China Ming Yang Wind Power Group Limited (NYSE:MY)
Q2 2014 Earnings Conference Call
August 25, 2014 8:00 am ET
Beatrice Li - Director, IR
Chuanwei Zhang - Chairman, CEO
Calvin Lau - CFO
Pierre Lau - Citibank
Carl Liu - Bank of China
Good morning and good evening, ladies and gentlemen, welcome to China Ming Yang Wind Power Group Limited Second Quarter 2014 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. Calvin Lau, CFO and Ms. Beatrice Li, Director of Investor Relations.
After the management's prepared remarks, there will a question-and-answer session.
This conference call contains forward-looking statements. These statements constitute "forward-looking" statements within the meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "target," "goals," "strategy," and similar statements. Such statements are based upon management's current expectations and current market and operating conditions, and are relating to events that involve known or unknown risks, 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.
Further information regarding these and other risks, uncertainties or factors is included in Ming Yang's filings with the U.S. Securities and Exchange Commission. Ming Yang does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.
I'd now like to turn the call over Ms. Beatrice Li, Director of Investor Relations. Ms. Li, please proceed.
Thank you, operator and thank you for joining us today. We have already issued our second quarter 2014 earnings press release and I hope you all had a chance to review it. The presentation used for this call is also available on our IR Web site.
In today's call, Mr. Zhang will discuss the latest business and operational developments of Ming Yang, and Mr. Lau will walk you through the company's financial performance for the second quarter 2014. After that, we will open the floor to questions from audience.
Now, I would like to turn the call over to Mr. Zhang.
Ladies and gentlemen, hello, everyone, I'm Zhang Chuanwei, the Chairman of the Board, CEO of China Ming Yang Wind Power Group. Welcome to the earnings release of the second quarter 2014.
First of all, I would like to talk about the macro policies as a whole.
Back on June 13th, the central leading team on financial and economic affairs of the China Central Government held a Sixth meeting which is dedicated to discuss the national energy strategy emphasizing the leading role of clean energy, large energy bases, energy transmission channels, balance among wind power, hydro power and thermal power and distributed energy resources are elevated to national level strategies.
In the coming year and the 13th five year plan period, the share of renewable energy power generation including wind power is expected to increase greatly in the country's energy consumption. Consequently a more rational and a positive environment would be created for the new energy sector further optimizing the industrial ecosystem.
Secondly, the National Energy Administration, NEA is investing much more efforts on offshore wind power and the issue of power surplus and grid connection. The administration is studying a quota system of renewable energy. This June, the National Development and Reform Commission, NDRC announced the benchmark tariff for offshore wind power.
For wind power projects that starts operation before 2017, the feed-in tariff is RMB0.85 per kilowatt hour for offshore and RMB0.75 per kilowatt hour for inter-tidal zones. This benchmark tariff is a strong booster to jumpstart the offshore wind power market. Recently, the NEA held meetings to drive offshore wind power announcing the construction plans for 44 offshore wind power project with a total of 10 gigawatts installed capacity.
With the countries target of building 30 million kilowatt offshore wind power capacity by 2020, the market size of offshore wind power is expected to reach RMB450 million to RMB600 million in the long run among which the market size of WTGs and parts may reach RMB250 million to RMB350 million.
The NEA is also studying a quota system of renewable energy giving composite requirements to power generating companies to generate powers from renewable energy, grid companies are required to buy electricity generated from renewable energy, while corporate users are required to use electricity generated from renewable energy as well. In this way, the issue of new energy surplus will be greatly eased providing us a systematic support for the sustainable growth of renewable energy.
The market is increasing as well; the second, the third and the fourth batch of the projects approved in the 12th five year plan are under construction now bringing in benefits for equipment manufacturers. In the first half year alone more than 11.5 gigawatts of wind power projects called for bid, which is a 40% year-on-year increase comparing to only 8 gigawatts last year. It is estimated that around 22 gigawatts to 23 gigawatts of wind power projects are under construction this year.
An increase in project tendering also drives construction. It is very obvious that the entire industry is picking up again. The capacity of wind power grew faster in the first half of 2014 as newly grid connected capacity hit 6.32 million kilowatts. Grid connected capacity reached a total of 827.7 million kilowatt with 23% annual growth.
Electricity generated from wind power amounted at 76.7 billion kilowatt hours with an 8.8% annual growth suggesting the issue of grid connection for wind power is further eased.
Next, I would like to talk about Ming Yang's operation. Ming Yang's capability in market expansion and operation are enhancing greatly offering a complete range of products with strong competitiveness.
In the first six months, Ming Yang has been focusing on guiding customers demand and promoting customized products and service. New orders in the second quarter amounted at an output of 617 megawatts contributing to a total of 3.6 gigawatts order signed. The recognized revenue in the second quarter amounted to an equivalent output of 303.5 megawatts among which 229.5 megawatt is from 1.5 megawatts WTG and 74 megawatts is from 2.0 megawatts products respectively.
To be customer oriented Ming Yang used a closed loop project management approach featuring cost optimization, [being] (ph) operation, robust gross margin and strong payment collection. Besides closed loop project management Ming Yang also works on indigenous development and are biding and a quota system is in place now. At present, the gross margin of most new orders are higher than 16%, while the net margin is between 3% to 5%.
While expense control is improving Ming Yang kick started a special campaign to clean up capital. We visited customers to have a better communication. We managed customer demand in the areas such as market, technology and engineering. We solved problems for our customers, the risk from actual orders. Ultimately, our capital has returned and the issue of capital liquidity is eased, 100.3% completion of connection plan was achieved consequently in the first half of the year.
In terms of technology, Ming Yang values innovation and product line building gateway. In the effort of building a wide product portfolio and to serve low wind speed market and the three key regional markets in North China, the R&D of two MW-180 meters blade WTG was launched.
In addition, the R&D of SCD 3.0 MW three blades, WTGs was started and the prototype is expected to be finished before the Chinese Spring Festival. The indigenous R&D of 4.1 MW large WTGs was also started to build – started.
Ming Yang's 1.5-89 meters wind turbine successfully won the first GL 2010 model certificate globally issued by DNV-GL Group, which is the most rigorous certification in world. It also suggests that Ming Yang is a global leader in design, manufacturing, operation and test of the 1.5 megawatt platform. This achievement also serves as a green channel and a guarantee for Ming Yang's WTGs to be manufactured and sold overseas. And it also helps its wind farm-grid connection and Ming Yang's overseas business expansion as a whole.
Back in July 200 units of Ming Yang's offshore WTGs including SCD 3.0 megawatt withstood the attack of Typhoon Rammasun, which is the strongest typhoon in China in the past 41 years. The post-typhoon examination showed that all Ming Yang's wind turbines were in perfect condition after the typhoon. Those WTGs were shutdown due to power grid damage. The reliability and stability of Ming Yang's product is once again proven and recognized by the market.
Certainly, I would like to talk about transformation.
Ming Yang made the step two development strategies to fuel our growth in the coming five to 10 years well in advance. Offshore strategy, overseas strategy, product innovation planning and new business model shall all contribute to the revenue transformation at Ming Yang.
Ascendant offshore wind power strategy is in place. Offshore wind power is the major battlefield for China's wind power development on June 2020. The two [equation] (ph) project is the first offshore demonstrated project in Guangdong province partnering with Ming Yang already started to deliver following WTGs model. At present both the WTGs and the jacket are being manufactured. The jacket installation will start in September.
This [equation] (ph) offshore project is the first commercialized offshore wind farm project in China. It is a milestone and a compass in the development of China's offshore wind power.
In addition, another offshore project of Yudean Group using Ming Yang's SCD 3.0 megawatts WTGs is to be approved in the near future. We signed another 300 megawatt of offshore wind power corporation agreement with Rudong government in Jiangsu province. Now, we are working on the project operation. Meanwhile, we are signing a binding agreement with CGMPC, Yudean and the Guangdong new energy to jointly develop 1.2 million kilowatt offshore wind power project in Zhanjiang, Guangdong province, which is expected to be commissioned in three years.
In terms of innovated way to develop new energy, on the one hand, we are planning a new energy investment fund, which will serve as a platform to leverage government guidance and the social capital to fuel wind power projects. On the other hand, we use an innovated financial leasing model to mobilize financial resources plan for the development platform of new energy. We acquired an integrated new energy company the Tianjin Jinneng investment company to jointly construct wind power project.
Around 500 megawatts WTGs will be constructed this year, while a large number of projects will be included in the national wind power and the solar power development plan for the year of 2015.
Ming Yang also exploits new profit sources in service offerings such as engineer operation and maintenance, EPC. Ming Yang is investing more efforts in the wind farm operation and the maintenance market. The service contract that are being executed by our current engineering department already hit a total of RMB20 million. It is estimated that the market size of wind farm operations and technical reform will reach RMB400 million in the future.
Also, we are preparing to set-up a new engineering company, all these efforts are to lay a foundation for Ming Yang to transform from a pure manufacturer to the combination of manufacturer and service provider. Ming Yang's efforts regarding EPC projects are standardizing as well. The Xuwen project in Zhanjiang city is under construction now which helps to improve Ming Yang's EPC credibility. Assistant of Engineering construction, management and payment collection is being built as the standard for building EPC projects in the future.
We witnessed results in overseas market entries; the DNV-GL certificate for Ming Yang 1.5 megawatt-89 meter WTGs is a driver to enter the India market. And India is believed to be a huge oversea revenue source for Ming Yang in the future.
Domestically, we are well on the track of our West China strategy exploring markets and quality resources to secure our market position in the future. (indiscernible) Chinhai, Tibet, (indiscernible) in the Mongolia and (indiscernible) are our priorities in locking in abundance quality wind resources and generating new orders.
Ming Yang is to be first one among the major 3 WTG manufacturers in China, who is able to have business presence in Southwest China, Northwest China and North China at the same time.
Ming Yang will firmly execute our step two development strategy to confirm our leadership in products, offshore business and the market as a whole. We will elaborate our innovative business model to transform our revenue structure securing our leadership in the wind power industry.
Next, I will like to give the floor to our CFO, Mr. Calvin Lau to review the financial performance of the second quarter of 2014. Thank you.
Thank you, Chairman. Good morning and good evening ladies and gentlemen. We have already issued press release. I will focus on just a few important metrics from our financial performance. Please note that all numbers are in RMB and all comparisons refer to year-over-year comparison unless otherwise stated.
Revenue in the second quarter 2014 was RMB935.6 million an increase of 74.1% as compared to that of previous corresponding period in 2013.
Revenue of wind turbine amounted to an equivalent wind power project output just over 300 megawatts at 3.5 megawatt, which is equivalent to 163 units of 1.5 megawatt in turbine and 337 units of 2.0 megawatt wind turbine.
The increase in revenue was mainly due to 84.5% increase in the number of wind turbines commissioned compared to the second quarter of 2013 as we continue to witness an uptick in business.
Gross profit in the second quarter was – in 2014 was RMB123.5 million compared to that of RMB66.1 million in the second quarter of 2013. Gross margin in the second quarter 2014 was 13.2% compared to that of 12.3% in the corresponding period in 2013. Again, the increase in gross margin was mainly due to the increased units 2 megawatt wind turbines commissioned during the period which had real higher gross margin compared to that of our 1.5 megawatt of wind turbines.
Just want to point out, on an adjusted basis, R&D provisions will be excluded from cost of sales, our adjusted gross margin would be more useful 16.4% for the second quarter of 2014 compared to the 15.3% in the corresponding period in 2013.
Going on to SG&A expenses, selling and distribution expenses were RMB59.1 million for the second quarter of 2014 compared to RMB34.3 million for the corresponding period in 2013 representing an increase of 72.6% which is essentially in line with the increase in revenues of this year and also in the current cycle that we actually witnessing.
And the expenses were RMB37.5 million for the second quarter 2014 compared to RMB17 million for the corresponding period in 2013 and which is actually representing a decrease of 46.4%. This is mainly due to a combination of, first of all, the reversal of provision for some bad debts which against trade and receivables of RMB20.7 million during the second quarter of 2014 as we received settlement from customers some of the long stand – outstanding and doubtful credit receivables.
And secondly, during last year we had actually included expenses incurred by our Indian subsidiary at the time, which we had actually deconsolidated since January 2014.
And lastly, R&D expenses were RMB22.2 million for the second quarter of 2014 compared to RMB20.7 million for the corresponding period in 2013 and this is actually in line with current research and development activities which we are actually carrying out as we continue to expand our product lines on to the 6.5 megawatts offshore wind turbine.
Our finance income was RMB43.6 million for the second quarter of 2014 compared to RMB45.1 million for the corresponding period in 2013. The decrease in finance income was mainly due to some interest income before the GWPL, our Indian subsidiary last year.
Lastly, financial expenses were RMB42.9 million for the second quarter of 2014 compared to RMB84.2 million for the corresponding period of 2013. The decrease in finance expenses was mainly due to interest expenses and other finance expenses incurred by the Indian subsidiary in the second quarter of 2013, which did not occur in the current quarter in 2014.
Lastly, total comprehensive income for the second quarter of 2014 was RMB11.8 million compared to the total comprehensive loss of RMB87.4 million for the corresponding period in 2013.
And lastly, cash and cash equivalents as of June 30, 2014 were RMB815.3 million compared to RMB811.8 million as of last quarter-to-date of December 31, 2013.
This concludes the financial reporting section. I would like to turn the call back to Beatrice.
This concludes our prepared remarks for Ming Yang Wind Power from our CFO. We will open the floor for questions. For the benefit of our listeners today, all questions and answers will be translated into English and Chinese. Operator please?
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) The first question comes from the line of Pierre Lau from Citibank. Please ask your question.
Pierre Lau - Citibank
Hello, Pierre Lau from Citibank. I have two questions. The first one is regarding Ming Yang's 1.5 megawatt product. What is the price of this product comparing to earlier this year and last year?
My second question will be for what Mr. Chairman Zhang just mentioned that there will be around 23 megawatts installed capacity – gigawatts installed capacity in China as a whole. What is your expectation for the year of 2015?
Thank you for your question. Regarding your first question, the price of our 1.5 megawatt product, the price has increased by 5% to 8% comparing with last year, so it's picking up and I believe that this is the trend going forward.
Having said that, we are also aware that the customers demand and the configuration is evolving as well. As I mentioned just now, the margin of our most new orders is higher than 6% thanks to our – thanks to the average selling price and our cost reduction.
Regarding your second question, for the next half of the year, Ming Yang is going to be quite busy with our production. And we believe that our market share will continue to increase comparing with that of last year.
As I mentioned that for the year of 2015, now we have confirmed orders totaling at 3.6 gigawatts together with another four drivers that is our western strategy, offshore strategy, oversea businesses and the new energy company, we are quite confident that Ming Yang will maintain a robust growth in the coming year. Thank you.
Thank you for question. Your next question comes from the line of Carl Liu from Bank of China. Please ask your question.
Carl Liu - Bank of China
Hello, I'm Carl Liu from BoC. I have two questions as well. The first question is about the margin of your new orders. Could you share more insights about the price of your orders in the third quarter?
The second question is about SG&A. I thought that your SG&A increased slightly during the second quarter, so what will be the share of SG&A in the coming time period?
Thank you, Carl. I will just answer the question very, very quickly. The first question with regard to the ASP, we expect this – will be able to continue to actually sign orders close to 4000 just below RMB4000 per kilo in terms of inclusive of VAT price.
And secondly in terms of the SG&A proportion to the percentage of revenue, we actually expect as the volume pick up in the second half of 2014 as our Chairman as actually mentioned, we expect the SG&A percentage to be just under 10% Q1 of –
Carl Liu - Bank of China
Carl Liu, just had a follow-up question that is regarding when the new orders worth at RMB4000 will be executed?
To answer your question, regarding the slight increase of our SG&A, I think it is on the one hand a result of the accounting standard. And actually this year, we are delivering far more products than the same period of last year as a result the cost of transport is increasing. And actually the recognized revenue you are seeing now is the product that we – the orders that we received last year while the SG&A expense is what is happening in the current period that's why the share of SG&A is slightly higher.
And in terms of the new orders, I believe that the new orders will be executed in the first half of next year while the revenue will be recognized in the second half of next year. And I think the price of the orders that we are producing now at a similar level as the orders that we just signed. The price is increasing steadily.
Carl Liu - Bank of China
Thank you for your question. (Operator Instructions) At this time, there are no further questions on queue. So I would like to hand the call back to Ms. Beatrice Li, Director of Investor Relations for closing remarks.
This concludes our prepared remarks for Ming Yang. Once again thank you for joining us today. We welcome you to contact me for any further questions. Thank you and a good day.
Ladies and gentlemen, this concludes our presentation. Thank you for your participation. You may now disconnect. Have a great day.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.