Can American Superconductor Make a Comeback After China's Ruling?

When Sinovel "allegedly" stole intellectual property (IP) from American Superconductor (NASDAQ: AMSC  ) in 2011 it set off a legal battle and controversy that lives on to this day. The fact that Sinovel agreed to pay a former employee to steal IP doesn't seem to be in doubt since the former American Superconductor employee spent a year in an Austrian jail, but what is in question is what protections U.S. companies have against IP theft in China.  

There was a small amount of clarity on that front  when China's Supreme Court rejected Sinovel's efforts to move two of four cases to arbitration. But these are two small cases: one seeking $6 million for unauthorized copying and use of AMSC's control software and another for $200,000 for copyright infringement. In other words, of the $1.2 billion in damages that AMSC is seeking this is a drop in the bucket. But it may be a big deal given the market's reaction.  

Is China respecting intellectual property these days?
It's difficult to read much into the ruling against Sinovel because it's not a final ruling, just a ruling against sending the case to arbitration. It also isn't AMSC's biggest case against Sinovel, so nearly three years later we still don't know if it will see anywhere near the $1.2 billion in damages it's seeking. But it's at least a small sign that China is taking IP enforcement more seriously than it has in the past. 

Until now, China hasn't exactly been eager to enforce intellectual property laws, especially when they help domestic growth and employment. There may be some ice breaking on that front, but investors shouldn't expect that stance to change now, even if the case is in AMSC's favor. I just wouldn't put my faith behind China's legal system.

Can AMSC survive?
Just last week, AMSC reported earnings and the financial situation is still dire. Revenue for the fiscal third quarter of 2013 was just $20.6 million and net loss was $8.4 million, or $0.14 per share. Financing is still required just to keep the company afloat and is the only reason cash increased from $32.8 million a quarter ago to $41.7 million to end calendar 2013.

Even outlook for revenues over $16 million and a loss of less than $16 million don't bode well for the company.

Buying American Superconductor's shares right now is a bet that the company will win its legal battle with Sinovel. If it does, there's huge upside considering that the company has a $132 million market cap and the suit is for $1.2 billion, but we've been waiting for a ruling for years now and value continues to evaporate. That risk is too high for me and while I hope for a comeback I'm still not willing to bet real money on one.

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  • Report this Comment On February 24, 2014, at 1:16 PM, KenLuskin wrote:

    Author of this article is badly MISinformed!

    Please go to AMSC website: READ... LATEST INVESTOR PRESENTATION

    Besides the Austrian employee, the US Dept of Justice INDICTED Sinovel! Do you understand what an indictment by the DOJ means???

    PAGE 24:

    Focus of Case,Amount Sought, Filed with Status

    FIVE SEPARATE ACTIONS:

    1) Arbitration $700 million+

    Beijing Arbitration

    Commission

    Awaiting fourth hearing; nearing completion of

    formal proceedings

    2)Trade secret infringement

    $450 million+

    Beijing Higher Court Awaiting first hearing date.

    3) Copyright infringement

    $6 million

    Beijing #1 Intermediate Court

    Awaiting hearing date. First substantive hearing

    had been delayed due to jurisdictional

    oppositions, which were resolved when China’s

    Supreme People’s Court found in AMSC’s favor in

    February 2014

    4) Copyright infringement

    $200,000 Hainan #1 Intermediate Court

    Awaiting hearing date. First substantive hearing

    had been delayed due to jurisdictional

    oppositions, which were resolved when China’s

    Supreme People’s Court found in AMSC’s favor in

    February 2014

    5)Trade secret theft, criminal copyright

    infringement

    $1.6 billion

    U.S. Department of Justice

    Sinovel indicted.

    ______________________________________

    HUGE MISTAKES in this article:

    #1) With Natural gas now trading at above $5 in US, with stockpiles at 10 year lows, WIND energy becomes much more attractive in the US.

    #2) Obviously author has ZERO clue about the air and water problems in China. Western US. has serious drought problems...Solar needs water to continually wash off panels.

    #3) AMSC has excellent Wind and GRID IP and products.

    #4) So AMSC is well positioned to grow sales and get to positive cash flow within a year.

    Company has had a multi year plan to be cash flow positive by March 30, 2015.

    #5) AMSC has 2 major programs that will increase sales and lead to positive cash flow:

    A) A deal with the US Navy that has been in long term development to use AMSC technology.

    B) Utility deals to increase GRID flexibility and reliability through use of AMSC technology.

    So, an investment in AMSC is NOT just about a settlement of the Sinovel litigation.

    Regarding China:

    Sec. of State Kerry just announced a "UNIQUE" deal between US and China for cooperation in climate change.

    The exact terms of this agreement are private thus far, but involve cooperation not only at the Govt level, but also at the corporation level.

    This announcement was followed just a few days later by the Chinese Supreme court ruling in favor of AMSC.

    China is DESPERATE to clean up their air and water!

    China NEEDS US CLEAN technology to get away from Coal power, which is causing a significant part of their pollution problems.

    WIND is the cheapest of all CLEAN technologies!

    WIND requires GRID solutions!

    AMSC has excellent WIND and GRID technology!

    If you:

    1) lack basic understanding of the relevant FACTS

    2) lack any semblance of long term VISION

    Then you canNOT CONNECT the DOTS!!!

    Investing is about the FUTURE!

    If you are myopic, you will MISS OUT on numerous "special situations", such as AMSC.

    My take, author is trying to help people who shorted AMSC, and are now panicking!!!

  • Report this Comment On February 27, 2014, at 10:01 AM, simonlegrue wrote:

    GUYS, IT'S JUST BUSINESS AS USUAL IN THE NEWSROOM, WHERE I SPENT MOST OF MY WORKING LIFE. THIS WRITER SIMPLY DID WHAT HIS BOSS ORDERED: "NOW WE NEED A NEGATIVE STORY ON AMSC, TRAVIS.

    http://www.fool.com/investing/general/2014/01/05/can-an-upco...

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