China Ming Yang Wind Power Group's CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: China Ming (MY)

China Ming Yang Wind Power Group Limited (NYSE:MY)

Q2 2011 Earnings Call

15 August 2011, 09:00 PM


Calvin Lau - IR Director

Chuanwei Zhang - Chairman of the Board and CEO

Manfred Loong - CFO


Paul Clegg - Mizuho Securities

Echo He - Maxim Group

Yang Song - Credit Suisse

Keith Li – CIMB

Edward Chun - Clairvoyance Capital

Eva Hu - Morgan Stanley


Good morning and good evening, ladies and gentlemen. Welcome to the second quarter 2011 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. Manfred Loong, CFO; and Mr. Calvin Lau, 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 21E of the 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, expects, 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 operating conditions and relate 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 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 Calvin Lau, Director of Investor Relations. Mr. Lau, please proceed.

Calvin Lau

Thank you, operator. And thank you for joining us today, and apologies for the slight delay in starting call. Actually, in fact, we have a full team on the call today. We just mentioned that our Chairman and CEO, Mr. Chuanwei Zhang, Mr. Manfred Loong, our CFO, Mr. Cao Renjing, our CTO, and also myself will be on call to answer your questions later.

And our second quarter 2011 earnings press release has just crossed the wire and will be available on our website at very soon, as well as together with the second quarter earnings presentation. And I hope you have the chance to quickly review figures and to -- welcome to ask us questions later on.

In today's call, Mr. Zhang will actually be discussing the latest business and operational developments of Ming Yang; and Mr. Loong will walk you through the Company's financial performance for the quarter; and then Mr. Zhang will brief you on the Company's outlook and guidance; after that, we will open the floor to questions from the audience.

I would like to now turn the call over to Mr. Zhang. Please proceed.

Chuanwei Zhang

(interpreted) Good morning and good evening, everyone. I'm Chuanwei Zhang, Chairman and CEO of China Ming Yang Wind Power Group Limited. Thank you for joining us in the results announcement for the second quarter 2011. Before that, I'd like to brief you up our current situation of the wind power industry in China.

According to the development planning of new energy to be released, which is part of the Chinese Government 12th five-year plan, wind power will be of strategic importance to the energy development. The scale of wind-power development will be enhanced and electricity tariff mechanism will be improved.

After raising a tariff off-grid connected photovoltaic power, it is expected that the Government will show support to the pricing mechanism of offshore wind power to stimulate another round of development of offshore wind power.

Additionally, there will be a new strategic planning of the wind market; a transition from the concentrated development of the three regions of North Eastern, North Western, and North China to the synchronous development of grand bases, areas with most wind speed offshore wind power and distributed clean energy. Overall, China's wind power industry has entered a crucial period and its focus is shifting from speed and size to quality and efficiency.

The development of China's wind power industry is entering a steadier growth phase. In May, the National Energy Administration hosted the Wind Power Development Conference in Nantong, Jiangsu Province, and the target installed capacity of wind power during the 12th five-year plan is set to be more than 100 gigawatts.

According to the National Energy Administration, 38.6 billion kilowatts of wind power was generated by wind power in China in the first six months of 2011; a year-on-year increase of 61%, which exhibited the fastest growth among all the energy sources in China.

The Chinese Government has laid down a series of industrial standards, aiming to emphasize product quality and efficiency, instead of only blind capacity expansion. We believe higher industry standards and barriers of entry will favor the more competitive players.

Ming Yang's development strategy is put product quality and efficiency first, with the focus on technology and product reliability. Our revenue recognition is based on-grid connection, and we strive for stable and healthy development. With Ming Yang's unique competitive advantages, we believe that our market share can be further increased during industry consolidation.

Secondly, China's offshore wind power development has started to garner greater attention and support. During the working conference, the National Energy Administration has proposed to elevate China's offshore wind power development through the national strategic level.

It is anticipated that by 2015 China will have installed 5 gigawatts of offshore capacity, together with a complete know-how of offshore wind power technology in industry value chain. We have been making enormous efforts in the past three years, which allowed us obtain the advanced technology of offshore SCD WTGs, and great advantages in terms of construction, operation management, and capital.

With the signing and implementation of the Engineering Procurement and Construction EPC contract with Guangdong Yudean Xuwen Wind Power Co. Limited, a subsidiary of Guangdong Yudean Group Co. Limited, which we believe is the first offshore wind power EPC solution in China, our advantages in offshore wind energy will be more outstanding.

Third, average selling price (“ASP”), has stabilized and has shown signs of picking up. The rising barriers to entry will mitigate the price war caused by over competition.

Ming Yang will attach more importance to continuously lowering cost per kilowatt hour. We have been committed to reducing cost per kilowatt hour and benefiting wind farm operators by means of providing standardized products of reliable quality, improving response speed of engineering service, lowering costs by using total solutions, and enhancing the utilization rate and generation capacity.

Fourth, the competitive landscape in the wind power industry. With rising barriers to entry and more severe competition, small manufacturers will be squeezed out gradually, which will result in higher market concentration ratio and favor strong players.

As is known, Ming Yang started as a private enterprise five years ago. Under the market mechanism, we strive to develop in a healthy manner, and we have gained great capital strength, advanced technology, products with reliable quality, a new business model that shares benefits with our clients, as well as a highly integrated value chain.

China's wind power industry has entered a crucial phase, where its focus is shifting from size and speed to quality and efficiency. In the past three years, Ming Yang has laid a solid foundation by focusing on developing standardized WTGs, including the development of low wind speed and high altitude WTGS, R&D, innovating business models, further integration of high-end value chain, and development of wind and solar energy storage solutions, and, mostly importantly, offshore wind power.

While some other wind turbine manufacturers are suffering from problems caused by over development, such as quality issues, service, value chain, and facing pressures related to technology, cost and quality, I believe Ming Yang will maintain a rapid and stable growth, welcoming a strategic opportunity for its advancement.

Now I'd like to walk you through the achievements we made in the second quarter. Recently, there have been a lot of questions about this industry, market environment, and China concept stocks. However, we continue to focus on our business; that's why we have maintained continuous growth, highlighting Ming Yang's sustainable competitiveness and unique advantages.

For the second quarter in 2011, we recognize revenue of WTGs commissioned amounted to an equivalent wind power project output as 367.5 megawatts, or 245 units of 1.5 megawatts WTG, representing an increase of 34.6% year over year.

Despite a declining ASP, we still maintained our gross margin at 19%, indicating our strong capability of cost optimization.

As for orders, in the second quarter, 429 megawatts of new orders were signed, including 253 units of 1.5 megawatts WTG, and 18 units of 2.5/3.0 megawatts SCD WTGs.

Our order backlog has reached 2,145 megawatts, including 1,263 units of 1.5 megawatts WTGs, and 85 units of 2.5/3.0 megawatts SCDs. As of June 30, 2011, we have signed orders for 4,265 megawatts since inception, including 2,676 units of 1.5 megawatts WTGs, and 85 units of 2.5/3.0 megawatts SCDs.

In the first half of 2011, we have made substantial progress in our key growth strategies; namely, in offshore wind power, new business model, high-end value chain, and foreign market penetration.

We have launched our SCD WTG with scientific altitude. After the successful commissioning of our SCD facilities in Rudong, we have developed standardized 2.5/3.0 megawatt SCD, accommodating applications for different conditions, including onshore and offshore, as well as various wind resources.

We have started batch production of both components and complete units, that have developed full procedure, full power test beds.

The delivery and hosting of the first batch of 3.0 megawatt SCDs for Xinjiang project has begun, after passing the full power testing. As for 5/6 megawatts SCDs, we have finished the designs, signed contracts for the components of the prototype, and a trial production of the prototype is underway.

With regards to offshore wind power, based on our product advantages of SCD wind turbines, we are devoted to creating competitiveness for the overall solutions of offshore wind power.

We are cooperating with China Railways major bridge to provide WTGs engineering and construction total solution services for China's offshore wind farms.

In July, we kick-started the first EPC solution project of 3 megawatts SCD offshore wind farms with Guangdong Yudean Group, which, I believe, offers lower construction costs than any other similar project in China.

Under the leadership of Guangdong development and reform committee, we will join alliance with China Southern Power Grid, Guangdong Yudean Group, and China Three Gorges New Energy Corp., pooling R&D resources to foster the development of offshore wind power in Guangdong.

Meanwhile, the Guangdong Government has approved the cooperation among Ming Yang, China Southern Power Grid, and Guangdong Yudean Group in Wanshan, Zhuhai.

The pilot program of solar and wind storage, which includes coastal wind power, and supplemented by photovoltaic generation and storage capabilities, will be launched this year, forming the solution of off-grid distributed generation of new energy.

Besides, in the offshore wind power development in Jiangsu, with the demonstration effect of our SCD prototype in Rudong, we locked in 3,150 megawatts of wind resources in Rudong. We will take the lead and co-develop these resources with our operators.

With our unique technology and cost advantages of our SCD products, value chains, and total solutions for offshore wind power projects, we will demonstrate our capabilities with the Guangdong and Jiangsu projects and further our inroads in nationwide offshore wind power development. We are confident that we will be one of the leaders in the offshore market and a leading provider in total solutions.

The downstream of the industry value chain, by our advantages of technologies, customer base, integrated industry value chain, and lease financing solutions, we have successfully initiated our new business models, such as EPC and BOT, extended our value chain, and transformed from production-oriented to service-oriented.

On n one hand, we established an R&D department to identify wind resources so that we can take the initiative to develop market resources and then co-develop with other operators.

As of June 30, 2011, we have identified over 30 gigawatts of wind resources. We adopt a strategy to trade our resources for new orders so that more orders are coming from our core clients. Moreover, our customer base has been extended and further diversified, which locks in more orders for 2012.

On the other hand, we collaborate with downstream operators to provide EPC solutions for both onshore and offshore wind power projects, enhancing customer benefits and expanding our business model.

The integration of the high-end industry chain is in full swing. In terms of rare earth supply, we have secured a supply from Ganzhou, Jiangsu, where enjoys the richest rare earth reserves in China.

Substantive negotiations with renowned international companies on joint production of permanent magnet generators and magnet materials is underway.

As for solar and wind energy storage, we have established a working group with a reputable Japanese battery company. Market research has started, and negotiation regarding the joint venture is underway.

With regards to carbon fiber, we have begun R&D on the carbon fiber blade, and we are talking with the renowned international company about the cooperation.

Finally, with good cost structure, technology niche, capital strength, besides America, we are actively exploring overseas markets, such as East Europe, India, and South Africa.

In East European market, we are utilizing Chinese financial instruments and EPC solutions, which have low construction costs and low cost per kilowatt advantages.

As for the India and South Africa markets, we are having talks with the local enterprises, hoping to form joint ventures to build plants and win orders. We expect to win our first overseas orders in the second half of this year.

Manfred Loong

Thank you, Chairman. I will now take you through our key financials.

Revenues for the second quarter of 2011 was RMB1,405.5 million; a year-over-year increase of 7.2%, primarily reflected the number of WTGs commissioned and equivalent of total power output of 367.5 megawatts, or 245 units of 1.5 megawatts WTGs.

Gross profit for the second quarter of 2011 was RMB267.2 million; a year-over-year increase of 7.3%.

While the ASP dropped by 20.1%, gross margin was maintained at 19% level and was within the range that we indicated in past quarter amid a challenging macro environment.

Turning to the bottom line, this quarter we achieved a total comprehensive income of RMB74.6 million, compared to RMB162.5 million for the same period in 2010.

Gross margin for the second quarter of 2011 was 19%, compared to 19% on a year-to-year basis. We're able to maintain the gross margin amid a very challenging industry wide environment and a declining ASP of 20.1% thanks to the successful execution of our cost optimization initiatives.

During the quarter, a range of cost reduction measures were carried out, including increased scale procurement, technology optimization, and refined payment structure, which all contributed to a lower cost per kilowatt.

Our debt ratio remained comfortable and healthy.

And, finally, about cash position. Cash and cash equivalents as of June 30, 2011 was RMB1,716.9 million, or $265.6 million equivalent; down from RMB2,486 million as of December 31, 2010. The change in cash and cash equivalents is primarily due to a change in working capital.

And I would now turn the call back to our Chairman to give us an update on outlook and strategy.

Chuanwei Zhang

(interpreted) Looking forward, as I mentioned earlier, we believe wind power industry in China will continue to see strong growth going forward, and we will continue to focus on our growth strategies to ensure we will fully capitalize on market potential, to maintain strong growth, and to continue to grow our market share.

Finally, regarding the business outlook for the full year of 2011, we target to recognize revenue from WTGs equivalent to wind power projects with a total output of 1.8 gigawatts to 2.0 gigawatts.

Based on an estimated total newly installed wind capacity of up to 20 gigawatts in China in 2011, we expect to obtain a market share of between 9% and 10% for the year.

Calvin Lau

Those are prepared remarks from the Chairman, and also Manfred, and Chairman and Manfred will now open the floor for questions. In order to save time and for better proceedings, please limit your questions to two per person, per time. Thank you. Operator, we can begin to start the Q&A session now.

For the benefit of our English speaking participants, please make sure you raise all your questions in English only. Thank you.

Question-and-Answer Session


(Operator Instructions). Paul Clegg, Mizuho.

Paul Clegg - Mizuho - Mizuho

As you look at your backlog and tie it to individual projects, how many of those megawatts are related to projects that already have approval from the NDRC, or other necessary regional approvals? And then I have a follow-up question.

Chuanwei Zhang

(interpreted) All of our orders and the products we delivered are approved by the NDRC.

Paul Clegg - Mizuho

All of the orders in your back log?

Chuanwei Zhang

(interpreted) Yes.

Paul Clegg - Mizuho

Okay, thank you. And then --

Chuanwei Zhang

(interpreted) Some of our back log are approved by the NDRC. But if the back log is under 50 megawatts, it is approved by the provincial government and the municipal government as of June 30.

Paul Clegg - Mizuho

Okay, thank you for that. And the second question, I was hoping you might give a little bit more detail on your outlook for the remaining quarters of 2011 in terms of pricing and margin.

I understood you to say that pricing seems to have stabilized, but I wanted to understand how much more room you have to reduce costs, and whether or not you think you can maintain the margins that you produced in the second quarter throughout the remainder of the year.

Chuanwei Zhang

(interpreted) Just like I said before, the ASP has stabilized and have shown signs of picking up.

And as for our production of our products, the products we're producing for the third quarter and fourth quarter are signed, and we are confident that we will maintain the margin of the second quarter in the remaining of 2011 by our advantages in technology.

Paul Clegg - Mizuho

Okay, thank you.


Echo He, Maxim Group.

Echo He - Maxim Group

My first question is, regarding that currently we're looking at the weakening demand from onshore project, obviously the offshore product is taking off, I just wonder how long you expect it will take for offshore projects to compensate, or to compensate the offshore project loss and the demand loss I mean, and to make the wind power industry growth back to the trend line; I’m talking about both the market, and also regarding your Company in particular.

Chuanwei Zhang

(interpreted) As for the overall market, just like I said before, in the past, the national wind power industry in China was experiencing an extensive development. Right now, it's making a step into the low wind speed developing project, such as the Western area, South and Western area, and also South China. But I still think that the offshore wind power is still developing.

And as for the offshore wind power market, obviously, it's improving significantly, and I believe its growth will be more obvious by 2012.

And as for Ming Yang, we think that we have unique advantages in terms of wind turbines with low wind speed and also high altitude. And meanwhile, we are still -- we show great competitiveness in traditional markets, such as Inner Mongolia, Gansu, Xinjiang and Eastern -- North East of China, and we believe in the coming two years our market share will show that we are a strong player.

Echo He - Maxim Group

Okay, thanks. And then my second question is what do you expect that you're spending on R&D, and also CapEx, this year and next year?

Manfred Loong

Our R&D and CapEx remaining for the remaining year is basically unchanged; position is unchanged, from what we revealed in the first quarter.

Echo He - Maxim Group

Okay. What about next year?

Manfred Loong

And in the next year, if you take, basically, what we spent in this year versus our high IPO plan then majority of that will go into next year.

Echo He - Maxim Group

Okay, got you. What about a CapEx this year and next year?

Manfred Loong

CapEx for this year actually is slowing down a little bit; slowing down as versus our IPO initial plan in the IPO. And for this year, we would see that -- for next year we would see the majority of the CapEx would be actually expended next year.

Echo He - Maxim Group

Okay, I understand. Thank you so much, that's my questions.


Yang Song, Credit Suisse.

Yang Song - Credit Suisse

My question is on the cash flow. We understand as of end of second quarter you have cash of RMB1.7 billion, but we are also seeing your receivables is increasing from RMB3.1 billion to RMB4.4 billion in the second quarter, can you discuss the cash flow from operations for second quarter and the outlook for the remaining of the year?

Manfred Loong

I will take that question on the working cap and the receivables. And, as we always say, we try to balance a healthy working capital by managing and designing our payments and receivables. If you look at our Q2's balance sheet, you will see the corresponding receivable is, together with our inventory, somewhat offset by our changes in our payables, trade payables, as well. So, overall, our working cap is still very balanced.

And the cash decrease during the quarter primarily also has to do with a pay back of our short-term loans from the banks.

Yang Song - Credit Suisse

Thank you.


(Operator Instructions). Keith Li, CIMB.

Keith Li - CIMB

I do some calculation. The average selling price for the turbine in the first half was about -- for second quarter was about RMB3,800, but I think, according to the market price, it's about RMB3,500 now, but that's also include VAT, so net of VAT would be something like RMB3,000 to RMB3,100, so should we expect your ASP to be recognized in the second half to be about RMB3,100, something like that?

And also, previously, you have mentioned that the average cost per megawatt the bottom would be RMB2,700, this seems to be the bottom that you can achieve maybe second half this year/maybe next year, so do you still think that is possible? That's all my question.

Manfred Loong

So, this has to do with our ASP and relative cost improvement. And you're correct with respect to the current market price, including VAT; and also, your calculation from Q2, of course, is accurate. But having said that, and remember we have the backlog already in our hands, so the current price that you have researched does not pertain to the ASP per revenue as we are going to be recognizing in the remaining half of the year. That's part 1.

And part 2 of that is -- as for the RMB2,700/kilowatt, that would be the minimum, minimum, that we can achieve this point and on, and there would be still room for our own improvement, from our aspect.

Keith Li - CIMB

Okay, thank you.


Edward Chan, Clairvoyance Capital.

Edward Chan - Clairvoyance Capital

I just look -- I want to clarify. So, for the costs, are we aiming to achieve RMB2,700 by the end of this year? So are we going to achieve that by fourth quarter this year? Thank you.

Manfred Loong

For the costs, RMB2,700, actually, we are talking about its for the average for the remaining of the year. And as I alluded to earlier, there's still room for us to make improvements.

And also, not to forget that for the future we have blended costs including our SCD and our 1.5megawatt, and when we can get into mass production of our SCDs, the blended costs would also indicate another potential for our improvements.

Edward Chan - Clairvoyance Capital

Okay, thank you very much.


Yang Song, Credit Suisse.

Yang Song - Credit Suisse

My question, this one is on rare earth price, we all know the rare earth price has surged recently, can you discuss what's the percentage of costs of goods sold from rare earth in your SCD model, and how much gross margin impact would the rare earth price increase have on that model? Thank you.

Chuanwei Zhang

(interpreted) Our SCD models used half direct drive technology, and we also use rare earth to produce the magnet materials that we use for our SCD production. And, actually, the cost of WTG, the magnet materials, the cost of magnet materials only accounts for 30% of the cost of our WTG. And as for the cost of the rare earth, only accounts for less than 5% of the complete unit. So and because we are having in-house production and self-supply and the mass production will offset the increase of the cost of rare earth.


[Eva Hu], Morgan Stanley.

Eva Hu - Morgan Stanley

I have two questions. The first one is we hear that, due to the off-grid accident in Gansu and Hebei, the State Grid has suspended the new on-grid approval since April this year, could management update us on the latest wind approval? And when will management expect the approval will open up?

The second question is among the NDRC analysis of first batch of 26 gigawatts wind farm approvals, how many projects have Ming Yang win among the 26 gigawatts? Thanks.

Chuanwei Zhang

(interpreted) For the first question, there’re three accidents in Gansu and Harbin, and the main reason is that they don't have the low voltage ride through technology. And so this has raised industry standards; that's why we can see that the low voltage ride through technology is a must have requirement for our wind turbine generator. And I think there would be any effect on the wind power industry, it would just raise the standards for our products. And whether it is approved or not, I don't think it will influence the long-term development.

And as for the question you asked for about the NDRC's 26 gigawatts (mis-interpreted), that includes the projects in the second half of 2010 and also 2011, and we believe Ming Yang's share will increase more than 10% -- will be more than 10%.


At this time, there are no further questions in queue so I'd like to hand the call back to Mr. Calvin Lau, Director of Investor Relations, for closing remarks.

Calvin Lau

Thank you all. Well, thank you for joining us, both today and tonight, for Ming Yang's Q2 earnings call. And we'd like you to keep in touch by either calling myself or emailing myself with any further questions; I'll be more than happy to answer them. Thank you.


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

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