China Wind Systems: Poised for More Growth

 |  Includes: CLNT, GE
by: Envelope Investing

China Wind Systems (CWSI.OB) recently completed a reverse stock split, which was the final step in preparing for a near term move to the Nasdaq.

When we first invested in the company, I think that some people questioned whether a company with its roots in the garment dying equipment business could successfully transform itself into a leading manufacturer of windmill components. Well, as the saying goes, it is hard to argue with success.

The company's wind divisions sales grew 118% in Q2 '09 to $3.64 million. They look poised to continue on their successful trajectory buoyed by recent large contract wins and continually increasing growth targets for wind power by the Chinese government.

China has doubled its wind power capacity in each of the last four years, and earlier in the year the Chinese government dramatically increased its 2020 target for wind power from 30 gigawatts to 150 gigawatts (talk about having the wind at your back). The Chinese government is also requiring that 70+% of the wind turbine components be manufactured in China. Traditionally, a lot of the components such as shafts, rings used for gearboxes and flanges have been imported.

The company will be attending the 2009 China Wind Power Conference in Beijing this week and we think that they could potentially win some new big orders (like the $14 million GE (NYSE:GE) deal that was struck back on July 31st). All of this further leads us to believe that China Wind Systems will be operating at full capacity by year end 2010. At full capacity we estimate their fully diluted run rate EPS will be $0.95. Given that this would be a huge growth trajectory for earnings, we think that the stock could trade at 15 times this run rate. To be conservative we are discounting this by 25% to give us a target of $10.68.