Strongly improving margins in third quarter ease concerns about overreliance on big state-owned customers

Key Takeaways

  • Xinjiang Goldwind’s third-quarter profit jumped 47% despite an 11% revenue decline, pointing to strongly improving margins
  • Company’s Hong Kong and Shenzhen-listed shares rallied strongly after the report’s release

By Doug Young

The latest quarterly report from Xinjiang Goldwind Science & Technology Co. Ltd. (2208.HK; 002202.SZ) is breathing some fresh air into shares of China’s leading maker of wind power equipment.

What exactly is behind the lift is a matter for interpretation for this high-profile company that is cashing in on a global rush to build up renewable power supplies. Goldwind is the clear beneficiary from its home China market, which accounted for a whopping 56% of all new wind power installation worldwide last year and is continuing to add new capacity at a similar clip in 2021.

A big chunk of that demand is coming from one of Goldwind’s biggest customers, the new energy arm of the massive Three Gorges hydropower dam operator in central China. We’ve previously written about the dangers of reliance on a single customer like Three Gorges Renewables, which can ultimately squeeze margins if that customer demands big discounts for its large purchases.

But at least so far this year, Goldwind’s margins have actually improved quite a bit, perhaps easing concerns that Three Gorges might be demanding big discounts for its purchases. There’s no new profit margin data in the company’s third-quarter financial report that was issued after markets closed on Tuesday. But in its earlier half-year report released in August, the company said its gross profit margin surged to 27.6% in the first six months of 2021 from 17.1% a year earlier.

That trend appears to be continuing into the second half of the year, based on the latest figures that we’ll review shortly.

Investors welcomed the latest report, with Goldwind’s Hong Kong- and Shenzhen-listed shares both up by about 10% in Wednesday morning trade after the report’s release.

Investors have been blowing hot and cold over Goldwind, and really, over the entire clean energy sector in general this year, following more bullish sentiment in 2020. The company’s Hong Kong-listed shares were actually down about 15% this year before the Wednesday rally, and its Shenzhen shares were unchanged over that period. The Hong Kong stock was down by much more midway through the year, but has rallied lately and is now up more than 30% from a year-low in June.

Goldwind is one of the few midcap Chinese companies to attract attention from major global fund managers, with an A-list of major shareholders that includes JPMorgan Chase, Morgan Stanley and BlackRock. But reflecting differing views on the company’s outlook, those major players have taken different approaches to the stock this year.

The most bullish is Singaporean wealth fund GIC, which has taken up a new major position in the company’s Hong Kong stock this year of just above 5%. Other bulls include BlackRock, which has doubled its stake in the company’s Hong Kong stock to 16.3% or more from 8.3% at the start of the year. Citigroup has also slightly boosted its stake in the Hong Kong shares to 9% at present from 8.7% at the start of the year.

But JPMorgan and Morgan Stanley fall into the more bearish class, with both selling significant portions of their holdings in Goldwind this year to a current 7.2% for the former and 5.4% for the latter. And fund house Schroders, which held 12.2% of Goldwind’s Hong Kong shares at the start of the year, has sold down that stake to below the 5% threshold above which companies are required to disclose their positions.

Revenue Slips, Profits Soar

Next, we’ll look at the company’s latest financials, which reflect the improving margins we mentioned above. On the one hand, the company’s revenue slipped 11% in the third quarter to 15.6 billion yuan ($2.4 billion), accelerating from an 8% decline in the first half of the year. But its profit was up 47% for the quarter to 1.2 billion yuan, and rose by an even higher 59% excluding the effects of one-time items.

The company didn’t give any explanation for the falling revenue. But in its earlier interim report released in August, it noted that sales for its largest wind turbines – which carry higher margins than its smaller products – soared more than fourfold in the first half of the year. That surge most likely continued in the third quarter, and came on orders from Three Gorges Renewables.

The company also said it expects continued strong demand, noting that expectation was behind a large jump in its inventory to 7.7 billion yuan worth of equipment by the end of September, representing a 34% increase from the end of 2020.

That expectation for continued strong demand was supported by the latest annual report from the Global Wind Energy Council. That report noted that new wind power installation worldwide grew by 53% in 2020 to a record 93 GW, with China accounting for a whopping 56% of the new installation. What’s more, the report said Asia was expected to add another 340 MW of wind power capacity between 2021 and 2025, with China accounting for a big portion of that.

China’s huge appetite for wind power is part of the nation’s bigger drive to install more renewable energy capacity to reduce its carbon footprint. The country has said it aims to achieve peak carbon emissions by 2030, and to become carbon-neutral by 2060. Wind is clearly an important part of reaching those targets.

From a valuation perspective, Goldwind looks relatively undervalued compared to global peers, perhaps because investors worried about its reliance on big customers like Three Gorges Renewables that might demand big discounts and hurt profitability.

Its Hong Kong- and Shenzhen-listed shares currently trade at price-to-earnings (PE) ratios of 27 and 21, respectively. Those figures are well below the 39 for European rival Vestas (VWS.CO) and the 37 for Canada’s TransAlta Renewables (RNW.TO). While such a discount was probably justified earlier due to concerns about Goldwind’s reliance on state-run entities, the latest figures showing improving margins could perhaps ease some of those concerns. That, in turn, could point to a stronger performance for the company’s shares in the year ahead.

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