American Superconductor AMSC S
June 13, 2008 - 8:06am EST by
heffer504
2008 2009
Price: 41.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 1,900 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT
Borrow Cost: NA

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Description

I will keep the writeup short and sweet: if you can get the borrow and hold on tight, you should short AMSC as it will never grow into its valuation.  The short thesis rests on 3 legs:

 

1)     Read the postings at www.citronresearch.com.  While I think it is unlikely that Sinotec is fraudulent, there is at least some reason to consider this a related-party dealing. 

2)     The recently-announced contract with Sinotec is unlikely to be fully realized in the timeframe of the contract, based on our due diligence.

3)     The market for wind turbines is simply not large enough to support AMSC’s valuation.

 

In addition, the breath-taking recent insider sales ($10m yesterday) reinforce our belief in the overvaluation.

 

More detail on each point:

 

1)     Citron’s points are mostly reasonable.  They discuss the company’s checkered past, the implausibility of the Sinovel contract, the potential for related-party transactions, and the possibility of shady accounting.  This is basically self-explanatory though.

2)     Our diligence confirms that Sinovel is a real, though secretive, company, currently capable of building roughly 600 1.5 MW turbines a year.  However, the AMSC contract implies roughly 8,300 units to be delivered over 3 years, or roughly 2,800 units a year.  None of the people with whom we spoke believe this is feasible, and instead expect Sinovel to ramp from 600 to roughly 1,000 units, and keep the remaining components in inventory (as a generous explanation!).  In 2007, Sinovel built roughly 20% of the 3.5 GW of turbines.  There are roughly 50 turbine manufacturers in China, several of which are as large as or larger than Sinovel, and the Chinese turbine market is estimated to grow to 6-8 GW a year in a few years.  If Sinovel retains its 20%, this would indicate 1.5 GW, or 1,000 units of 1.5 MW, supplied by them over time, which is consistent with this commentary.

3)     The total world turbine market is 20 GW/ yr.  This is projected to grow to 40 GW/ yr by 2012.  However, most of this is fully-integrated production- ie, GE, Vestas, and other large manufacturers all make their own electrical components, and are thus not an addressable market for AMSC.  Assume that 25% of the market is non-captive/addressable (I believe this is generous), then 10 GW/ yr is 6,700 1.5 MW turbines, at $55k revenue per component and 30% gross margin, with a 5% sg&a load and a 30% tax rate, a little under $10k net profit per component.  This leads to $64m of profit for AMSC, which is roughly 30x earnings.  And remember, this assumes that AMSC captures 100% of the market, and that market doubles from the current level.

 

A rough estimate would be, best-case scenario, AMSC captures 70% of the market and gets a 20x multiple, which would lead to a stock price of roughly $20.  Fraud or lack of business execution leads to additional downside.  Like all silly valuations, of course, they can get sillier, and any help identifying a catalyst here would be appreciated!

Catalyst

operational issues with AMSC components or Sinotec turbines
citron research postings lead to regulatory scrutiny
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    Description

    I will keep the writeup short and sweet: if you can get the borrow and hold on tight, you should short AMSC as it will never grow into its valuation.  The short thesis rests on 3 legs:

     

    1)     Read the postings at www.citronresearch.com.  While I think it is unlikely that Sinotec is fraudulent, there is at least some reason to consider this a related-party dealing. 

    2)     The recently-announced contract with Sinotec is unlikely to be fully realized in the timeframe of the contract, based on our due diligence.

    3)     The market for wind turbines is simply not large enough to support AMSC’s valuation.

     

    In addition, the breath-taking recent insider sales ($10m yesterday) reinforce our belief in the overvaluation.

     

    More detail on each point:

     

    1)     Citron’s points are mostly reasonable.  They discuss the company’s checkered past, the implausibility of the Sinovel contract, the potential for related-party transactions, and the possibility of shady accounting.  This is basically self-explanatory though.

    2)     Our diligence confirms that Sinovel is a real, though secretive, company, currently capable of building roughly 600 1.5 MW turbines a year.  However, the AMSC contract implies roughly 8,300 units to be delivered over 3 years, or roughly 2,800 units a year.  None of the people with whom we spoke believe this is feasible, and instead expect Sinovel to ramp from 600 to roughly 1,000 units, and keep the remaining components in inventory (as a generous explanation!).  In 2007, Sinovel built roughly 20% of the 3.5 GW of turbines.  There are roughly 50 turbine manufacturers in China, several of which are as large as or larger than Sinovel, and the Chinese turbine market is estimated to grow to 6-8 GW a year in a few years.  If Sinovel retains its 20%, this would indicate 1.5 GW, or 1,000 units of 1.5 MW, supplied by them over time, which is consistent with this commentary.

    3)     The total world turbine market is 20 GW/ yr.  This is projected to grow to 40 GW/ yr by 2012.  However, most of this is fully-integrated production- ie, GE, Vestas, and other large manufacturers all make their own electrical components, and are thus not an addressable market for AMSC.  Assume that 25% of the market is non-captive/addressable (I believe this is generous), then 10 GW/ yr is 6,700 1.5 MW turbines, at $55k revenue per component and 30% gross margin, with a 5% sg&a load and a 30% tax rate, a little under $10k net profit per component.  This leads to $64m of profit for AMSC, which is roughly 30x earnings.  And remember, this assumes that AMSC captures 100% of the market, and that market doubles from the current level.

     

    A rough estimate would be, best-case scenario, AMSC captures 70% of the market and gets a 20x multiple, which would lead to a stock price of roughly $20.  Fraud or lack of business execution leads to additional downside.  Like all silly valuations, of course, they can get sillier, and any help identifying a catalyst here would be appreciated!

    Catalyst

    operational issues with AMSC components or Sinotec turbines
    citron research postings lead to regulatory scrutiny

    Messages


    SubjectChinese Wind Power report
    Entry06/19/2008 12:26 PM
    Memberspecialk992
    I totally agree with your post, unfortunately including the part about the difficulty identifying a catalyst. Much of what you wrote was also true at $25 a share, namely that given the low margin nature of this business there is no real prospect they will earn enough money to justify a market cap over a few hundred million, unfortunately with a speculative stock like this it's unclear when it will matter. I wouldn't be surprised if the Sinovel contract announcement represented the peak stock price (and the insiders seem to think this is a possibility), but they also have a stable of other customers they could start announcing years-out orders with. I also think that a lot of the speculative buying in this name is based on oil prices and when this turns around a lot of the "air" will come out of AMSC. I wanted to post a link to the Global Wind Energy Council's report on Chinese wind energy. It contains stats that put into context just how out of whack these claims by Sinovel are- for these orders to be real the Chinese would have to double their capacity installation every year for several years and Sinovel would have to get near 100% market share (up from less than 10% when this report was published) to use all the components in this order. http://www.gwec.net/index.php?id=8

    SubjectRE: Good idea
    Entry06/26/2008 11:45 AM
    Memberheffer504
    Hawkeye,

    I agree with all this and perhaps didn't convey the negative opinion that is uniformly shared by the wind turbine community on this company. The downside for this short is surely single digit, I was putting $20 out there as a best-case scenario.

    Regards,

    Heffer

    SubjectRE: Are you equally -ve ZOLT?
    Entry08/08/2008 06:56 AM
    Memberheffer504
    i have no position on zolt. i agree with everything you say and ceo has a taint, but think that they do have a legitimate business as more applications require carbon fiber, and they can deliver it more cheaply than the aerospace guys. haven't done work on the supply/demand situation now though, so my opinion is not very informed...

    SubjectRE: heffer or anyone else following amsc?
    Entry07/31/2009 09:17 AM
    Memberheffer504

    i am not sure if they would consider the sinovel extension in the bookings number or not, though i wouldn't put it past them.  i think it is fair to say that they got approximately new business outside of sinovel, and will continue to work down that contract, but i have no opinion about whether all the other business that is "on the come" will ever materialize.  this is a decent entry point since the reaction yesterday was so overdone, but there is real risk that investors will keep jumping in here to get exposure to the chinese wind power growth, so i am on the sidelines currently...


    SubjectToday"s announcement
    Entry04/05/2011 06:57 PM
    Memberpman908
    Well done

    SubjectKevin Douglas
    Entry04/08/2011 05:36 PM
    Membermiser861
    Does anybody know who this guy is?  Is he worthy of paying attention to?

    SubjectRE: how low can it go
    Entry09/14/2011 08:59 PM
    Memberdr123
    An interesting development in the saga and an illustration of the pitfalls of doing business in China:
     

    DEVENS, Mass., September 14, 2011 - American Superconductor Corporation (NASDAQ: AMSC), a global power technologies company, today announced that it is taking a series of legal actions against Sinovel Wind Group Co. Ltd. (Sinovel). 

     

    AMSC is filing criminal and civil complaints in China against Sinovel and other parties alleging the illegal use of AMSC's intellectual property.  These cases follow an intensive investigation conducted by both AMSC and law enforcement.  Based in part upon evidence obtained through the investigations, AMSC believes that Sinovel illegally obtained and used AMSC's intellectual property to upgrade its 1.5 megawatt wind turbines in the field to meet proposed Chinese grid codes and to potentially allow for the use of core electrical components from other manufacturers. 

     

    AMSC is seeking to compel Sinovel and the other parties to cease and desist from infringing its intellectual property and is also seeking monetary damages to compensate AMSC for its economic losses resulting from the infringement.  AMSC also has filed a claim for arbitration to compel Sinovel to pay AMSC for past product shipments and to accept all contracted but not yet delivered core electrical components and spare parts under all existing contracts with the Company. The arbitration claim was filed with the Beijing Arbitration Commission in accordance with the terms of AMSC's supply contracts with Sinovel.

     

    Additional information about the legal actions is contained in the Current Report on Form 8-K that AMSC is filing with the U.S. Securities and Exchange Commission.  AMSC is now operating its business based on the assumption that Sinovel will not be a customer.

     

    "We are taking legal action against Sinovel based on its contractual breaches and strong evidence of its criminal misconduct," said AMSC President and Chief Executive Officer Daniel McGahn.  "These actions send a clear message that AMSC is enforcing its intellectual property and commercial contracts."

     

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