Major Stakeholder’s Big Demands Send Chill Through Goldwind’s Stock

Wind power equipment maker’s share plunge after it discloses major new business from Three Gorges New Energy, which could divert orders from more profitable customers   

Key takeaways:

• Xinjiang Goldwind’s ties to major stakeholder and customer Three Gorges New Energy are likely to grow as China moves aggressively to install more renewable power
• Goldwind’s shares could trade at a discount to larger peers due to lower profitability of business from Three Gorges New Energy

By Doug Young

When is massive new business not necessarily a good thing?

If you’re wind power specialist Xinjiang Goldwind Science & Technology Co. Ltd. (2208.HK; 002202.SZ), the answer is when that unexpected new business comes from a single connected customer on a mission to curry favor with Beijing. In this case the connected customer is China Three Gorges New Energy, the new energy arm of the operator of the country’s massive Three Gorges Dam and one of Goldwind’s largest shareholders.

This particular tale has a number of lessons for investors, including the risks faced by companies that take on such massive state-run entities as investors. In this case Three Gorges New Energy owns about 16% of Goldwind, meaning Goldwind can hardly afford to alienate an entity that is at once one of its largest stakeholders and also an important customer.

Having such a major strategic stakeholder is a bit of a double-edged sword in any situation. On the one hand business from such a stakeholder can provide a steady revenue stream. But on the other hand, such a customer can use its position to sometimes make unreasonable demands. And when that stakeholder is a big state-owned enterprise in a typical hurry to help Beijing meet its objectives, a company like Goldwind can hardly say no.

We’ll review the specifics of what has just happened shortly, but the aftermath was clear in the company’s formerly highflying stock. Goldwind’s Hong Kong-listed shares plunged 7.4% on Monday, while its Shenzhen-listed shares fell by a smaller but still sizable 3.8%. Shares in both markets initially fell more on Tuesday, but reversed and were up more than 1% late in the morning session.

Since cresting in late March, Goldwind’s Hong Kong shares have lost about 15% of their value, while the Shenzhen shares are down by about 11.5%. Interestingly, despite the larger declines in Hong Kong, Goldwind’s Hong Kong shares still trade at a higher price-to-earnings (PE) ratio than their Shenzhen counterparts. The former ratio now stands at about 24, versus 19 for the latter.

A big reason for that difference could be the huge amount of interest in the company by major global investors, including JPMorgan, Morgan Stanley and Citigroup, as well as major U.S. fund house BlackRock. Those investors all have major positions in Goldwind’s Hong Kong-listed stock, which has probably boosted that listing’s PE. But it also means those shares could come under further pressure if the big names get spooked by the latest news and decide to sell down their positions.

All that said, let’s read into the latest news on the company, contained in an announcement that was released on Monday after markets closed. In that announcement, Goldwind said it was making major upward adjustments to annual caps on sales of its core wind power equipment and related services under a framework agreement with Three Gorges New Energy.

Goldwind said it would more than double the agreement’s annual cap this year to 8.5 billion yuan ($1.3 billion) from a previous 4.5 billion yuan. It proposed an even larger increase in the cap for wind power services, raising the figure to 690 million yuan from a previous 200 million yuan.

The company recently reported 2020 revenue of 56 billion yuan for all 2020, with Three Gorges New Energy accounting for about 4.2 billion yuan of that, or about 7.5% of the total.

Aggressive Targets

The sudden increase in Three Gorges orders is related to China’s aggressive push to get more energy from renewable sources, which has benefitted Goldwind and its global peers tremendously in the last few years. The rush to build more renewable energy capacity received even more emphasis in the country’s recently announced Five Year Plan that runs from 2021 to 2025.

Stepping up to help Beijing to meet its aggressive objectives, Three Gorges New Energy has rolled out its own new plan to install 15 gigawatts of new clean energy capacity annually for the next few years, according to Goldwind. A good portion of that is likely to be wind power, and Goldwind will almost certainly be the main equipment supplier for such projects.

In this case, another part behind the surge in orders owes to bureaucratic deadlines.

Specifically, Goldwind notes that Three Gorges New Energy is rushing to finish building previously approved ocean-based wind power projects by the end of this year. The year-end deadline is inflexible, since any such projects that aren’t finished and connected to the grid by then won’t be eligible for a subsidy in the form of higher state-set prices they can charge for the power.

Goldwind is careful to point out it considers Three Gorges’ request to sharply boost its orders “fair and reasonable, entered into on normal commercial terms in the ordinary course of business.” But the unstated implications are clear: When your biggest customer and major stakeholder tells you to give it more business, you can’t really say no.

As one of Goldwind’s largest customers, Three Gorges New Energy probably receives sizable discounts for its purchases. Thus this kind of sharp boost in its orders will inevitably eat into Goldwind’s margins for the foreseeable future, and will probably force it to reject more profitable business from smaller clients as its capacity gets strained.

In terms of valuation, Goldwind’s Hong Kong and Shenzhen-listed shares, at PEs of 24 and 19, respectively, now looking relatively cheap compared to global leader Vestas (VWS.DE), which trades at a ratio of 42. Perhaps that big difference could be called the “China discount” due to Goldwind’s strong ties to a major state-owned entity. Whether that discount grows or narrows in the months ahead could depend on how the big Western investors view this strong connection that looks set to grow even stronger in the years ahead.

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