AMSC faces ill winds on Sinovel setback

By A. Ananthalakshmi

BANGALORE (Reuters) – American Superconductor could be forced to cut production after Sinovel, its largest customer and China’s top wind turbine maker, refused to accept shipments, raising concerns of slowing growth in the world’s largest wind energy market and wiping out nearly half of the U.S. company’s market value.

The loss of business from Sinovel (601558.SS: Quote, Profile, Research), which accounts for nearly three quarters of American Superconductor’s (AMSC.O: Quote, Profile, Research) revenue, could also prompt the wind turbine parts maker to raise more capital to complete a recently announced acquisition and push it back to losses.

Late on Tuesday, AMSC said Sinovel — the world’s third largest wind turbine maker — would not accept shipments till it reduced its inventory levels and refused to make payments for some shipments made in this fiscal year.

This raises the twin specter of slowing growth in China’s wind market and supply exceeding demand.

New installed capacity in China doubled every year between 2005 and 2009, but is expected to grow at a slower rate for the next few years. Chinese manufacturers accounted for four of the top 10 in the world in 2010.

A big chunk of the capacity — 26 percent — is not connected to the grid, and prices of turbines are also falling because supply is growing faster than demand, according to UniCredit analysts.

Raymond James analyst Pavel Molchanov said it looks like Sinovel’s own production has ground to a halt and that is working its way down to its supplier base.

“While obviously very frustrating, we see this as indicative of a broader trend — a large number of Chinese wind farms awaiting grid connection — rather than a deliberate slap in the face to AMSC,” Molchanov said.

AMSC and Sinovel did not immediately respond to e-mails and calls requesting comment.

With the slump in demand from Sinovel, inventories have been creeping up alarmingly for AMSC.

Citigroup analyst Timothy Arcuri estimates AMSC has about 2.5-3 gigawatts of excess inventory of products meant for Sinovel.

“It will take about six months to work through this inventory before AMSC’s production would start to return for a more normalized level,” Arcuri said.

The analyst, who slashed his price target on the stock to $17 from $25, also said AMSC would have to raise about $100-$200 million to complete the buyout of a Finnish rival.

In March, AMSC said it would buy The Switch Engineering Oy for $266 million — $79 million of which would be paid in stock.

But with the drop in AMSC’s stock value on Wednesday, it would require more shares to complete the deal, said Robert W Baird analyst Michael Horwitz, who halved his price target on the stock to $11.

AMSC’s stock slumped as much as 49.5 percent to a year-low of $12.54 on Nasdaq on high volumes. Through Tuesday, the stock fell 23 percent in the last six months.

CUSTOMER CONCENTRATION FINALLY BITES

For months, analysts have warned that AMSC’s overbearing dependence on Sinovel is a huge risk.

AMSC, which benefited from an explosive growth in China’s wind turbine market, has been trying to diversify to other markets and customers but not with any great success.

The company’s sales to Sinovel accounted for 73 percent of the company’s revenue in the third quarter, down only slightly from the 79 percent in the second quarter.

AMSC posted its first-ever profit in fiscal 2009. But on Tuesday it warned of a fourth-quarter loss and slashed its full-year revenue outlook — the second time in less than a month.

Ardour Capital analyst JinMing Liu said Sinovel’s refusal could mean it was looking for an alternative supplier, or was putting pressure on AMSC to cut its product prices.

(Reporting by A. Ananthalakshmi in Bangalore; additional reporting by Megha Mandavia; Editing by Maju Samuel and Saumyadeb Chakrabarty)

AMSC faces ill winds on Sinovel setback