Big Depreciation Nips Goldwind In Disposal Plan For Self-Developed Wind Farm

Key Takeaways:

• Goldwind will raise 881 million yuan through the spinoff of a 100 MW self-developed wind farm in Jiangxi province, far less than the 1.8 billion yuan the plant was worth two years ago
• The company’s gross profit margin fell to a 10-year low in the first half of the year as it struggles with stiff competition

By Doug Young

Wind may be a major clean energy source of the future, but it’s hardly a breeze for investors trying to earn profits by building new wind farms.

Wind power equipment maker Goldwind Science & Technology Co. Ltd. (2208.HK; 002202.SZ) thought it saw a win-win for itself in building new wind farms using its own products, earning both short-term sales and longer-term profits when it eventually sold those farms for big gains. But the reality is looking quite different, at least based on a disclosure last week that appears to show the value of such wind farms has dropped sharply over the last two years.

Goldwind revealed that it plans to spin off one of its self-developed wind farms, the 100 MW Quannan Tianpaishan project in East China’s Jiangxi province, into a separate entity listed on the Shenzhen Stock Exchange, where the company’s Shenzhen shares are already listed.

But it said the listing, which would see Goldwind put its entire 100% interest in the project into the new listed vehicle, was expected to generate just 881 million yuan ($120 million) in proceeds. That’s less than half the 1.8 billion yuan third-party assessment of the project’s value from just two years ago when Goldwind first announced the spinoff plan.

What’s more, Goldwind said it would buy 20% of the shares of the newly listed entity, whose formation was approved by the Shenzhen Stock Exchange and China’s securities regulator last week, according to the announcement. Goldwind is required to hold that stake for five years, the announcement added.

We don’t know how much Goldwind spent to build the project, though we can probably assume the newly announced 881 million yuan in spinoff proceeds means it will be selling the wind farm at a loss. That fact, combined with the added fact that Goldwind will be forced to hold 20% of the shares for at least five years, means that the company is likely to immediately recoup only about 700 million yuan of its original investment.

All this shows the big dangers that can come with wind and solar farm construction by equipment makers looking to create new demand for their products. Goldwind certainly isn’t the only company to turn to construction of its own new energy power plants to create demand for its products, with most major solar and wind companies engaged in similar actions.

The dynamics of successful green energy power plant construction are all the more difficult due to the many moving parts involved. Those include government subsidies that are constantly changing, mostly being lowered and phased out to force operators of solar and wind farms to stand on their own. At the same time, falling equipment prices as technology improves and competition remains fierce are constantly lowering the cost of new plant construction, making older farms look pricier and less efficient.

The result of all this can be the kinds of big value declines that Goldwind is seeing in Quannan Tianpaishan. The project may have helped Goldwind’s sales at the time of the its construction, but now it’s coming back to ultimately undermine the company’s bottom line profit.

Sagging Shares

Stock market reaction was relatively muted after the announcement, probably because investors are already quite bearish on Goldwind. Its Hong Kong-listed shares rose slightly the day of the announcement, only to give back the gains and a little bit more the next day. The company’s Hong Kong-listed stock has lost more than half of its value over the last 52 weeks, and now trades near a five-year low.

Many of the big-name investors that once flocked to Goldwind’s Hong Kong shares have now abandoned the company. At the beginning of this year it counted the likes of Blackrock, JPMorgan, Citigroup and Singaporean sovereign wealth fund GIC as major backers, each with 5% or more of its Hong Kong-listed stock. But the latest disclosures show that GIC and Citi have sold down their stakes, leaving only JPMorgan and Blackrock.

Following this year’s selloff, Goldwind’s Hong Kong shares now trade at a lowly forward price-to-earnings (P/E) ratio of just 4.7, though its Shenzhen-listed shares trade more strongly at a ratio of 12. Such discrepancy is relatively common for such dual-listed companies, as Mainland Chinese investors often give them higher valuations than their global peers in Hong Kong.

Still, both of Goldwind’s ratios are half or less of the 24 for global rival Vestsas (VWS.CO), though it’s Shenzhen ratio is ahead of the 7.5 for domestically listed peer Ming Yang (601615.SH). Truth be told, both Chinese companies’ ratios seem quite low considering both are leaders in an industry that looks set to boom as countries race to install more clean energy.

The investor gloom owes to tumbling profitability for Goldwind, mostly due to competition but also over concerns about more losses it’s likely to face from future sales of other self-developed wind farms. The company’s overall sales actually jumped by 32% in the second quarter to about 13.3 billion yuan, reversing declines in the first quarter and for all of last year, as Goldwind began to fill its big order backlog built up during the pandemic.

But its second-quarter profit tumbled 57% year-on-year to just 210 million yuan, as its gross margin for the first half of the year plunged to a 10-year low of 16.94% from 24.72% a year earlier. Goldwind is trying to move into higher-end wind turbines and was hoping its wind farm construction business could improve its profitability. But as the likely losses from the Quannan Tianpaishan project show, such wind farm construction is hardly a safe bet to generate new profits.

Increasingly ESG-conscious Western investors may also be avoiding Goldwind due to its headquarters in the controversial Xinjiang region. Goldwind dropped “Xinjiang” from its name earlier this year, in a bid to play down its roots in the region. But such a name change is really just cosmetic, and going forward the company will need to contend with both investor concerns about its Xinjiang roots and, more importantly, its tumbling profitability.