China Ming Yang Wind Power (MY) announced fantastic results for the past quarter and beat all consensus estimates. However, its share price showed downward momentum and recently traded in the lower 10s. According to Benjamin Graham's method, shareholders should not be too concerned with erratic fluctuations in stock prices. That's because the stock market behaves like a voting machine in the short term but acts like a weighing machine in the long term (i.e., the stock’s true value will be reflected in its price over the long run). Instead of viewing MY as an underdog, I believe its current price in the lower 10s provides value investors a very attractive entry value.
China’s 12th Five-Year Plan presents an exciting renewable energy plan. It states that the installed capacity of wind power will reach 100 million kW by 2015 and 180 million kW by 2020, which suggests roughly 12 GW of newly installed capacity annually. Ming Yang will benefit from these supportive policies as a leading WTG manufacturing company in China. There are also two key wind power development areas: Onshore, including Inner Mongolia and Xinjiang, and offshore, including Jiangsu, Hebei, and so on. Because Ming Yang has also secured wind resources in these key wind power development areas, the long-term relationship with wind farm developers in these areas will definitely boost Ming Yang’s sales in the near future.
In previous articles, I have provided some background on Ming Yang; I will focus on valuation in this article.
Most financial resources show Ming Yang’s trailing P/E as 18, which makes it look like an overvalued stock. However, it should be pointed out that MY just became profitable in 2010, so its negative earnings in Q4 2009 adversely affected the calculation of its trailing P/E.
In fact, MY has earned US$0.71 in the first nine months of 2010, compared to a net loss of US$0.2 for the same period in 2009.
MY’s latest quarterly report shows that the company is aiming to achieve revenue recognition of an estimated 800 1.5 MW WTG units in 2010, and is also targeting an estimated 1400 1.5 MW WTG units and 100 3.0 MW SCD units in 2011.
I will show my calculation of estimated revenues for MY in both 2010 and 2011, based on the above information, in the following steps:
1. Calculation of unit price for 1.5 MW WTG units.
According to the latest quarterly report, the total recognized revenue in the third quarter of 2010 was US$ 222.1 million (RMB 1486.0 million), based on 239 1.5 MW units with an exchange rate of 6.69 RMB/USD. The unit price for 1.5 MW WTG units is $222.1 million ÷ 239 = $0.9293 million/unit.
2. Calculation of unit price for 3.0 MW SCD units.
On December 7, 2010, MY announced that it had won its bid for a government authorized wind farm project in the Hami area of Xinjiang Uyghur Autonomous Region, China. Ming Yang’s winning bid is equivalent to 67 units of 3.0 MW SCD WTGs with an awarded total contract value of RMB 824 million. Based on an exchange rate of 6.69 RMB/USD, the contract value is $123.2 million and the unit price for 3.0 MW SCD units can be calculated as 123.2 ÷ 67 = $1.8383 million/unit.
3. Now we can easily estimate that the revenue for MY in 2010 will be 800 x 0.9293 = $743.4 million and (1400 x 0.9293) + (10 x 1.8383) = $1484.9 million in 2011.
As of September 30, 2010, 4.6 million shares have been issued upon the exercise of share options, which were granted to certain directors and employees in Ming Yang. If all of these options were exercised, the net book value per share would decrease to US$ 10.28. Adding back the 125 million common shares, the diluted shares for MY is 125 + 4.6 = 129.6 million.
Finally, excluding IPO costs, the net margin per share for MY is 16%. Therefore, we can calculate the net income for MY in 2010 as 743.4*16%/129.6 = $0.92 and 1484.9*16%/129.6 = $1.83 in 2011.
Considering MY’s closing price of 9.9, P/E in 2010 is 11 and forward P/E in 2011 is only 5.5.
The order backlog of MY increased to 1,331 units and 363 units (not yet signed) as of September 30, 2010. The cumulative WTGs commissioned in 2010 totals 549 units. The strong demand for MY’s wind turbines and order backlog, together with orders awarded but yet to be signed, makes me feel confident that MY will achieve its revenue target.
Goldwind (002202.SZ) is a state-owned pure wind turbine supplier in China and can be seen as MY’s most comparable peer. Goldwind is now trading at 32 trailing P/E and 15 forward P/E.
The financial statement for MY is audited by KPMG, one of the “Big 4,” and therefore the credibility of the financial data is ensured. Considering the supportive policies made by the Chinese government and improving profitability from MY, I believe that MY with P/E less than six is obviously an undervalued stock.
Disclosure: I am long MY.