Is China Ming Yang Wind Power Group's Business Even Sustainable?

When shares of China Ming Yang Wind Power Group  (NYSE: MY  ) jumped nearly 12% on April 8 after the company reported its fourth-quarter numbers, many investors would have happily hoped to end the week with some neat profits. But the stock reversed direction soon after, closing the week 13% lower. What went wrong?

Is Ming Yang's business losing steam? Source: Wikipedia.

Where is that revenue going?
The sharp jump in Ming Yang shares after the earnings announcement surprised me because the numbers were downright disastrous.

The wind turbine maker's fourth-quarter net loss more than tripled to $82.9 million, backed by a staggering 40% year-over-year drop in revenue. If that isn't bad enough, the fourth quarter proved yet again how management is struggling to tame costs. Try and digest these year-over-year figures: Ming Yang's quarterly administrative expenses more than doubled to $67.9 million, while selling and distribution expenses doubled to $13.9 million.

The company primarily attributed higher expenses to two factors: greater transportation costs to deliver wind turbine generators to "remote wind farms," and higher bidding charges against the tenders it won during the quarter. Ming Yang has for several quarters given the same reasons for its rapidly growing expenses. The company is essentially incurring such high costs on winning orders and fulfilling existing contracts that it isn't earning a penny out of it its work. Is such business even sustainable?

And this isn't a one-quarter story. Just see how Ming Yang's top and bottom lines behaved over the past five quarters:

Source: Ming Yang Q4 2013 earnings presentation. The amounts are in renminbi.

Source: Ming Yang Q4 2013 earnings presentation. The amounts are in renminbi.

Ming Yang is clearly struggling to break even. The company's top line is growing at a rapid pace, backed by strong growth in orders, but an investor doesn't benefit until that incremental revenue converts into profit.

Interestingly, Ming Yang expects to become profitable this year, which is perhaps what excited the market after the company released its numbers. It's funny, though, that management had absolutely no clue about when the company would turn around until the third quarter, and it even explicitly mentioned how it doesn't provide financial forecasts. So what changed within one quarter to make Ming Yang so optimistic?

There's hope, but...
Ming Yang is primarily betting on higher selling prices to boost margins in 2014. There's a general time lag of one year between when the company books orders and recognizes revenue against them. For example, whatever revenue it generated in 2013 pertained to orders received in 2012, when prices were running low.

Recent industry reports indicate the bottoming of the wind power market in China, with prices of wind turbine generators bouncing back last year to improve 11% on an average from the lows of 2011. The good news is that a major portion of the 1.82 gigawatts' worth of orders that Ming Yang received in 2013 were booked during the fourth quarter. Since those higher-priced orders will be delivered and recognized as revenue in 2014, Ming Yang's top line could get a good boost this year.

...there are bigger reasons to worry
But the question remains: Will the company be able to cut down on administrative and selling expenses to benefit from that incremental revenue? Moreover, the Chinese wind power market isn't out of the woods yet, and recovery could be lumpy.

In fact, if you go deeper into Ming Yang's financials, you'll realize that the selling price for its 1.5-megawatt wind turbine generators, which also form a bulk of its order and sales, actually fell to its lowest in five quarters during the fourth quarter, even as its cost jumped to its highest in five quarters. In simple words, the margin on Ming Yang's key product actually shrunk in in the last quarter. So what's the guarantee that the trend will not continue into 2014?

If I were you, I'd take Ming Yang's management's words with a grain of salt and remain on the sidelines. Oh, and did I mention the trouble the company is facing with its venture in India, which also contributed substantially to its losses in the fourth quarter; so much so that Ming Yang has already lost more than what it invested when it entered the venture in 2012? Stay tuned for more details in an upcoming post.

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