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China Ming Yang Wind Power Group Ltd. (NYSE:MY)

Q3 2012 Earnings Call

November 16, 2012 8:00 AM ET

Executives

Beatrice Lee – Director, IR

Chuanwei Zhang – Chairman and CEO

Vincent Pang – CFO

Analysts

Peter Snelling – Merrill Lynch

Operator

Good morning and good evening, ladies and gentlemen. Welcome to the Third Quarter 2012 China Ming Yang Wind Power Group Limited Earnings Conference Call. At this time, all participants are in a listen only mode. With us today are Mr. Chuanwei Zhang; Chairman and CEO; Mr. Vincent Pang, CFO; and Ms. Beatrice Lee, Director of Investor Relations.

After the management's prepared remarks, there will be a question and answer session. This conference call contains forward looking statements. These statements constitute forward looking statements within the meaning of Section 21(e) of the US Securities Exchange Act of 1934. As amended and as defined in the US Private Securities Litigation Reform Act of 1995.

These forward looking statements can be identified by terminology such as will, expect, anticipates, future, intends, plans, believes, estimates, targets, goals, strategy and similar statements.

Such statements are based upon management's current expectations and current market and operation conditioning and relating to events that involve known or unknown risk, uncertainties or other factors, all of which are difficult to predict, and many of which are beyond Ming Yang's control, which may cause Ming Yang's actual results, performance or achievements to differ materially from those in the forward looking statements.

Future information regarding these risks and other risks and uncertainties or factors is included in Ming Yang's filings with the US Securities and Exchange Commission. Ming Yang does not undertake any obligation to update any forward looking statements as a result of new information, future events, or otherwise except as required under applicable law.

I would now like to turn the call over to Beatrice Lee, Director of Investor Relations. Mr. Lee, please proceed.

Beatrice Lee

Thank you, operator and thank you for joining us today. We have issued already issued our third quarter 2012 earnings release. I hope you have a chance to read it. The presentation used for this call is also available on our IR website.

In today's call, Mr. Zhang will discuss latest business and operational developments of Ming Yang. And Mr. Pang will walk you through the company's financial performance for the third quarter of 2012. After that, we will open the floor to the questions from audience. Now I would like to turn the call over to Mr. Zhang.

Chuanwei Zhang

[Interpreted]

Good morning and good evening ladies and gentlemen. I am Chuanwei Zhang, Chairman and Chief Executive of China Ming Yang Wind Power Group. And thank you for attending our third quarter earnings conference call.

In the third quarter we further improved our financial performance amidst a challenging market environment. We've recorded a total comprehensive income of 5 million recognized revenue equivalent to the wind power project with an output of 228MW and we also improved our gross margin by 2.9% quarter-over-quarter to 17.4%. In terms of new sales contracts, we entered to sales contracts for wind power projects with a total output of 302MW and our order backlog amounted to 2.2GW.

Before diving into our business progress over the quarter, I would first like to share with you some thoughts on the wind power industry.

In terms of industry consolidation continued into the third quarter with a market showing a narrowing down trend, industry sources were reallocated after a prolonged period of competition among the power equipment manufactures causing smaller players like (inaudible) technology and the financial strength to find themselves on the brink of collapse.

At the same time wind power developers also reacted to the industry and laid a series of strategic adjustments, reallocating resources from north china to the south to focus on projects and diversifying the project portfolios from large scale to distributed development while taking a more sensible approach to our investments.

In the wake of rapid changes within the industry, Ming Yang will continue to make use of this innovation in technology and its business model to make appropriate adjustments to its strategies. Although we strive to face these challenging time and outperform the market through the implementation of the following basis.

First, we will capitalize on technological innovation to manufacture customized products. Ming Yang has been dedicated to enhance our competitiveness and to provide greater value to our customers. Right now, the industry is trending towards lean development from large scale development as the wind turbine manufacturer, the foundation of sustainable development is the lower wind power development and operations cost. So the technology innovation thereby improving power generation efficiency and lower wind power generation costs.

Since our inception, Ming Yang has been adhering to our R&D principals at high energy output, higher stability and lower power generation cost. Through the accumulation of expertise and (inaudible) capital, we have been able to successfully launch customized products catering to wind and other weather conditions and the power grid in China including typhoon weather, low temperature conditions and the high altitudes. We also customized the blades and transmission systems according to different wind farm requirements. While we will start to customize to achieve the best matching between wind resources, turbine and a design by visiting the customers site for location selection at the early stage of a project. Then we can optimize all the technical processing and the electrical aspects of the whole installation. This will double the power generation from 10 to 20% therefore we will not only meet the power generation target but also share the benefits brought by the high power generation with our customers and achieve a win-win situation.

Our 2MW WTG prototype has recently started power generation in full power and has successfully been connected to grid on a testing wind firm and joined by, it has reached a scalable capacity and a straight, we have one orders of over 246MW. A serialized and diversified product structure, will enable Ming Yang to enhance the gross margin, gross profit of this product and improve product customization.

Second, we will further analyze customer needs in order to effectively customize our business models. In the third quarter after expensive research and discussions, the management decided to implement a full scale customization of our business model. Our business models currently include operation leasing, financial leasing and EPC. Such now, our project construction will consist of deepening our understanding of a customer need so that they can shape a second model for our customers and diversify our revenue structure. We will create to customize the business model to provide a solution to our customer’s difficulties with products, construction cycle, financing and (inaudible). In the meantime we will receive service income and financing income at the time of the scales.

So in forward, we plan to continue for our sales model invest further in customer communications to optimize services and win customer reorganization at the preliminary feasibility and its design stages. We will provide a phase by phase all inclusive business model that's addressing the specific customer needs starting with wind farms, moving on to business execution and then after sales operational maintenance services. With a strategic adjustment, Ming Yang will shape its own evolution shifting from product oriented manufacturing to a service oriented one.

Third, we will spare no effort to enhance customer resources and solidify our leasing position in the industry.

Recently we signed a contract with a local government in (inaudible) Henan province to build a 300MW wind power project. It is expected to take three years to complete construction and begin operations. The project is part of a strategy to promote the use of renewable energy in Henan province. With Henan’s market leadership in southern china, we will fully integrate industry resources and the government support and integrate our market share.

In September we signed a strategic corporation agreement with China Guangdong Nuclear Power Group to co-develop wind power projects Guangdong and Jieyang provinces. We also eyeing the overseas market and will further our corporations to further to improve our operations at the appropriate time. Together, we will establish a renewable energy fund and enhance the utilization rate of wind and the solar power. This strategic corporation will further strengthen our advantages in Guangdong and Jieyang and provides us with many more business opportunities. Besides this, we formed a joint venture with Huaneng Renewablesin the same month where will co-develop wind power in south china to drive demand for wind turbines and increase our market share.

Through continuous efforts, we have made a major breakthrough this year winning five new customers namely China (inaudible),China Energy Conservation Investment Corporation, China National Nuclear Corporation and China Guangdong Nuclear Power Group. As we speak, Ming Yang has formed a complete customer structure with 10 key strategic customers.

Fourth, we will enhance our core products and advance our offshore wind power strategy.

Thanks to the reach of our resources, prevalent in the region and a sound power generation network, Guangdong is set to become the future of Chinese wind power development. Currently over a planning of offshore wind power generation has been approved by the NDRC.

We have set up a joint venture with eight companies including China Southern Power Grid and China (inaudible) New Energy Corporation to establish the South Offshore Wind Joint Development Co., Ltd and Enterprise that aims to develop wind power projects in Guangdong and other regions in China. Our product, the simple compact, the SCD wind turbine generator has already reached maturity through our systematic professional industry chain. Last quarter we have recognized revenue from our first SCD turbine project thanks to the utilization of innovative technologies and the new materials, our SCD units possess the advantages of being small, light, effective and typhoon resistant also relative to offshore wind power development. We also have our top Chinese offshore wind power development, team and R&D system.

With the help of our total solutions offerings in offshore wind power, and the demonstration effect of offshore wind power development in Guangdong region, we strongly believe that we are poised to become leaders offshore wind power investment in both China and the rest of the world.

Finally, we will leverage on our strength in finance and capital to actively expand in international markets.

[Audio Disturbance] of Chinese wind power market Ming Yang is setting the sight on advancing into the overseas market to create new catalysts for growth.

Tuning into India, we have officially established a joint venture company with Reliance Energy, India’s largest private electricity company. In October we transformed a local factory in accordance with our straight company spend and established production lines and quality control systems for turbine and the blade manufacturing.

Recently we have entered into a finance agreement with financial institutions where we will use these sizable financial advantages to provide our India operations with technologies, brand recognition, major components and engineering services along with total engineering procurement and a construction solutions to create customize the products, innovative business models and total solutions, financial services that we are automatically increase our expansion into the south Asia market.

In addition to the above, we are planning to establish a holding company in (inaudible) committed to the divestment of the Eastern Europe market, we are also actively expanded our corporation with wind power developers in Romania and (inaudible) through bases implementing in Eastern Europe, we have moved further into Eastern European markets and continued to strengthen our overseas development strategy.

While at the market rationalizes, where we have strived to build on our cost saving measures and the development of new materials to improve our service model transforming from the previous model where we underwent expensive construction and resource allocation to smaller, more efficient operations utilizing lower cost and high efficiency to create a better value service chain and expanding our profit model.

The consolidation of the industry should be regarded as a significant opportunity from Ming Yang. During this period, our strength in finance, human capital, technology and brand recognition along with our ability to integrate the supply chain, were served to form a powerful accumulative effect and [Audio Disturbance] capability where we will rely on our report to distinguish ourselves as we strive to become a world-class wind turbine manufacturer and a clean energy total solution provider.

With that, I will now hand you over to our CFO, Mr. Pang who will walk you through the company’s financial performance over the third quarter. Thank you.

Vincent Pang

Good morning or good evening ladies and gentlemen. As we have already issued earnings release, our focus on just a few important metrics from our financial performance. Fiscal debt all numbers are in RMB and all comparisons prefer to year-over-year comparisons unless otherwise stated.

Revenue in the third quarter of 2012 was down 59% to 788 million reverting a decreased demand of wind turbines, commissions in the quarter. So wind turbines of which revenue was recognized amounted to an equivalent wind power project output of 228MW of 152 units of 1.5MW wind turbines. The decrease in revenue was primarily due to the overall weakened market demand for wind turbines in China.

As of September 30, 2012, we have installed 33 units of wind turbines which were commissioned through our EPC program for the funding to the program development was subject to final approval by local banks. As a result, incurring with our revenue recognizing policy, we developed recognized such a revenue which was approximately 116 million during this quarter.

Gross profit for the third quarter was down 55% to about 137 million while gross margin was 17% compared to 16% in quarter three 2011. The decrease was a result of weakened demand overall. Comparing with quarter two this year, however, the gross margin for the quarter improved by approximately 2.9 primarily due to a favorable mix of higher margin sales contract of wind turbines recognized during the quarter.

In terms of operating costs, selling and distribution expenses in the third quarter were down 38% to 48 million. The decrease was due to the decreased transportation expenses as a result of fair number of wind turbine deliveries. That bidding charges incurred due to the last bidding activities and that share based competition expenses incurred during the period.

Administrative expenses in the third quarter were down 32% to 59 million which was primarily due to the fact that there was a provision of receivables of 28.7 million in the third quarter of 2011 whereas there was a 4.7 million provision in the corresponding period in 2012.

R&D expenses in the third quarter were up 22% to 23 million. The increase was due to the fact that the company is currently carrying out more wind turbine development projects resulting in an increasing stockholders (inaudible) and higher material consumption and depreciation charges.

Turning to the bottom line, total comprehensive for the third quarter was 5 million basic and diluted earnings per share was $0.03 compared to $0.82 in quarter three 2011.

As for our cash position, our cash and cash equivalent as of September 30, 2012 was 1.5 billion representing an increase of 10% from 1.3 billion as of December 31, 2011.

Finally, after seeing a slight improvement in our gross margin in the quarter, we expect this trend to continue in the pursuing quarters, at the same time, we will continue to maintain our cost control measures.

This concludes the financial reporting session and I would now turn the call back to Beatrice.

Beatrice Lee

This concludes our prepared remarks for Chairman and also the CFO. We will now open the floor for the questions. For the benefit of our English speaking participants, please give all your questions in English only. Operator we can begin to start the Q&S section now.

Question-and-Answer Session

Operator

(Operator Instructions). Just one moment, one question has come through of Karl Lu (ph) of ICBC International.

Unidentified Analyst

Could you please give us some color on (inaudible) in new orders for the third quarter.

Vincent Pang

With regard 302MW new orders in the quarter three basically mainly from the 2MW wind turbines, there are about 123 units of 2MW wind turbines new orders in quarter three which account for 246MW. The rest of them is the traditional 1.5MW.

Unidentified Analyst

Could you please give us some geographic for like which probably is for these new orders? Where are these new orders from, is from Henan province, Guangdong province or some other province?

Chuanwei Zhang

[Interpreted]

Most are in the Henan and Guangdong province as well as the Fujian province for (inaudible) and a couple of orders were from the north, for example (inaudible).

Unidentified Analyst

Okay thank you. And my second question is that, could you please give us more information about the 2MW wind turbine like what kind of price it is and the difference between the cost level with the traditional 1.5MW and any difference compared to our competitors for this type of wind turbine?

Chuanwei Zhang

[Interpreted]

Compared with our turbine with our competitors you will find that this is and our technology based on about 1.5MW turbine technology and it is customized one. The price order blades, these is a prolonged blade which are more suitable for places like in Southern China where the wind speed is slow or in places with higher altitudes, places with good transportation where there are a lot of hills. So this is the second point, the point is as I said, it is customized and a lot of components can be used, a lot of components from 1.5MW turbines can be used onto the 2.2MW turbines. In terms of the selling price it is only 3 to 5% higher than that of 1.5MW but in terms of production cost, it is 2 to 3 percentage lower than the 1.5MW turbines.

Operator

(Operator Instructions). Your next question comes from Peter Snelling of Merrill Lynch. Please ask your question.

Peter Snelling – Merrill Lynch

I wondered if you would update us a bit on your share repurchase program and any further actions to enhance the share price?

Chuanwei Zhang

[Interpreted]

Personally, I already repurchased over 2% of the auditable shares in the second half of this year and we are continuing to buying back.

Operator

At this time, there are no further questions in queue, so I’d like to hand the call back to Ms. Beatrice Lee, Director of Investor Relations for closing remarks.

Beatrice Lee

Thank you all for joining us today and tonight for Ming Yang’s third quarter 2012 earnings call. We’d like to keep in touch and welcome you too accordingly or email me with any further questions, I would be more than happy to answer them.

Operator

Ladies and gentlemen this concludes our presentation. Thank you for your participation. You may now disconnect. Have a great day.

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