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Sinovel reported earnings:

Also in domestic trading yesterday, shares in wind turbine maker Sinovel Wind Group lost 4.9% after it said net profit in the first quarter rose by only 1%, to 438 milllion yuan. Revenue gained by 20.3% from a year earlier to 3359 million yuan; net profit rose by 1% to 438.5 million yuan.

Bloomberg said:

Sinovel Wind Group Co. (601558 CH), China’s largest wind-turbine maker, lost 4.9 percent to 65.82 yuan, the lowest close since its listing on Jan. 13. The company’s profit growth slowed to 1 percent in the first quarter, according to a statement to the Shanghai Stock Exchange yesterday.

That's a pretty small drop for such a massive fall in earnings growth. Today, the stock was up $.48 to $65.22 after hitting a 52-week low of $64.64 near the opening.

Here is what was said about the company when it IPO'ed:

The stock slumped as much as 8.9 percent from the 90 yuan offer price on the Shanghai Stock Exchange. The Beijing-based company raised 9.5 billion yuan ($1.43 billion) in China’s biggest initial public offering this year, according to data compiled by Bloomberg.

Sinovel Wind, backed by a company linked to the son of China’s Premier Wen Jiabao, sold stock at 44 times 2009 earnings, compared with 18 for Xinjiang Goldwind Science & Technology Co. The company’s sales grew 36 percent last year after more than doubling in 2009, Haitong Securities Co. estimates, while a U.S. complaint to the World Trade Organization may threaten overseas expansion by Chinese wind companies.

Sinovel still sells for a premium to Goldwind (a $1 billion IPO in 2010). Goldwind fell to a 52-week low (about half its 52-week high) of $10.56 today. While researching Goldwind, I came across this:

Goldwind’s greatest strength is in its turbines’ nacelles, where the permanent magnet direct drive (PMDD) generator the company’s engineers began developing six or seven years ago is housed. The PMDD generator is now widely seen as the emerging industry standard, and Goldwind is the acknowledged world leader, with over 6,000 units in operation globally.

“By using permanent magnets, you reduce the top of the tower mass,” Rosenzweig explained. “Less steel, less cost.” The PMDD, he went on, eliminates the gearbox. “It’s the part of the turbine that breaks the most often, and when it does break, it’s very expensive to replace or fix.” With Goldwind’s PMDD, “that’s effectively designed out.”

In China, Rosenzweig said, Goldwind’s PMDD technology has proved itself “offshore, up in high altitudes, in the cold of Mongolia and the heat of the Gobi Desert.” It has “lower maintenance requirements” and “a very good performance record across our fleet.”

The durability of the PMDD generator is one of the keys to Xinjiang Goldwind’s recently announced huge investment shift from onshore to offshore wind.

The wording of this story bothers me because it sounds like the PMG's in the PMDD's they are talking about are Goldwind owned. Isn't that The Switch's PMG technology and don't they claim Goldwind as their customer? After AMSC engrandizing of the Sinovel relationship, let's pray that The Switch isn't doing the same with their PGM technology!

Goldwind's Q1 results were revenue up 0.04% and net profit down 16.99%. That, and a worsening in its already negative net cash flow by 84.46% paint an ugly picture. Maybe China isn't going to be the global leader in wind...

Here is what was written Friday about Sinovel (and AMSC) and it shows a $1 billion shift in the company's cash to inventory:

It is reported that wind turbine makers, including industry leaders Sinovel and Goldwind, are grappling with a weaker market.

Shares in NASDAQ listed American Superconductor Corporation plummeted 40% overnight after a customer on the other side of the planet suddenly adjusted to an unexpected change in weather for China's wind energy sector.

The US energy equipment manufacturer announced on April 5th 2011 that China's Sinovel Wind Co, its largest customer, had refused March 31st 2011 to accept USD 56 million worth of electrical components.

Sinovel, the world's second largest wind turbine manufacturer in term of market share, was supposed to take delivery of the parts in March. Jilted AMSC was forced to downgrade its annual revenue estimates, and investors sold the stock.

The authors of a report released by China International Capital Corporation in early April said that "Sinovel's decision underscored its deteriorated cash flow position, which could have been caused by postponed payments by wind farms."

And it's just one sign of a weakening wind turbine market in China. The Chinese Wind Energy Association says newly installed wind power capacity rose 37.1% to 18,928 MWs in 2010 as compared with 2009, but that was far below its growth rates topping 100% for the previous four years.

A wind energy analyst told Caixin that "Accounts receivable and inventory should be blamed for such a huge amount of Sinovel's negative cash flow."

Sinovel's cash flow storm hit quickly. In 2010, Sinovel reported earning CNY 3.17 billion on CNY 20.3 billion in sales; each was figure up 48% from 2009. But the company also booked a negative net cash flow of CNY 1 billion in 2010, compared with a positive CNY 1.38 billion in 2009.

Company and CITIC Securities reports say Sinovel's inventory turnover ratio fell to 1.69 in 2010 from 4.23 in 2007, while its accounts receivable turnover ratio was 2.5 in 2010 compared with 8.18 three years earlier.

Mr Tao Gang VP of Sinovel said that the company's decision to drastically increase inventory had been a strategic move, primarily due to demands for a 3 MW turbine manufacturing line in Jiuquan in Gansu Province. Sinovel is handling 60% of the equipment supply for a government project there.

To ensure capacity and meet contract terms, Sinovel prepared in advance more than 100 sets of these turbines as well as several 5MW turbines, increasing the company's inventory value by more than CNY 2 billion in 2010.

Then there is this about AMSC:

Is Sinovel just trying to work off excess inventory due to a slowdown in the Chinese Wind market, or are they beginning to shift some of their business to other suppliers?

They found that Sinovel affiliate Dalian Guotong Electric (GT Electric) started producing frequency converters in 2010, and is ramping up production at the typical Chinese breakneck pace. Sinovel owns a 22.5% share in GT Electric, giving them a strong incentive to prefer their frequency converters over AMSC's.

GT Electric's product website (Chinese only) is here, and much of the other information they found is in the August 2010 China Wind Power newsletter, which said GT's factory will be "capable of import substitution."

GT does not have the capacity to replace AMSC yet, and Sinovel will likely want to have more field experience with GT converters before abandoning AMSC. But the contract Sinovel signed with GT electric for 2011 gives them 4% of their total ... in GT's second year of operation.

So, on the Sinovel front, there are lots of worries. Why didn't AMSC disclose the GT Electric ownership by Sinovle in its Risks section of their SEC filing? Why didn't AMSC question the inventory build at Sinovel and the massive amount of cash being drained from their balance sheet (like Barron's did)? And, in its press releases about The Switch merger, little has been said about the risk of their PGM business. Is it in trouble because Goldwind and others own big chunks of the technology?

Here is what the Seeking Alpha writer had to say about AMSC as an investment:

I still believe that Sinovel will resume purchases from AMSC later this year, but I think it is unlikely that those purchases will grow in coming years. Further, AMSC still needs to raise $100-$200 million to complete the (revenue-diversifying) purchase of "The Switch" I discussed in the previous article. The fear of dilution will likely depress AMSC's share price over the next couple of months, meaning that I no longer think that AMSC is a good speculation where it currently stands in the $11.50 to $12 range.

These events are unlikely to bankrupt AMSC, and I think many of the company's other businesses have great potential for growth, but from a very low base. For now, I've sold my stake, but I will be looking for opportunities to buy again at lower levels.

I may not be the only one looking for bargains. I shot a quick email off to John Segrich, whose Gabelli SRI Green Fund (SRIGX) holds "a little" of the stock. He thinks AMSC is a lot more interesting now that it has fallen so far, and speculates that it could be a buyout target for someone wanting to own the technology.

I dislike owning a company with so much uncertainty surrpounding its operations. I initially invested thinking this was a Sinovel problem. With so many other manufacturers being lined up for sales I thought that if Sinovel went away that AMSC could grow its way out of the mess. Since AMSC isn't #1 in the world market in what it sells to Sinovel, how great is that technology? If Sinovel thought it could get its own Chinese supplier, are the new customers for AMSC just short-term buyers while China scales up?

The investment value of AMSC, for me, keeps coming back to The Switch -- a company AMSC does not own and may never own. Now that Goldwind has caused me to question The Switch's technology, it is very tempting to sell now and just watch. Owning something you really don't understand is very silly and silly is how I am feeling...

The only thing worth waiting for is this month's earnings conference call. What is said there is the only event on the horizon that could launch this stock... or crater it.

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