The installed capacity of the wind power industry continues to grow. Following a 1.1-fold increase in stock prices on average in 2013, the stock prices of the 6 wind power companies we cover dropped by an average of 11% in the first half of 2014, mainly due to the sell-off by investors after the lucrative profits and the impact of weak wind resources on wind power operations in the first half of the year. The short-term profit performance of the business will cause pressure. Despite fluctuating wind resources, we see continued growth in wind power capacity driving industry earnings growth. Against this backdrop, we believe that leading wind turbine seller Goldwind (2208 HK, BUY) will see more solid growth in the next 1-2 years.

 

Spotlight: Steady Wind Power Installations Coming Soon

 

In the first five months of 2014, the total newly installed wind power capacity in China was 4.05 GW, a year-on-year increase of 18%. The domestic wind power public bidding capacity reached 4.5 GW in 2Q, adding to 7 GW in 1Q, the total tendered capacity in the first half of this year increased by 30% YoY to 11.5 GW.

 

Although the national wind power installed capacity plan in 2014 was the same as last year at 18 GW, we believe that with the improvement in the financial situation of wind power operators and the improvement of the fundamentals of the wind power industry, including grid connection and power curtailment issues, the actual installed capacity will be realized in 2013. After 15 GW, 14 years are quite likely to complete the industry target. The top three wind power operators, which own about 30% of domestic wind power installed capacity, have a total installed capacity target of more than 20% year-on-year growth this year, so the wind power industry may even exceed the set new installed capacity target in 2014. Despite the time lag between wind turbine bidding and final product delivery, the gratifying bidding volume supports our judgment that new wind power installed capacity is expected to grow by 20-30% yoy to 18-20 GW throughout the year.

 

We expect Goldwind to maintain a market share of about 20% in 2014, with wind turbine shipments reaching 3.4-3.6 GW. Goldwind has the world's second-largest wind turbine market share, with about 10.3%, second only to the 13.2% share of Vestas, the world's largest wind turbine manufacturer. In China, Goldwind is undoubtedly the leader in wind turbine manufacturing, and its leading market share of 23.3% is more than double that of United Power, the second largest wind turbine manufacturer in China.

 

Goldwind's gross profit margin in 2013 rebounded by 5.9 percentage points year-on-year to 20.1%, mainly due to the stabilization of product prices after the continuous decline in the past 2-3 years and the reduction of production costs of its core wind turbine manufacturing business. Although the average selling price of wind turbines for which the company will recognize revenue in 2014 will be roughly the same as last year, we believe that due to the company's scale effect and effective cost-cutting measures (including outsourcing and the use of cheaper raw materials on the premise of ensuring the quality of wind turbines) Driven, the company's gross profit margin is expected to further expand. The room for further growth of the company's gross profit margin comes from the increase in the proportion of revenue obtained from the company's wind farm operations with higher profit margins. We expect the company's recurring profit to achieve a CAGR of around 40% in 2013-16.

 

Although weak wind resources may drag down the earnings performance of wind power operators in the first half of the year, we believe that the growth of installed capacity in the second half of this year and in 2015 will drive the company's future profit growth. We believe that companies with strong balance sheets and cash flow will gain a larger market share, with installed capacity growth expected to outpace the industry average of 2.5x growth from 78 GW in 2013 to 200 GW in 2020. Longyuan Power (0916 HK, BUY) and Xintian Green Energy (0956 HK, BUY) are still our top picks in the industry due to more stable balance sheet. Huadian Fuxin (0816 HK, BUY) is another good choice due to its diversified clean energy asset portfolio including wind power, hydropower, nuclear power, etc., which can mitigate the negative impact of low wind speed.