An In-Depth Look at A-Power

You may have noticed that A-Power Energy Generation Systems (Nasdaq: APWR  ) has been on an absolute tear lately, with shares up 70% over the past month. Last week's Dubai dip was no match for this momentum. I've been remiss in covering developments at this company, and it's high time I got up to speed on the story. Let's see what all the fuss is about.

Reasons to be optimistic ... and skeptical
A-Power got off on the right foot early in 2009, forming a gearbox assembly joint venture with General Electric (NYSE: GE  ) . The firm also opened China's largest wind turbine manufacturing facility around that time. Coming up light on revenue, A-Power's first-quarter results were far from a-mazing, but the company did raise its full-year earnings guidance by 10%, to $32 million. Seasonally slow first-quarter earnings coming in at just over $1.5 million pointed to some huge quarters to come.

I missed that latter point at the time. Then again, with a track record of overpromising results, I may not have given this guidance a lot of credence. To see what I mean, compare last year's earnings guidance of $35 to $45 million to actual results of $28.5 million.

Grow an overnight conglomerate? Just add sunlight (and natural gas)
In August, A-Power announced second-quarter earnings of $6.3 million, on par with the previous year. So far, no bottom-line explosion. The company also signed some interesting memoranda of understanding.

One said that the company would buy Japanese thin-film solar panel equipment manufacturer EVATECH, broadening A-Power's green reach. Another MOU had majority-owned Shenyang Power Group agreeing to construct an offshore liquefied natural gas facility. That's well outside the distributed energy generation realm, within which SPG was specifically formed to operate.

I can't help but be concerned that this company is overreaching. It's like A-Power wants to become the Chinese Siemens (NYSE: SI  ) or ABB (NYSE: ABB  ) overnight. You'd think they might try to cement their position in the capital-intensive wind turbine business before tackling new verticals. Getting into the solar or LNG business is no casual affair.

I guess with the government heavily subsidizing your expansion, you're more apt to build an empire. A-Power put up just 55% of the funds for the EVATECH purchase, with local governments covering the rest.

A Texas-sized turbine order
If anyone shared my concerns about the new company's new adventures in alternative energy, these were certainly overshadowed by the late October announcement that A-Power will supply up to 240 turbines to a proposed $1.5 billion, 600-megawatt West Texas wind farm in which SPG is a joint venture partner.

This news was enough to make steam come out of certain Washington lawmakers' ears. (Hey, maybe that's the solution to our renewable energy needs!) As a project that could potentially qualify for hundreds of millions of stimulus dollars, this wind farm put A-Power in the crosshairs of Senator Schumer from New York, who argued that the U.S. should source its own high-value turbines.

There were conflicting comments by various JV members as to whether the project would actually seek Federal grants. Austin's Cielo Wind Power (whose largest wind farm developed to date was 279 megawatts) said, quite definitively: "This project will not take place without the planned benefits of the American Recovery and Reinvestment Act." A-Power, however, claimed that U.S. stimulus funds would not be involved, and that Chinese banks would carry the load.

Perhaps just to be safe, A-Power and private equity partner U.S. Renewable Energy Group soon announced that the parties (or more accurately, SPG and US-REG) are going to build a wind turbine manufacturing plant in the U.S., with a capacity of 1,100 megawatts. That's the same as A-Power's giant plant in Shenyang!

A-Power has thus taken a page from Suntech Power (NYSE: STP  ) and Yingli Green Energy (NYSE: YGE  ) , as it looks to nip U.S. protectionism in the bud. The company actually goes far beyond the modest U.S. presence that these solar firms have planned.

A Foolish final thought
I frankly don't know what to think about this company. As of the August conference call, A-Power had constructed all of two wind turbines. I don't have any insight into the quality or cost competitiveness of these capital goods. The Texas deal is a huge win, suggesting that financial players consider A-Power to be "bankable," but the question still nags at me: Can the company execute on this scale, right out of the gate?

If you're buying shares of A-Power today, you're making that bet. Maybe you understand the company's technical capabilities better than I do, and know that we're looking at the First Solar (Nasdaq: FSLR  ) of wind turbines. Without that conviction, I'm resigned to sit and watch this one play out from the cheap seats.

ABB is a Global Gains pick. Suntech Power and First Solar are Rule Breakers recommendations. Power up your portfolio with a trial subscription to any of our Foolish newsletters, free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 01, 2009, at 12:46 PM, Teacherman1 wrote:

    I am with you. While I am usually a longer term investor, I did a short term buy on this on Nov. 19, and sold yesterday for a 25% gain.

    I am putting it on my watch list, and if I get a better long term feel for it, I might go back in again.

    Just seemed to come out of nowhere and start shooting up. When I read in my local (Austin, Tx) paper about the wind farm deal, I knew it was going up, but the comments by Schumer made me pause a couple of days, or I would have made a 52% protit.

    I guess you could say my caution caused me to sustain a 27% loss, but since it was an opportunity loss, I can live with it.

    Good article, and probably the word of caution needed at this time.

    It was my first venture into Chinese stocks, which I have avoided up to now.

    I did however, buy into another one a few days later.

    COGO

    Fundamentals look good, good balance sheet and profitable. Not the rocket that APWR might turn out to be, but have been around since 1917 (formerly named ComTech), they have a good game plan and are in the right place at the right time.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On December 01, 2009, at 1:24 PM, Teacherman1 wrote:

    Testing 1,2,3

    I made a post to this earlier and it did not show up.

    It is now 12:23 CST.

    Will be interesting to see if this one takes, if they both take, and which one shows up first.

  • Report this Comment On December 01, 2009, at 4:57 PM, JaysRage wrote:

    I was hoping that this would be an in-depth analysis.

    This whole article looks like a lot of sour grapes for someone who missed out on a great buying opportunity earlier in the year. The author found ways to build a cloud around every silver lining.

    Based on previous earnings under-achievement, the stock was under-priced, even before the series of breakthrough news announcements.

    The bottom line is that wind is entering its prime, and APWR is the only small cap stock positioned to capitalize on it. It has an amazing pipeline of orders in a number of different areas of its business, and it's positioned to become an even larger player in the wind space in a country that has made a huge commitment to green technologies.

    It will miss 3rd quarter earnings. This would be no surprise to me. The story is in the 2010 growth and pipeline, not 2009 Q3 earnings. If it dives after an earnings miss, it will be your last chance to catch this stock before 20. I'm looking for that opportunity to add to my position.

  • Report this Comment On December 02, 2009, at 11:52 AM, IsthisRight26 wrote:

    Another way to look at the evolution of A-power wind business.

    1- they needed bulk and key components so they embarked on a large plant and a GE Alliance

    2- Blocked by some other suppliers for other key components, A-power had to WAIT for local sourcing

    3- Meanwhile, price of electricity is kept down ( due to crisis) and Capital for 'customer' projects is tight in a CHEAP ELECTRICIT YMARKET (China).

    4- Take evasive action : transport components and factory( if needed) to market where electricity sales bring higher revenue ( US electricity cost relative to China). Debt from China bank to U.S plant and Jobs is added value = Gain Market foothold.

    Notice Mercedez Benz doing something similar ( Step # 4).

  • Report this Comment On December 04, 2009, at 10:08 PM, tkell31 wrote:

    Another worthless article emphasizing style over substance. In depth? Good theory, but hardly scratched the surface of what is going on within and around this company.

    "Then again, with a track record of overpromising results, I may not have given this guidance a lot of credence. To see what I mean, compare last year's earnings guidance of $35 to $45 million to actual results of $28.5 million."

    Gee Toby, they've been around for a whole two years yet you cite their track record of overpromising. Well based on your crappy article I guess it is safe to say you have a track record of crappy articles. I wonder if starting up within a year of the most debilitating economic event in our lifetimes contributed to that "overpromising." I mean based on your conclusion every single company in the world has a track record of overpromising. Dont hurt yourself thinking about it, the answer is yes.

    Overreaching almost seemed like a good point until I considered who I would trust more to know whether it was, GE or you. It took me about .00001 seconds to conclude GE probably knew a little more about A-Power's capability then you, but thanks it is always good to consider what can go wrong and let that stop you from getting in early.

    Good idea to sit it out. I mean why invest in a company that worse case is growing modestly carving out a niche in China and best case could be at $100 by 2011. The US and China are going to spend about 1 trillion dollars on clean energy over the next five years who would want to make money off that anyway? Maybe I'm 100% wrong, but when I ask myself what would Buffett do I'm pretty sure he would say growth, value (future), go for it.

  • Report this Comment On December 15, 2009, at 7:33 AM, ifool100 wrote:

    Interesting how they are looking to expand. And let's face it, nobody really knows the full story. APWR is risky, but rewarding and promising. Rather than commit to the sidelines though, I think it may be prudent to trade with the chart indicators when they show a definite direction.

  • Report this Comment On December 16, 2009, at 11:00 AM, Deepfryer wrote:

    "The bottom line is that wind is entering its prime, and APWR is the only small cap stock positioned to capitalize on it."

    You're just not looking hard enough :-)

  • Report this Comment On December 22, 2009, at 9:45 AM, JaysRage wrote:

    Deepfryer -- Good point. There are others......should have said APWR is the best positioned to capitalize on it.

    By the way, since this article has been written, APWR is up over 25%.....in less than a month. If you waited for the dip after earnings like I mentioned, you'd be looking at over 33% gain in under a month. What a horrible horrible miss by someone who is supposedly an alternative energy expert.

    This is a terrible article.

  • Report this Comment On January 22, 2010, at 10:50 AM, JaysRage wrote:

    Eh, I'll eat some crow here. All of the negatives in this article have come to roost. It's oversold right now, but if you watched and waited, you got a much better entry point than the middle 16s. I still like 'em, though.

  • Report this Comment On March 08, 2010, at 4:16 PM, XMFSmashy wrote:

    Appreciate the concession, JaysRage. APWR's below $12 today.

    TS

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