20 September 2019

The ill winds that sent Sinovel from hero to zero

Former Sinovel Wind Group (601558.CN) chairman Han Junliang {韓俊良} could not have been more confident in 2011 when he announced to investors that the group would become the world’s biggest player in the wind industry by 2015.

Sinovel was hitting a peak as the nation’s biggest maker of wind turbines, having brought in more than 20.3 billion yuan (US$3.3 billion) in revenue and 1.9 billion yuan in profit in 2010.

But that was three years ago and Sinovel is a whisper of its former self despite an industry upturn. The problem? Sinovel turned out to be an investor’s worst nightmare, entangled in a web of fraudulent accounting practices, lawsuits, regulatory investigations and product quality issues.

Sinovel founder Han gained the nickname “the wind power maniac” for his trademark aggressive style. Under his leadership, the company caught the wind of an industry boom between 2005 and 2009, during which time government support spawned rapid expansion in new projects.

But sales sank just as quickly as they rose, with the top line collapsing over 90 percent in just three years to just 2 billion yuan in the first nine months of last year. Sinovel has warned of an expected net loss of 3 billion yuan for those three quarters.

Worse still, regulators are investigating the group for the second time in seven months. No details have been released but the authorities are believed to be looking into whether the group cooked its books. Han resigned as chairman last March. 

The first time Sinovel came to regulatory attention, the company admitted it had inflated sales figures and net profit, sending top managers heading for the exits. The U.S. Justice Department also filed criminal charges against Sinovel for trade-secrets theft and criminal copyright infringement of software source codes of its US supplier.

Once number one, Sinovel is now seventh in the country’s league of turbine manufacturers, according to the Chinese Wind Energy Association. The company puts its disappointing results down to a range of factors: delays in orders and receivables, low installation capacity, and high service and maintenance fees. But that is only part of the picture. 

Thanks to improved grid connections and clearer subsidies, fewer wind farms are idle in China. That means most players are doing a lot better. Archrival and industry leader Xinjiang Goldwind Science & Technology (02208.HK) made a 428 million yuan profit last year, jumping 179 percent from a year earlier.

The industry has also been buoyed by the 18 gigawatt installation target set by the National Energy Administration this year.

So why is Sinovel doing so badly? Some of the key reasons are its tarnished reputation and questionable operational approach.

The company clearly had a hard time wooing new customers with a shadow over its accounts and the ongoing investigation by the China Securities Regulatory Commission. Given the choice, buyers would prefer to deal with a more trustworthy counterparty.

Product quality has been another big hurdle. Customers are reportedly holding back payments due to the poor performance of Sinovel turbines, making repeat or new business that much less likely.

The root of these problems can be traced back to the Han dynasty, when Sinovel went on an investment and expansion spree without much thought to costs and the risk of a market decline. When the downturn hit, the group was weighed down by overcapacity. Depreciation expenses added to the burden.

Southern Weekly quoted an unnamed analyst from Guotai Junan as saying that Sinovel’s unsold inventories could be worth billions of yuan. Former Sinovel chairman Wei Wenyuan {尉文淵} said last year that the utilization rate of its factories was no higher than 20-30 percent, with receivables amounting to as much as 10 billion yuan.

Sinovel has also failed to really diversify from making wind turbines. Running wind farms, for example, is more profitable than making turbines, which is one reason why Goldwind has been doing much better. Goldwind president Wang Haibo said the return on wind turbine assets was just a little more than 1 percent last year, while the figure for wind farms was 15 percent. The profit margin of farms is also 10 times higher than the manufacturing side, the National Business Daily quoted Wang as saying.

About 84 percent of Sinovel’s market value has evaporated since the company went public in 2011 and the end to the downward spiral is still nowhere in sight.

– Contact the writer at [email protected]


EJ Insight writer