Friday, June 27, 2008

Bookkeeping: New Position in A-Power Energy Generation Systems (APWR) to Create Alternative Energy Mini Basket

I am trying to build a 3 position basket of "alternative energy" (non solar) names. I started this basket with a small stake in American Superconductor (AMSC) which I actually added a bit to here as it pulls back to $36 and fills a gap from June 9th. [Jun 12: Starting a Beachhead in American Superconductor (AMSC)]

Today I am adding A-Power Energy Generation Systems (APWR). Here is a generalized description

A-Power Energy Generation Systems, Ltd., formerly Chardan South China Acquisition Corp., through its PRC operating subsidiaries, is the largest provider of distributed power generation systems in China and will enter into Chinas wind energy market in 2008. The Company is also focused on developing and commercializing additional renewable energy technologies

This company moved to the NASDAQ Global market on Jun 2, 2008, and is actually followed by a few smaller brokerage houses; therefore I can conclude it's not a complete scam ;) .. something I worry about with any tiny far flung Chinese name. At a market capitalization of about $800M at today's prices its far smaller than our average fare and I believe either the 2nd or 3rd smallest current holding.

This company has a fast growing baseline business in China (and expanding to other Southeast Asian markets) but the kicker is the potential wind business which is just beginning. Please note there are a lot of over the counter Chinese "wind plays" being touted just about everywhere - I don't do over the counter unless it's a Nintendo or something of that nature. And unlike certain small cap wind stories that a certain financial TV personality likes to tout, APWR actually has a profitable base to work off of (i.e. positive earnings) while it grows out its new wind business. So the wind business is the ultimate reason to own the name, but not a contributor (yet). But in a year or two I expect (despite being low margins) it will attract most of the attention. But the old business is not too shabby either - let's take a quick look at the last earnings report. The numbers are small in total, but very nice in terms of percentage growth.
  • For the three months ended March 31, 2008, A-Powers revenue was $32.3 million, an increase of 85.0% from $17.5 million in Q1 2007. The increase was due to continued growth in the Companys core distributed power generation business and the relatively larger size of projects under construction in Q1 2008 compared with Q1 2007.
  • Due to the stage of certain contracts being performed in Q1 2008, gross margins were 11.9%, a decrease from 13.9% in the first quarter of 2007, but an increase of 0.7% from 11.2% in the fourth quarter of 2007.
  • On an annualized basis for all of 2008, management expects gross margins on its distributed power generation business will be approximately 13.5%, similar to its gross margins in 2007.
  • Net income for the first three months of 2008 amounted to $2.9 million, an increase by $1.3 million or 79.1% compared to $1.6 million for the first three months of 2007. This increase was attributable primarily to the growth in revenue and operating income and an increased number of larger distributed power generation contracts.
Some commentary on their core business
  • Compared to the rest of the year, the first quarter has always been a slow quarter for A-Power due to the harsh seasonal weather in Northern China, where a majority of our projects are based. This harsh weather causes the construction on most of our projects to be halted in January and for a majority, if not all, of February.
  • During the first quarter of 2008 we made great progress in not only obtaining new contracts in China, but also in expanding our operations into Southeast Asia. As previously announced, we signed a $150 million distributed power contract in Thailand and began working on this project in May. We are in discussions with a number of other potential customers throughout China and Southeast Asia and expect to announce new major contracts over the next few months.
Some commentary on their future wind business
  • For an update on the wind business, we have made encouraging progress sourcing the necessary wind turbine components from China and abroad and are on-track to complete the first phase of our wind turbine production facility this month. This first phase includes a 180,000 square foot wind turbine assembly facility with the capacity to produce 420 of the 750kW wind turbines and 300 of the 2.5 MW wind turbines each year.
  • We expect to begin producing wind turbines at this new facility in the third quarter of this year and look forward to becoming one of the major providers of wind turbines in China.
Backlog of core business increased from $400M to $700M which we always like. That is over a year's worth of business The company is debt free - we like that; should mean no new equity dilution anytime soon. Despite a low margin business, they only have 32.7M shares outstanding so net income is spread over just a relatively few amount of shares - always like that. Earnings for 2008 are projected @ $1.15 and for 2009 @ $1.47, and I do believe this does not include any of the wind business which probably will take some time to really ramp up. The company has guided to $1.04 to $1.34 for 2008. But at today's $24.70, and using the analysts $1.15, we are paying a forward PE of 21x 2008 estimates versus the folks who 5 days ago were paying 28x when it peaked just under $32.

Another plus - I understand the CEO's English which is always a bonus when listening to conference calls and he has even appeared on CNBC in April of this year - not "extremely" informative but you can view it here.

We have a nice SEC presentation filed here, very good viewing. So that takes care of name 2 of the 3 stock mini basket - I'd really like to add this name into a larger scale if we get a further pullback, but it's now retraced much of its "hey we're a wind play" hype move. I generally prefer much higher margin business models, but with the growth potential, wind potential, and location in the fastest growing energy market in the world - we can live with it.

The third name acts like a coal stock - it never pulls back :) I might just have to bite the bullet one of these days and buy it as its up 68% in the 6 weeks I've been watching it. And that's after a huge gap up post earnings. Grrr...

All these are speculative so as a basket I'll probably limit them to 5%ish of the portfolio, in case one implodes or is more hype than reality.

Today's purchase in American Superconductor pushes it up to a 1.65% stake.

Today's purchase in A-Power Energy Generation Systems establishes a 1.65% stake and comes after a 5 session pullback of 22%. I bought today's stake in the $24.70s and hope to add down at $23 and if so lucky, down at $21.

Long American Superconductor, A-Power Energy in fund; long A-Power Energy in personal account

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