“If You Add to The Truth, You Subtract From It”
- The Talmud
It is no secret that Citron Research is skeptical of American Superconductor (NASDAQ:AMSC). The company has now crossed the line to ridiculous. They have taken a small customer in Sinovel and added so much nonsense that they have subtracted any corporate credibility that is still left from a company that has done nothing but burn through investors money. It is our opinion that anyone on Wall Street would have to be deaf, dumb and blind not to realize the complete lunacy of American Superconductor’s most recent press release.
As management continues to sell stock at a furious pace, American Superconductor announced a $450 million order from Sinovel that is supposed to be used to support more than 10 Gigawatts of power by the end of 2011. This is on top of their current $100+ million “backlog” to the same customer.
To explain how crazy this press release was, Citron refers to the largest wind power purchase order in the world, which was just publicly announced by T. Boone Pickens. Pickens, with General Electric, plans to build a farm for 4,000 megawatts (4 Gw) that is planned in 4 phases for ultimate completion in 2014. This project has been publicized all around the world in every language imaginable.
Now we are supposed to believe that American Superconductor just received an order for 10 Gw to be delivered by 2011. That is 2 ½ times the size of the Pickens project in a time span that is half the time. Yet, nowhere in any language do we see an order awarded to Sinovel that would support anything close to this.
This order cannot live in a vacuum. Nowhere can we read of the: funding, the customers, or suppliers of other components that are essential to wind turbines, such as gearboxes, generators, blades, bearings, cast hubs or towers, which comprise 80%-90% of the cost of a wind unit. We are to believe that every other customer involved in this deal has decided not to put out any press.
An order of this size would be the largest order for windpower in the history of the world... but we can read about it only in one place: an AMSC press release.
Not to carry on but let’s look at how ridiculous this really is. General Electric is one of the top 5 largest companies in the world. When they received an order for 1,000 MW of wind power they put out a PR.
Sinovel is a small company that did not even put out a pr when they got an order more than 10x that size…guess they didn’t want anyone to get “wind of it”.
The Pickens project is supposed to cost up to $12 billion for all 4 Gw, therefore using the same math this Sinovel project would cost up to $30 billion in the next 3 years. Where is the financing for $30 billion in wind projects? Is it contingent on anything? What a great job Sinovel has done at keeping this secret.
Let’s Get One Thing Straight
American Superconductor DOES NOT manufacture wind turbines. They make a power controller and electrical components that are commodities in the wind power business. They are low margin items in a highly competitive industry, and among the only components in wind turbines not facing significant logistics and supply constraints. So any order for electrical components from AMSC should be matched with orders for essential components necessary to complete wind turbine projects.
Analyzing the PR
Let us look at the headline of this tremendous pr, “AMSC receives $450 million follow on order from China’s Sinovel Wind.”
First thing we notice is the company refers to their customer as Sinovel Wind. That is funny because the real name of the customer is Sinovel Windtec. http://www.sinovel.com/
The PR mentions no delivery schedule, no minimums, no cancellation fees. What happens if AMSC makes all of these power controllers and then Sinovel decides in two years they can buy them cheaper in China? Considering the prices of these systems is not going up and soon they will be manufactured by local Chinese companies, shouldn’t that be a concern for AMSC?
*notice on the bottom of the Sinovel website they admit themselves that they have a maximum capacity of 1000 units…strange considering today’s PR announced orders to “support” 9,0000 units. Better yet, on the bottom left of the website written in Chinese (the blue writing) it says “website under construction”. If you are going to build the biggest wind system in the world how about first making a website.
Yes, the customer shares the same name as the AMSC subsidiary Windtec. As suggested by Citron in the past, this is somehow a related party transaction as these companies are joint ventured. That has not only been mentioned by Citron, but their joint venture has also been commented on in industry press. In an article in Modern Power Systems only two weeks ago referred to the Sinovel Windtec as a joint venture 3x in the same article. Something just isn’t right.
So if they are selling 9,000 systems to Sinovel, who is their next largest customer? This is a tie — there are two customers who have each bought 20 systems each.
It’s in the numbers… NOT
A critical glance at AMSC’s 10-K leaves more questions than answers, as every accounting red flag jumps out.
$15.5 million in “unbilled receivables”
Zero allowance for doubtful accounts
And our favorite is the recording of revenue on a cost of completion basis.
Between the unusual gross margins and issues with the warranty accrual, the 10-K deserves its own report.
A Closer look at Sinovel
An examination of Sinovel’s finances and the AMSC’s acquisition of Windtec make it very clear how unlikely it is that a multi-billion dollar wind turbine deal (an arms-length one at that) has grown out of the ground in less than 18 months.
As of Dec 31, 2006, these numbers appear in Sinovel’s D&B:
|Balance Sheet Data||(USD equiv)||(USD equiv)|
|Accounts Receivable/Payable||4.76 million||2.36 million|
|Other Receivables / Payable||8.16 million||7.63 million|
|Fixed Assets||32.97 million|
|Construction in Progress||23.63 million|
|Other liabilities||76.58 million|
|Total Equity||2.85 million|
|Profit and Loss Data||(USD equiv)|
|Cost of Sales||22.83 million|
|Profit net of Taxes||48.9 thousand|
In early 2007, AMSC acquired Windtec, and by September 2007, Sinovel had placed orders worth $90 million with AMSC. Assuming that the electrical subsystem components supplied by AMSC comprise 5% of completed wind turbine installations, this would have represented $1.8 billion in deliverable wind turbine commitments.
Investors are due an explanation as to how this bonanza comes into being.
- Is there an undisclosed financial relationship between Sinovel and Windtec, which requires restating all these transactions?
- Are these fungible orders according to US GAAP – where are the funds necessary to pay for this magnitude of purchase?
- What about announcement of the projects – which would clearly be the world’s largest wind projects, including location and funding disclosures and timeframes?
- Are firm commitments in place for the blades, bearings, gearboxes, castings/hubs, and towers, all supply constrained components, which are necessary to fulfill these contracts?
A relentless drumbeat of insider share sales – over 500,000 shares in just the last 60 days – completes the picture. CEO, Directors, CTO … if things are so great, it sure makes you wonder why all the officers are running to the bank.
Cautious Investing To All