yuan, though that portion of its business accounts for just 16% of its revenue.

Reflecting the China slowdown, the company reported a sharp rise in its inventory to 15.3 billion yuan by the end of last year from 9.85 billion yuan a year earlier.

Three big factors that undermined the company’s profit last year were big rises in impairment losses and income taxes, factors that will continue to affect the company going forward. Its income tax expense nearly tripled to 997 million yuan from 335 million yuan a year earlier, probably the result of higher tax rates now replacing earlier lower ones that were designed to stimulate the industry’s development, but are now expiring.

The company reported an net impairment losses of 307 million yuan last year, which marked a big reversal from the net gain of 270 million yuan in 2022. The swing is likely related to losses the company is recorded related to its business building wind farms, which are rapidly losing their value due to oversupply in the market. Reflecting that, the company’s gross margin for its wind farm-building business tumbled 18 percentage points last year to 47.3% from 65.4% in 2022.

The other big factor undermining Goldwind’s profit was weakness in China’s currency, the yuan, which caused the company to post a 225 million yuan foreign exchange loss for the year, reversing a 106 million yuan gain a year earlier.

The combination of negative factors caused Goldwind’s net cash flow from operating activities to plunge to 1.85 billion yuan last year from 5.88 billion yuan a year earlier. As that happened, its cash also fell to 13.7 billion yuan at the end of last year from 15.2 billion yuan a year earlier. That’s quite significant, since its cash roughly doubled in the previous year.

The bottom line is that Goldwind is getting shaken by a Chinese wind market whose sails are rapidly deflating after several years of heady growth. While the company could offset some of its sputtering China business with foreign sales, that likely won’t be enough to make up for contracting sales in its important home market.

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