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April 07, 2011 – Comments (7) | RELATED TICKERS: AMSC

I've been building a large cash position lately, but today I went and used some of this to buy some shares of American Superconductor.  By the start of Wednesday, AMSC's shares had fallen over 45% (from prices near $25/share to $13/share).  AMSC makes electronic components for wind turbines, with their main customer being a Chinese corporation (Sinovel, recently IPO).  Sinovel told AMSC that they would not take new orders (hich are 70% of AMSC's business), threatening the revenue and prospects of AMSC greatly.  It appears to be bouncing now from this extreme low as people buy back into the company and think about the implications of the bad news.

My take on this:

 * Sinovel stopping orders of AMSC is definitely bad and impacts revenue immediately.  If this means that Sinovel is replacing AMSC with a Chinese supplier, this will have very negative effects for a long term.  If Sinovel is only pausing on orders because of too high an inventory, this drop is greatly overstated.  

 * Wind power is set to have a good years from 2011-2012.  Looking at one of the big name companies, Vestas, revenues continue to grow and sales grew going into 2011.  The nuclear crisis in Japan now shows why wind power will continue to grow.

 * Offshore wind development is now being actively pursued.  This will open large tracts of the world to near constant energy production.  The high price of this energy will fall as offshore transmission lines are built.

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 As such, I've bought into AMSC.  If AMSC restores sales to Sinovel or finds other diversified clients in wind production (Vestas, GE... etc) than this may be a nice buy in time.

 -Rof 

 

7 Comments – Post Your Own

#1) On April 07, 2011 at 10:17 AM, SockMarket (35.76) wrote:

Rof - good blog and I'd agree with most of it. Only issue i have is

 The high price of this energy will fall as offshore transmission lines are built.

Those things take years to be built and come online. Even after that people need to switch to electric cars/busses/trains etc. which will take several more years. While it will eventually drop prices the fall almost certainly won't be during construction.

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#2) On April 07, 2011 at 10:17 AM, binve (< 20) wrote:

Hey Rof,

Nice writeup man. I agree, I am getting very interested in AMSC as well. There have been a lot of sell-offs in the alternative energy arena recently. And like you I am a long term fan of wind power generation.

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#3) On April 07, 2011 at 4:07 PM, traderbach (< 20) wrote:

I thought about buying in to AMSC several times but each time I was stopped by the thought that Sinovel & other Chinese companies would ultimately shop domestically for their hardware needs.  It seems inherent in the Chinese State Capitalism model that they will cut out non-Chinese rivals when they can to boost their own industrial muscle.  Given this model it seems inevitable that  western companies who supply hardware and rely too heavily on the Chinese market for sales will get hit. 

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#4) On April 07, 2011 at 5:01 PM, rofgile (99.41) wrote:

Oof, I don't know if I am trying to catch a falling knife, or being smart.  That's the problem with buying when others are scared - either you are using your head, or your losing your a$$!  :)

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This is interesting though - the largest investor of AMSC is gobbling up stock now.  He's a private investor named Kevin Douglas (Barron's story), and he now owns over 20% of the stock..

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 It's also interesting that the shipments were contracted with Sinovel.  I am assuming that either it would be illegal for Sinovel to just break a contract, or that there would be some penalty associated with doing that? 

 -Rof 

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#5) On April 07, 2011 at 5:14 PM, rofgile (99.41) wrote:

Here's a nice writeup on the AMSC business too.

I'm actually quite intrigued by this company.  They might also be growing their superconducting power transmission segment.  

That would provide diversity and stability to the business, but not for several years still.  

However, if AMSC isn't likely to go bankrupt, which, even with the large revenue loss posed by Sinovel's move, this may make it a good value purchase for their other lines of business. 

 -Rof 

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#6) On April 07, 2011 at 9:20 PM, TruffelPig (< 20) wrote:

Citron Research thinks AMSC is a lemon. He has some valid points in his report. I think that there is only one thing worse than having a large cash position - to invest part of that position in a potentially bancrupt company. A bargain is when one gets something good for a good price - this company doesn't appeal to me as something good. Thus, in my opinion, it might be ok to trade the company but it is probably not a good investment.

Yesterday I was contemplating too and looked into this - I am definitelt staying far away from this after some reading. Got burned once before. 

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#7) On April 10, 2011 at 1:05 AM, rofgile (99.41) wrote:

I read the citron report, and they were spot on. Yes - the company just got hosed by their major Chinese vendor.

* AMSC was overexposed to Sinovel (75% of revenues).  Now, because Sinovel is a partial government entity of China, there is no legal recourse.  

* Side-effects could also now be the loss of an acquisition deal with another wind company in Europe (Switch Engineering) for 265 million.  This was AMSC's chance to diversify wind power clients.  Evil Sinovel!  The deal was 185 million in cash, and the rest in stock.  More stock may need to be issued to make the deal now.  There is no fee if they back out of the deal, which may not be a bad option (as they could keep their cash reserves to wait out Sinovel).  

There is a lot of fear on AMSC. 

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 I like the CEO though, a guy named Greg Yurik.  He was a professor at MIT.  Lots of publications and patents.  I saw an interview with him on CNBC and he just seemed rather decent.

 He was a big researcher in High Temperature Superconducting, which is where the company started (not wind power).  Now HTS is finally being deployed by AMSC and they are 80% of the world market.  They built a small HTS setup in Long Island (about a mile or so), but a large Korean order is to build about 15 miles in 2012.  They will also build HTS in New Mexico to connect the disparate US power grids.

 I don't know if HTS (cooled by -200 liquid nitrogen) will really take off.  The advantages are: huge amounts of power transmission compared to normal lines.  Lack of power loss (superconductors have 0 power loss - quite amazing and we still have no clue as to why this is :)).  The lines go underground, which is likely lots more expensive, but not able to be damaged by storms or people.  Connecting substations using HTS does not require new substations to be built (unlike conventional power transmission).  

 The big catalyst here would be if HTS building had a decent profitability, and if we began to upgrade our power grid finally.  In that case, widespread building of HTS to connect power grids (allowing for power to be transmitted across the US, no more regional blackouts, ability of renewables in the desert to power NY city, etc) could become a big industry.  

 I am willing to bet that AMSC is not killed by Sinovel (and have invested now in AMSC).  There is a good chance that AMSC share price could go lower depending on the interactions with Sinovel (why did they go renegade?) and the future acquision of Switch (will more shares be made?).  This is a company where I might buy in tranches...

 These are my thoughts :) 

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 Rof 

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