Tuesday, December 30, 2008

A-Power Energy (APWR) Warns on Fourth Quarter

A-Power Energy (APWR) is out with a heck of a pre-announcement this morning and the stock tanked. Luckily we sold almost our entire position out as it hit resistance near $6 just over a week ago BUT we began rebuilding the position (and it was up to 2% of the portfolio) going into today. [Dec 22: Bookeeping - Beginning to Rebuild A-Power Energy] At the time I wrote

I actually cut even more as the stock failed $6 and we went into the week down to a 0.8% stake. The stock is down 11% today alone so we'll begin to redeploy back into the name, but allowing for a move back to the upper $3s/low $4s if the market returns to reality in the coming weeks. I will continue to trade this wide range (upper $3s to 50 day moving average, currently $6ish) until the stock proves it is ready to make a move above resistance.

So as you can see by the chart, despite the warning the stock held its $3s range on the bottom side - at which point as I said above I'll be buying.

However, this news gives me pause.
  • For the 2008 fourth quarter, the Company now expects revenue to be approximately $76 million and net income to be approximately $5 million. Both revenue and net income guidance are now lower than previous guidance of $158 million and $15.5 million, respectively.
  • Mr. Jinxiang Lu, A-Power's Chairman and CEO, commented, "Due to the unusual current macro economic conditions, a few of our key potential contracts, which we expected to close in the fourth quarter, were postponed.
  • As our projects are highly capital intensive, we always require a sizeable down payment as a key component of our standard contract. Under today's environment, we believe that it is even more important to exercise prudence on customers' payment terms and to continue to focus on our cash flow management.
  • Entering into 2009, we remain confident with a positive outlook for China's wind energy market as both government and enterprises have a strong commitment for renewable energy development, and we maintain a leading position in the marketplace, where the barrier to enter is high. As a result, we continue to expect profitable growth in 2009."
I'm going into 2009 assuming every stock I own is going to miss earnings by 50% and then seeing if the stock is still "cheap" based on that assumption. Even if APWR misses current 2009 estimates ($1.60s) by 50% it will still be cheap. However, I was taken aback by the scope of today's announcement. Their non wind business customer base is highly concentrated in China which in theory is in a relatively closed financial system, and thus should not be so exposed to the global credit contagion. But it appears from the wording in the document today that this is not the case. (which would add to my speculation that China is going to surprise investors materially to the downside in 2009)

Further, their non wind business is backloaded into certain quarters (this being one of them) and the "miss" is over 50% on revenue & nearly 70% on net income. They say the contracts are 'postponed' but as we've seen in other companies, postponed can turned into 'cancelled' quite easily, especially in this environment. Again, the fact that their non wind customer base is mostly Chinese and even there they are seeing this sort of credit/macro economic issue is even more surprising than if it was a bunch of European or American contracts being "postponed".

For aggressive investors purchasing in the $3s still makes sense; the issues are more about upside. With such a cloudy outlook and lack of track record over the long run, it is hard to have confidence that these contracts are only postponed for a quarter or two. More importantly from a portfolio management point of view we have been focusing on more secure revenue streams in what we believe will be a rocky 2009 with credit conditions perhaps improving but still remaining tight. We want to have visibility in 2009 in as many companies as possible, not guesswork. Right now APWR has officially become speculative guesswork. Obviously at this low valuation a lot of the risk is already in the stock price, but right now I have zero clue what 2009 estimates will be and hence have a hard time putting a valuation on the name. So instead of adding to the position I am going to take the conservative route and just sit with what I have. Again, aggressive speculators/traders would take a different tact than I am - buying here in the upper $3s and flipping out in mid $4s to low $5s.

I'll wait for the next earnings report conference call to see if they can provide better clarity on 2009. So we're down on this last batch of purchases but thankfully had locked in a large amount of sales in the $5.90s when the position was much larger. On the plus side the company has a solid cash base and no debt so it's not an issue of solvency. There are just easier places to fish right now.

Long A-Power Energy in fund and personal account

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