American Superconductor: You Have to Read It to Believe It 22 comments
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“If You Add to The Truth, You Subtract From It”
- The Talmud
It is no secret that Citron Research is skeptical of American Superconductor (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.”
http://biz.yahoo.com/bw/080610/20080610005242.html?.v=1
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) |
| Cash | 6.28 million | |
| 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) |
| Sales | 26.93 million |
| Cost of Sales | 22.83 million |
| Profit | 48.9 thousand |
| Taxes | 0 |
| 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?
Insider sales
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
Disclosure: Short
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This article has 22 comments:
Do not invest in AMSC!
They have NO other products!
The USA does not need any alternate energy!
The USA should not think green!
We do not need any of those efficient superconductors either.
The Navy does not need any of those dumb high efficiency engines.
There is plenty of oil for everyone and it will continue to get cheaper.
We should just keep drilling for oil--deeper and deeper and deeper!You are an expert!
Listen to the experts!
It has been proven that experts are right almost half the time.
Ignore them both.
If you want to know where these guys are coming from, read:
ww.deepcapture.com
If you don't have time to read the entire thing , watch the video.
I have owned a modest position in this stock for over 5 years and I have never gotten a whiff of the dishonorable behavior the author hints at here. And don't forget: all the news lately has been about wind generation components--but AMSC has a lot more going for it than that.
2. Sinovel is the 8th largest wind turbine manufacturer in the world, a couple of spaces behind Siemens (GE is number 3). The world's largest manufacturer, Vestas, blamed a recent worse-than-expected quarter on competition from Sinovel (along with another named Chinese maker).
3. Sinovel is backed by both the Chinese government and by it's corporate parent Dalian Heavy Industries. DHI is an enormous industrial conglomerate that's the largest employer in the city of Dalian (a city of over 6 million people) controlling a dozen or more divisions (including multiple steel plants, a crane plant, shipping facilities, etc). The crane plant alone employs nearly 5,000 employees. The fact that the previous chairman of DHI was (before joining DHI) the city's vice-mayor (a position of very great power in the PRCC) tells you something about the firm. The previous chairman of DHI is an extremely well known businessman in China, who's now head of Brilliance Auto.
4. DHI is making much of the rest of the turbine internally.
Of course, that doesn't mean that you should take the press release at face value. But there's no reason to believe that the management made the deal up.
The author, Andrew Left, works for Citron Research which is why it seems 'lifted.' Hope that clarifies things...
www.crossprofit.com/vi...
Stock hasn't recovered yet.
CrossProfit (consensus)
exports in 2009,
the cost of their turbines will be 1/3 less then Vestas and Gamesa. if so they will be a commerical success and the size of the $450 million Sinovel contract makes more sense.
The company claims the orders are to support a "planned" 10GW of installed wind power. The company has also publicly stated that the turbine power converters run $50k-$100k, depending on the exact power level (up to 3MW). Let's assume that Sinovel is going to meet the 10GW plan with the AMSC Windtec 1.65MW Turbine design. This would result in 10,000/1.65 = 6000 wind turbines. To compute a conservative revenue number for AMSC let's assume the $50k converter. Revenue = 6000*50 = $300M.
The company has also stated that they will provide SCADA & controls electronics for these turbines, which i have not been able to pin a price on. Perhaps these components, along with some service revenue bring the total system selling price to $75k. This would result in Revenue = 6000*$75k = $450M.
If we believe their website, Sinovel currently has an annual capacity of 1000 turbines. So, IF Sinovel held their capacity constant over the 3 year period from 01/2009 to 12/2011 (this is the stated period over which the deliveries will occur) they could produce 3000 Wind Turbines without expanding at all. It's ambitious, but not hard to believe that Sinovel, if backed by conglomerate Dalian & the Chinese Gov't could ramp up to produce 2x that amount over a three year period which would bring us to the 6000 turbines required to meet the 10GW number. We also know that there are plans to manufacture a 3MW size within this time period. Using a product mix of 1.65 & 3MW turbines would require less than 6000 units "turbine capacity" to support the 10GW number.
Sinovel legitimacy questions aside (how do we get good data on that Chinese company?), I think we can conclude that the quoted facts support the AMSC claims. It certainly looks like an ambitious deal, but not inconceivable as this article has hastily suggested.
but what I like about AMSC is their high efficiency transmission lines which is being tested by LIPA (long island power authority) and a legit order was placed by a legit asian firm (i forgot if it was japan or korea).
HTC wires, HTC I believe is their acronym, are more expensive and would be ideal in high density population areas where wires go underground. The market is huge, it is still a couple of years away, and is really still the center of the long-term AMSC puzzle.
I really don't put much value into their wind turbine business anyways - and they look overvalued at anything above $20/share
-long amsc, short calls @22.5, so I should be cashing out this month