Sinovel’s founding chairman Han Junliang is renowned for an ability to cultivate government connections. He once bought out all the first-class tickets on a long-haul flight to get some quality time with an official in charge of clean energy policy. Little wonder that he was so good at discerning the policy headwinds, transforming a wind turbine maker founded as recently as 2005 into an industry leader.
Sinovel was equally immaculate in timing the capital markets. Going public in Shanghai in January 2011, its Rmb9.5 billion ($1.5 billion) initial public offering was oversubscribed 40 times. Sinovel stock was priced at Rmb90 per share (still a record for China).
That gave the company a market capitalisation of close to Rmb100 billion (making it one of the top 50 listed firms). The IPO was priced at 36 times Sinovel’s 2010 net profit but local brokerages still saw value, expecting further growth in earnings.
But Sinovel’s IPO investors never got their second wind and the stock has never gone above the offer price. Far from it: as of this week, Sinovel shares were trading marginally higher than Rmb5. Rather than seeing its earnings soar, Sinovel’s net profit plummeted by more than half to Rmb775 million in 2011. Worse, the company sank Rmb582 million into the red a year later.
The bad news keeps coming. In early April Sinovel announced that it had overstated its 2011 net profit by Rmb168 million due to “accounting errors”.
What could be behind the mistake? WiC reported last year that oversupply in the wind power industry has seen Sinovel struggling with Rmb8.5 billion in unsold inventory (see WiC176).
Since then, Sinovel management has struggled to manage the crisis. Chairman Wei Wenyuan resigned on May 14, only a month after taking up the post, leaving Sinovel looking for its third boss in two months.
And last week, the China Securities Regulatory Commission (CSRC) announced a formal investigation for suspected violations of securities laws and listing rules. A couple of Chinese rating firms subsequently downgraded Sinovel’s credit rating.
“Sinovel only took two years to grow from a start-up to the country’s biggest turbine maker. And it took as much time to lose 90% of its market value,” 21CN Business Herald reports, questioning the integrity of some of the bullish pre-IPO research reports on the firm.
Sinovel’s case is a good illustration of why the CSRC has shut the primary market for nearly a year in an effort to protect retail investors. And given the flurry of probes into would-be IPO candidates and their listing sponsors (see WiC194), investors are also braced for what the CSRC’s Sinovel investigation might uncover.
In fact, only a few months after the implosion of Suntech, once the world’s biggest solar panel maker, others are wondering whether the alpha male of the wind power pack is also on verge of going under.
Sinovel owed its early success to reading the policy runes more astutely than its competitors, says Caijing Magazine.
But its undoing is related to mistakes made by the policymakers too. Underdevelopment of power grids remains a key bottleneck for China’s drive into renewable energy. Many projects still aren’t connected to the grid, meaning that a lot of wind farms just aren’t economic. “Giant wind turbines are everywhere but they never turn,” the Economic Information Daily laments.
The central authorities are still keen to wean the country off its reliance on coal-fired power and the China Electricity Council said in March that growth in wind power production last year surpassed that of coal-fired power for the first time. The state media is also trying to sound upbeat. There is no overcapacity in the wind power sector, the People’s Daily reckons, simply oversupply in wind turbine manufacturing.
It’s a nuanced verdict, albeit one that won’t be particularly reassuring for Sinovel shareholders.
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