Goldwind posted disappointed FY19 results, as net profit read only RMB2,109mn down 32.9% YoY. We think the Company was struggling in a booming wind installation market, which led to a mismatch between tightened material supply with increasing costs and squeezing ASP due to pricing competition. WTG GPM showed improvement in 2H19, raising FY19 GPM to 12.5% from an extreme low of 11.3% in 1H19, but WTG warranty provision rate had a substantial increase of 2.3ppt YoY. Mgmt. expects GPM to increase 2-3ppt on improving ASP in 2020. As per our calculation, however, WTG GPM need to rebound to at least 15.7% to drive earnings growth. We cut FY20/21E EPS by 38.1/4.1%, and cut TP by 36% to HK$7.70. Downgrade to HOLD.
- Strong WTG shipment enhanced leading position. WTG shipment reached 8,171MW, far better than our estimate, while GPM suffered another squeeze by 6.3ppt to 12.5%. Margin squeeze was mainly driven by 6.6% decline in ASP, and we estimate unit costs exhibited slight increase of 0.6%. According to mgmt., GWD sustained its leading market share of 28.0% in China, but strong sales didn’t help the Company to earn more. Net profit was RMB2,109mn,down 32.9%, first time decline from 2012.
- Heads up for warranty provision. We’ve observe a significant growth in selling and distribution expense in FY19, driven by substantial increase in warranty provision ratio. Mgmt. explained it was due to precaution treatment as GWD launched more new WTG models for both onshore and offshore market. As GWD will have WTG sales shift towards new 2.5/3.0s series and deliver more offshore turbine, we expect the provision rate to remain high and to cause earnings pressures (see Figure 2 for provision details).
- 15.7% WTG GPM a critical line. We think WTG GPM at 15.7% is a critical line to cover major expenses, including 1) selling and distribution at 7.7%; 2) admin expenses at 6.5%; and 3) other expense at 1.5%. Mgmt. expects GPM to improve by 2-3ppt in 2020 as ASP pressure relieves from low price order. However, due to thrilling downstream demand and supply disruption caused by COVID-19, we remain cautious on WTG margin improvement. Other than that, we think GWD is also facing product delivery risks due to potential shutdown of global supply chain.
- Cycle bottom may last long in 2020/21. By launching state of the art technologies and comprehensive customer services, we do think GWD is on track to a recovery, but is now facing challenge and dragged to a slower pace. We cut FY20/21E EPS by 38.1/4.1%. Our TP is trimmed by 36% to HK$7.70 based on 10.6x FY20 P/E. Downgrade to HOLD.
