3 stocks for investing in China's mighty wind power industry

05/17/2010 6:38 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

In August 2007 only one Chinese wind turbine maker, Xinjiang Goldwind, made Merrill Lynch’s list of the top ten wind turbine makers in the world.

In 2010 two Chinese companies Xinjiang Goldwind and Sinovel Wind Group both make the top 5. Sinovel has climbed to No. 3 in the world.

Even though neither company sells much of anything outside of China. (In 2009 the two companies exported 20 units with a total capacity of 29 megawatts.)

The growth story is spectacular but not especially surprising. $47 billion of China’s stimulus spending over the last two years went into alternative power generation such as solar and wind. A local content law that required 50% of any turbine purchased with government money to be made in China was revised to require 70% local content.

China installed two times the number of wind turbines in 2009 than it had in 2008. Wind power capacity soared to 25.8 gigawatts in 2009 from 12.2 gigawatts in 2008. And in 2010 plans are to add another 18 gigawatts of capacity.

The investment story isn’t quite that simple.

Some of that installed capacity doesn’t produce power as often as it should because Chinese wind turbine makers are still climbing the reliability curve. Some of it was installed in remote areas such as China’s Inner Mongolia region that have lots of wind but only rudimentary connections to the country’s electricity grid. As of May 2010 more than 80 wind farms in that region have shut down because they don’t have any way to get their electricity to market.

And non-Chinese wind turbine makers are fighting back with bigger, more-efficient turbines than Sinovel and Goldwind make—so far. A plunging euro has lowered prices for machines made by European companies such as Vestas Wind Systems (VWDRY). (For more on Vestas and other euro stocks to buy see my post  http://jubakpicks.com/2010/05/14/economic-growth-policies-to-fight-inflation-and-now-budget-cuts-in-an-election-year-from-brazil/ ) And China rescinded its 70% local content rule so that the growing export business of domestic wind turbine manufacturers wouldn’t be subject to reprisals.

But probably the toughest thing for investors to figure out is which, if any, of China’s wind turbine manufacturers are actually making any money. The domestic industry has grown from 6 companies in 2004 to more than 70 in 2009. I think it’s fair to say that price competition is intense.

Did I mention that China’s two biggest wind turbine companies aren’t yet public? Sinovel is looking at a Shanghai IPO and Goldwind just got permission for a Hong Kong listing. (U.S. investors face extreme difficulties in buying shares of one of the most interesting non-Chinese companies, India’s Suzlon, because it trades only on the Mumbai markets.)

I think you want a piece of the world’s fastest growing market for wind power but how do you invest? (For when to invest, see my post on China’s current bear market in stocks and when it might turn around http://jubakpicks.com/2010/05/11/chinas-stocks-enter-bear-market-territory-on-inflation-fears/ )

First, I laid out the case for buying Vestas in my May 14 post. The company is losing share in China but it is making more sales thanks to the end of the 70% local content rule and the price-edge that a cheap euro brings. The company has the technology to stay competitive with very aggressive Chinese companies.

Second, take a look at bearing-maker Timken (TKR). The giant bearings required by every-larger wind turbines require special steels and exacting manufacturing. Timken has just opened its eighth plant in Asia to supply China’s wind turbine, mining, power transmission, (and automotive) sectors. Just in case you’re thinking that all Timken makes are the kind of small steel ball bearings that you used as your shooter in playing pottsies, Timken’s giant tapered bearings can sell for $100,000.  Along with gear boxes, large bearings have been one of the major bottlenecks for all global manufacturers of wind turbines. Sitting at the producing end of a supply shortage isn’t a bad place to be.

And finally, third, consider American Superconductor (AMSC). On May 17 the company signed a $445 million contract with Sinovel Wind Group to supply power converters that control power flows, regulate voltage, monitor system performance, and control the pitch of the turbine blades. In the first quarter shipments to Sinovel climbed 10% from the fourth quarter of 2009. (The company got 74% of its total revenue from Sinovel in the quarter. That’s good only as long as Sinovel itself keeps growing strongly. In this situation you might want to think of American Superconductor as a substitute for owning Sinovel directly. The recent contract between the two companies runs for 30 months.)

In general if you’re interested in investing in wind power I suggest that you look at component suppliers. If you can find components where supply is constrained and therefore prices are stable and margins high I think you can avoid the consequences of the intense pricing pressure at the complete turbine level.

It shouldn’t be impossible to find a component maker or two that fits the bill. Wind turbines are incredibly complex machines with, by Merrill Lynch’s count, 8,000 component parts in each.

Good hunting.

Full disclosure: I don’t own shares of any company mentioned in this post.
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