A-Power Energy (APWR) Bit of a Miss but Business Metrics Solid

I haven't had a chance to listen to the conference call yet, but from the earnings release A-Power (APWR) had a solid quarter although they missed the analysts estimates. Due to the lumpiness of their distributed energy business (sort of like an global engineering type of company) it is hard to look at one quarter versus the next but the key is they have a very back loaded year (3rd and 4th quarter are 75% of their yearly EPS this year) and they "mostly" executed on the 3rd quarter coming in at 28 cents versus 32 cents estimate. For a company with a 15, 20, 25 PE ratio I'd be concerned but at 4x 2008 estimates I can live with this. The stock has been pricing in disaster (and an investor base that demands a better web site - inside joke) and unfortunately with the wind business coming online people seem to now view this stock as a proxy on oil or a solar stock. There is a lot of irony in that, which I won't even touch.

For 2008 analysts are in for $1.09 EPS, and $0.49 for Q4. I am going to extract the 4 cent miss for Q3 (takes you down to $1.05 on the year) and then baseline a miss of 10% on Q4 (just to be conservative) which takes you down to an even $1.00 EPS. The company had been guiding for a range of $35M to $45M net income; which they are now narrowing to the $35M (that was a huge range for such a small company but again this is a very lumpy business based on contract signings). $35M divided by about 33.6M shares = $1.04 EPS for the year. So we're all in a similar range here, I'm trying to create worst case scenarios in my models. Hence the $1.00 EPS target.

The stock closed at $4.02 so again we have 4x earnings for 100%+ year over year growth. The company is guiding to $2 in EPS in 2009. That would be 100% growth next year. They have an entire wind business ramping up which gives them a great probability to ramp earnings - but I am going to assume some worst case scenarios and the $2.00 turns into $1.60 EPS for 2009. (60% growth) This means in my scenario which is 20% below what management is guiding the stock is trading at 2.5x 2009 estimates.

So let's review, 100% growth this year, and 4 PE ratio. Management guiding to 100% growth next year (2 PE ratio on 2009), I am conservatively saying 60% growth, and 2.5 PE ratio. Fundamentals mean nothing and valuation means nothing in this market, but I am just displaying some scenarios so we can one day look back and get a good chuckle out of all of it. Even at a 15% growth rate I would assume a 2.5 forward PE would not be deemed expensive, but I guess so. Also, this is including cash - if I net out cash the company becomes even cheaper - just over 1 PE ratio on managements 2009 estimates. How's that for cheap? This is no debt ladden DryShips (DRYS) whose revenue is based largely on a 3rd party index, which is the sort of company that trades at similar multiples.

If they miss by X cents in this quarter or another this means they grew 110% instead of 130% year over year, but at this PE multiple we are discounting growth of 5%, not 90% or 100% or 120%. So while the market is so obsessed with beating a number, I am looking at the year over year growth, and ability to hit some high back loaded EPS numbers necessary to get to their full year 2008 EPS. They seem able to do it.

There is still a Thailand contract people want to see converted into a firm contract and this continues to drag out: "We remain confident this MOU will be converted into a contract shortly as we are currently in final discussions with the customer and we are working together with the customer to obtain the necessary approvals in Thailand." It would be good to see this finalized so one less uncertainty remains over the company.

The wind business looks to be on target with, as promised, 10 of their larger (2.7 MW) turbines to be converted into revenue in Q4 2008. " In addition, the components that we have secured for the initial 10 2.7 MW wind turbines began arriving at the port in Dalian, China this week. We expect that all of the components needed to produce the first 10 2.7MW turbines will be transferred to our wind facility in Shenyang by the end of November. For this reason, we are on-track to produce the first 10 2.7MW wind turbines this quarter and all 10 units are expected to be recognized as revenue in 2008."

They have some potential incremental revenue from this business in 2008 with their smaller (750 kW) turbines as well "We have also secured components for 30 of the 750kW wind turbines from multiple domestic and international sources for delivery over the next few months. We believe we will be able to produce at least 20 of the 750kW wind turbines this year."

But the most important thing is this a potential gold mine of revenue in 2009 and 2010; at full capacity we have a $2B+ business (revenue) coming online. But with oil headed to what appears $40 American investors just seem to assume every country is like us and abandons all long term plans based on the whims of oil prices. Maybe with Obama in office Americans will learn how other countries actually make plans past 1 election cycle - we can only hope. p.s. when was the last time you put a barrel of oil into your local electrical generating utility? Hence why does the price matter? Discuss amongst yourselves....

Second wind turbine plant looks to be on target to all earlier promise: "We commenced the initial design and construction work on this new facility in October 2008 and expect it will be completed in July 2009. When the Bayan Nur wind facility is completed, A-Power will have an annual capacity to produce over 1,800 MW of wind turbines"

On to the earnings numbers. We have about 120% year over year revenue growth, gross margins dropping from their 14% range to below 12%ish as they fluctuate at different parts of their contract cycles, their administrative expenses doubled from $1M to $2M year over year, with net income up 124%.

Cash is up year over year but down from last quarter (now just under $60M) with no long term debt and working capital jumped from $38M to $96M. No long term debt, and a full blown balance sheet now appears in their earnings release unlike the last time around. Good things.

• For the three months ended September 30, 2008, A-Power's revenue was $85.4 million, an increase of 119.7% from $38.9 million for the three months ended September 30, 2007. The increase was due to continued growth in A-Power's core distributed power generation business and the relatively larger size of projects under construction compared with the prior period.
• Cost of revenues for the three months ended September 30, 2008 amounted to $74.8 million, an increase of $41.5 million compared to $33.3 million in the same period of the prior year. Gross margin decreased during the three months ended September 30, 2008 to 12.3% from 14.3% in the same period of the prior year. The decrease in gross margins was primarily due to costs that were incurred in the construction phase of projects during the third quarter of 2008. Once these projects progress to equipment delivery and installation phases, gross margin should return to approximately 14%.
• General and administrative expenses amounted to approximately $2.0 million for the three months ended September 30, 2008, an increase of approximately $1.0 million compared to approximately $1.0 million in the same period of the prior year. This increase was primarily due to the addition of key technical and managerial talent and direct expenses associated with being a publicly listed company in the U.S.
• Net income for the three months ended September 30, 2008 amounted to $9.4 million, or approximately $0.28 per share, an increase of 124.3% compared to $4.2 million for the three months ended September 30, 2007.

This is the one small cap Chinese stock I am sticking with because the earnings potential is too staggering - and it only has $4 more dollars to go before it gets to zero. ;) For the obsessive few who follow this stock the other things the company needs to take care of are a new CFO, and a new website - along with the Thailand contract I believe every major beef would then be taken care of and this stock might scorch higher to a forward multiple of ... well ... 3x 2009. I continue to find it ironic how people question/doubt management of every Chinese company when they should look around and see what a disaster the "heads we win, tails we win" domestic CEOs have brought to America now twice in a decade. There are good, average, and bad in both locations --- Americans really need to learn to respect their creditors - we don't want those credit lines pulled, do we?

Back to A-Power, I realize people view it as both (a) an infrastructure stock and the belief is every energy project worldwide is getting cancelled (despite China's $500B+ stimulus plan), and (b) the belief with oil dropping like a rock every alternative energy project will be cancelled in 2009 and 2010. If we are heading to that stone age outcome, well the stock price of any entity will be the last thing one needs to worry about. But this is how we are now pricing things - good companies get no benefit versus bad companies - they are all junk. Personally I look forward to the energy shortages the world will be encountering in 2011+ as a lack of investment in 2009 and 2010 puts the world at its knees again once global "growth" returns to "neutral". Maybe one time we'll learn to lack past our nose... humans are a bit slow to evolve. Or perhaps as we enter the Global Depression of 2009-2010, Americans will be like many on this planet who live with 4 hours of electricity a day. I guess we need to be open to every outcome nowadays because as you know the "stock price" always is right.

I'll edit this post with any info I generate from the conference call later in the week.

[Oct 20: A-Power Energy Provides Follow Ups to Last Week's Conference Calls]
[Oct 13: A-Power Energy Up 55%]
[Oct 7: A-Power Lets CFO Go]
[Oct 6: A-Power Energy Announces Huge Contract - Stock Down 30%]
[Sep 11: A-Power Energy Update]
[Aug 28: China to Subsidize Wind Turbines]
[Aug 25: A-Power Energy Earnings/Guidance Remain In Line - Wind Business on Track]
[Jul 23: A-Power Energy Signs $300M Contract with Thailand]
[Jul 14: A-Power Energy Generation Systems Hot and Heavy with Press Releases - Up Another 7%]
[Jul 9: A-Power Energy Generation Up 15% on Announcement of Completion of Largest Wind Turbine Plant in China]
[Jun 27: New Position in A-Power Energy Generation Systems to Create Alternative Energy Mini Basket]

Long A-Power Energy in fund and personal account