American Superconductor – You Have To Read it To Believe It!!!

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News Flash — Update — June 13, 2008

In behavior normally reserved for penny stock promotions, the CEO of AMSC sold $11 million in stock — around 250,000 shares — most of which was on the day of AMSC’s questionable press release. Selling into this volume, yet before release of the 8-K with the contract details, is deceptive business practice at its worst.
The questions about this deal have been best pointed out in numerous analyst reports, who raise the obvious doubts about the viability of this contract.

  • Sinovel’s (AMSC’s Chinese counterparty) willingness to commit to a multi-year forward-year, fixed price deal — completely inconsistent with how Chinese companies are doing business with foreign suppliers. Citron notes that at least three large-scale industrial Chinese competitors will be mass-producing electrical subsystems for wind turbines by 2009. AMSC has historically won no more than a “right of refusal” to supply components on a competitive basis when it licensed a design. This design is sourced from competitor Furhlander.
  • How Sinovel can absorb 7500 units of electrical components (which exceeds by a factor of 3 Sinove’ls projected capacity to produce turbines) when it doesn’t have supply agreements on the other turbine components, such as blades, towers, bearings, and hubs all of which are seriously supply constrained.
  • There’s nothing in this agreement that compels Sinovel’s specific performance, or stipulates cancellation penalties, yet explicitly grants Sinovel the right to change which sizes of units they are buying. This appears to transfer all the execution risk to AMSC, leaving us to wonder whether it is in fact a purchase order by FASB rules, or in reality just a MOU.
  • Sinovel’s inability to finance the $10 billion project pricetag of this massive number of turbines. (Citron understands that Sinovel’s parent Dalian may have financial issues of its own, and may be preening for an IPO to raise capital.)
  • No mention of the fact that 17% of the blockbuster purchase order is a VAT tax – a fact conveniently left out of the PR – and overlooked by analysts — that will surely put their pricing model on a diet.

All of which makes us wonder: How long will AMSC benefit by the street’s misperception that it is even in the “wind turbine” manufacturing business, much less a “pure play”? In fact, AMSC manufactures commodity electrical components for wind systems, which comprise no more than about 5% of completed wind farm projects, are not in short supply. It also licenses turbine designs, which numerous Chinese competitors are moving with remarkable speed to design independently of foreign licensors.

Cautious investing to all.


06/11/2008    

“If You Add to The Truth, You Subtract From It”… The Talmud

It is no secret that Citron Research is skeptical of American Superconductor. The company has now crossed the line to ridiculous. They have taken a small customer in Sinovel and added so much nonsense that they have subtracted any corporate credibility that is still left from a company that has done nothing but burn through investors money. It is our opinion that anyone on Wall Street would have to be deaf, dumb and blind not to realize the complete lunacy of American Superconductor’s most recent press release.

As management continues to sell stock at a furious pace, American Superconductor announced a $450 million order from Sinovel that is supposed to be used to support more than 10 Gigawatts of power by the end of 2011. This is on top of their current $100+ million “backlog” to the same customer.

To explain how crazy this press release was, Citron refers to the largest wind power purchase order in the world, which was just publicly announced by T. Boone Pickens. Pickens, with General Electric, plans to build a farm for 4,000 megawatts (4 Gw) that is planned in 4 phases for ultimate completion in 2014. This project has been publicized all around the world in every language imaginable.

http://www.msnbc.msn.com/id/19231397/
http://www.cnn.com/2008/US/05/19/pickens.qa/
http://www.usatoday.com/tech/science/environment/2008-05-15-pickens-wind-turbines_N.htm

Now we are supposed to believe that American Superconductor just received an order for 10 Gw to be delivered by 2011. That is 2 ½ times the size of the Pickens project in a time span that is half the time. Yet, nowhere in any language do we see an order awarded to Sinovel that would support anything close to this.

This order cannot live in a vacuum. Nowhere can we read of the: funding, the customers, or suppliers of other components that are essential to wind turbines, such as gearboxes, generators, blades, bearings, cast hubs or towers, which comprise 80%-90% of the cost of a wind unit. We are to believe that every other customer involved in this deal has decided not to put out any press.

AN ORDER OF THIS SIZE WOULD BE THE LARGEST ORDER FOR WINDPOWER IN THE HISTORY OF THE WORLD …. BUT WE CAN READ ABOUT IT ONLY IN ONE PLACE: AN AMSC PRESS RELEASE.

Not to carry on but let’s look at how ridiculous this really is. General Electric is one of the top 5 largest companies in the world. When they received an order for 1,000 MW of wind power they put out a PR.

http://www.genewscenter.com/Content/Detail.asp?ReleaseID=3601&NewsAreaID=2&MenuSearchCategoryID=

Sinovel is a small company that did not even put out a pr when they got an order more than 10x that size…guess they didn’t want anyone to get “wind of it”.

The Pickens project is supposed to cost up to $12 billion for all 4 Gw, therefore using the same math this Sinovel project would cost up to $30 billion in the next 3 years. Where is the financing for $30 billion in wind projects? Is it contingent on anything? What a great job Sinovel has done at keeping this secret.

Let’s Get One Thing Straight.

American Superconductor DOES NOT manufacture wind turbines. They make a power controller and electrical components that are commodities in the wind power business. They are low margin items in a highly competitive industry, and among the only components in wind turbines not facing significant logistics and supply constraints. So any order for electrical components from AMSC should be matched with orders for essential components necessary to complete wind turbine projects.

ANALYZING THE PR

Let us look at the headline of this tremendous pr, “AMSC receives $450 million follow on order from China’s Sinovel Wind.”

http://biz.yahoo.com/bw/080610/20080610005242.html?.v=1

First thing we notice is the company refers to their customer as Sinovel Wind. That is funny because the real name of the customer is Sinovel Windtec. http://www.sinovel.com/

The PR mentions no delivery schedule, no minimums, no cancellation fees. What happens if AMSC makes all of these power controllers and then Sinovel decides in two years they can buy them cheaper in China? Considering the prices of these systems is not going up and soon they will be manufactured by local Chinese companies, shouldn’t that be a concern for AMSC?

*notice on the bottom of the Sinovel website they admit themselves that they have a maximum capacity of 1000 units…strange considering today’s PR announced orders to “support” 9,0000 units. Better yet, on the bottom left of the website written in Chinese (the blue writing) it says “website under construction”. If you are going to build the biggest wind system in the world how about first making a website.

Yes, the customer shares the same name as the AMSC subsidiary Windtec. As suggested by Citron in the past, this is somehow a related party transaction as these companies are joint ventured. That has not only been mentioned by Citron, but their joint venture has also been commented on in industry press. In an article in Modern Power Systems only two weeks ago referred to the Sinovel Windtec as a joint venture 3x in the same article. Something just isn’t right.

So if they are selling 9,000 systems to Sinovel, who is their next largest customer? This is a tie — there are two customers who have each bought 20 systems each.

http://phx.corporate-ir.net/phoenix.zhtml?c=86422&p=irol-newsArticle_Print&ID=1120095&highlight

It’s in the numbers … NOT.

A critical glance at AMSC’s 10-K leaves more questions than answers, as every accounting reg flag jumps out.

http://209.85.173.104/search?q=cache:fQMwQt8o-NcJ:www6.lexisnexis.com/publisher/EndUser%3FAction%3DUserDisplayFullDocument%26orgId%3D574%26topicId%3D100016870%26docId%3Dl:796257890%26start%3D19

$15.5 million in “unbilled receivables”

Zero allowance for doubtful accounts

And our favorite is the recording of revenue on a cost of completion basis.

Between the unusual gross margins and issues with the warranty accrual, the 10-K deserves its own report.

A Closer look at Sinovel

An examination of Sinovel’s finances and the AMSC’s acquisition of Windtec make it very clear how unlikely it is that a multi-billion dollar wind turbine deal (an arms-length one at that) has grown out of the ground in less than 18 months.

As of Dec 31, 2006, these numbers appear in Sinovel’s D&B:

Sinovel DNB (PDF)

Balance Sheet Data (USD equiv) (USD equiv)
Cash 6.28 million  
Accounts Receivable/Payable 4.76 million 2.36 million
Other Receivables / Payable 8.16 million 7.63 million
Fixed Assets 32.97 million  
Construction in Progress 23.63 million  
Other liabilities   76.58 million
Total Equity 2.85 million  

 

Profit and Loss Data (USD equiv)
Sales 26.93 million
Cost of Sales 22.83 million
Profit 48.9 thousand
Taxes 0
Profit net of Taxes 48.9 thousand

In early 2007, AMSC acquired Windtec, and by September 2007, Sinovel had placed orders worth $90 million with AMSC. Assuming that the electrical subsystem components supplied by AMSC comprise 5% of completed wind turbine installations, this would have represented $1.8 billion in deliverable wind turbine commitments.

Investors are due an explanation as to how this bonanza comes into being.

  • Is there an undisclosed financial relationship between Sinovel and Windtec, which requires restating all these transactions?
  • Are these fungible orders according to US GAAP – where are the funds necessary to pay for this magnitude of purchase?
  • What about announcement of the projects – which would clearly be the world’s largest wind projects, including location and funding disclosures and timeframes?
  • Are firm commitments in place for the blades, bearings, gearboxes, castings/hubs, and towers, all supply constrained components, which are necessary to fulfill these contracts?
Insider sales

A relentless drumbeat of insider share sales – over 500,000 shares in just the last 60 days – completes the picture. CEO, Directors, CTO … if things are so great, it sure makes you wonder why all the officers are running to the bank.

Cautious Investing To All