Top Three Reasons to Buy China MingYang Wind Energy

On November 15th, 2010, China Ming Yang Wind Power (MY) reported its third quarter results for 2010. Shares jumped as much as 14% in early trading after the earnings were released, but the stock pulled back throughout the later trading hours. If there are no material events, I consider MY to be a significantly undervalued stock. In this article, I want to provide my top three reasons to long MY following my previous article.

1. Strong Financial Highlights

Unit (RMB)	2009-Q1	2009-Q2	2009-Q3	2009-Q4	2010-Q1	2010-Q2	2010-Q3
Revenue	149576	451989	231159	339968	1008074	1310536	1485963
Gross Profit	3972	4432	25842	41722	206758	249050	248654
Diluted (loss) earnings / share	-0.32	-0.51	-0.49	-0.9	1.37	1.61	1.7

The above table represents the quarterly results of operations for the quarters in the period from March 31st, 2009 to September 30th, 2010 inclusive. Financial highlights are summarized below:

• Total revenue increased by 543% over Q3 2009, to RMB 1,486.0 million ($222.1 million).
• Gross profit increased by 862% over Q3 2009, to RMB 248.7 million ($37.2 million), which is well above the analysts’ estimates of RMB 113-142 million. Gross margin also increased to 16.7% compared to 11.2% for Q3 2009, above analysts’ estimates of 16.5%. The Q3 2010 gross margin is lower than the 19.0% in Q2 2010, due to the sales contract mix in Q3 2010, and should bounce back to over 18% in Q4 2010.
• Basic and diluted earnings per ordinary share were RMB 1.70 ($0.25) compared with basic and diluted loss per share of RMB 0.49 for the same period in 2009. The most recent analysts’ consensus for FY 2010 is in the range of 0.69 to 0.72. In fact, MY already earned an EPS of $0.69 in the first nine month of 2010 and could easily beat these estimates by several cents.

The quarterly results of operations from MY are affected by seasonal trends. Since customers typically award winning bids for wind farm projects in the first and fourth quarters of each year, the cost of sales in MY is typically higher in the second and third quarters of each year.
It is reasonable to assume MY‘s fourth quarter results will be at least as good as those from the third quarter. This assumption gives an estimate of $0.94 for 2010 EPS. Considering the current closing price of $10.60, P/E in 2010 is only 11, which suggests that MY is significantly undervalued. If we consider that secured sales orders have doubled in the past twelve months and that the sales revenues are not recognized yet, the forward P/E of MY is around 7. MY’s direct competitor, Goldwind, is trading at 15x P/E.

2. Good “Guanxi” With Chinese Governemnt

“Guanxi” literally means "relationships." In China, the right "Guanxi" makes all the difference in ensuring that a business will be successful. MY has very good “Guanxi” with government and some evidence is shown below:

• A total of 66 investment projects were reported to the Chinese central government this year, for 5.7 billion RMB, and Ming Yang received 60 million RMB to support its business.Ming Yang received 51 sets of SCD wind turbine orders from the government.
• In addition, Ming Yang has signed offshore wind farm development agreements with the government of Rudong county, Jiangsu Province, and two new energy subsidiaries of China Huadian Corporation ("Huadian") and China Huaneng Group ("Huaneng") (HNP), two of China's largest wind power developers.
• On the evening of Oct. 29, 2010, MingYang held a celebration of its successful listing on the NYSE in the United States in Beijing’s Great Hall. This is very rare for a non-state-owned company. Among the companies that were allowed to hold celebrations of listing on a major exchange in Beijing’s Great Hall are the Industrial and Commercial Bank (ICBC), and China Railway, which are state owned enterprises with good “Guanxi” with the government.
• The newly released 12th Five-Year Plan of China (2011-2015) aims to boost the development of strategic emerging industries, and Beijing will provide 4 trillion RMB ($600 billion) to financially support key emerging industries, including wind, solar, biological, new-energy automobiles, etc.

3. Coverage From Top Analysts

The joint bookrunners for MY are Morgan Stanley (MS), Merrill Lynch and Credit Suisse (CS). Now the quiet period for IPOs has ended, analysts are beginning to add coverage for this stock. During the last five days, Morgan Stanley started China Mingyang at “Overweight” with a target of $15.40. Merrill Lynch started MY at “Buy” with a target of $17 while Credit Suisse started MY at “Outperform” with a target of $16.10. The current price level offers a huge discount compared to the consensus estimate from analysts and is an optimistic sign for MY.

There are two important attributes that define value investing, according to Michael F. Price, the 271st richest person in the world and a renowned money manager who has earned a reputation for buying undervalued companies. One is patience and the other is focus; this means that one should not be distracted by global or macro forecasts. It is always easier to understand a security than an economy and using this understanding leads the way to profit.

At the current price level, MY is a significantly undervalued stock and offers a price with a discount large enough to allow for a margin of safety. The business of MY is the manufacture and sale of wind turbines and is easily understood. As a technology leader in China’s wind power equipment industry, MY will benefit from the new policies and is well positioned to capture a large share of the fast growing wind energy market in China. With strong sales figures for wind turbine orders and increased demand for wind energy in China, I believe that MY offers a fantastic investment opportunity.

Le Gaga: Veggie Lover's favorite

Le Gaga Holdings, Limited (GAGA) is one of the largest greenhouse vegetable producers and one of the fastest growing major vegetable producers in China. Gaga grows vegetables in open fields and greenhouses, and focuses on applying advanced agricultural techniques to grow safe and consistently high-quality vegetables. Over 100 varieties of vegetables are sold to wholesalers, institutional customers and supermarket chains in China and Hong Kong. Their customers include Walmart, the largest grocery retailer in the world, and the top three Hong Kong supermarket chains, Wellcome, ParknShop and Vanguard.
 

As one Chinese proverb suggests, “Hunger breeds discontent.” Agriculture has always been a very important industry in China and contributed 18.1% of China’s GDP in 2009. The largest component of the agricultural industry is farming, contributing 47.7% of the sector’s output, according to Frost & Sullivan. The farming industry in China includes the farming of vegetables, grain, fruit, tea, cotton and other crops.

China is the largest global producer of vegetables by volume. In 2009, China’s vegetable production reached RMB 875.8 billion, and this amount is expected to increase to RMB 1,286.5 billion in 2014. China’s large vegetable production output is due to the availability of arable lands. Vegetables are indispensable ingredients in Chinese cuisine, and China has consistently high vegetable consumption. The idea of a vegetarian diet is stressed by China’s traditional religions, such as Taoism and Buddhism, and welcomed by the Chinese people.
 

Over the past four years, vegetable prices have steadily risen in China and the trends are expected to continue. For example, the wholesale price of cabbage is 10 times more expensive now than it was in 2009.  Since October, 2010, the price of cabbage has gone up nearly 40% within only ten days in Shouguang, Shangdong Province, China’s largest vegetable distributor. Very recently, the KimChi Crisis in South Korea became the catalyst to boost the price of cabbage in China.
 

“In order to obtain a good profit, the key is to develop planting plans," said Mr.  Ma Chengrong, CEO of GAGA, during an interview with financial media: GAGA has developed an effective and comprehensive database to store sales, seed, and vegetable production information in target markets and accumulated valuable proprietary knowledge through years of research and development. A strong brand has been built on the superior quality and safety of GAGA’s produce and the reliability of their supply.
 

The table below shows the operation data for GAGA between 2008 and 2010.

	2008	2009	2010	Unit
Total arable land area	17103	16525	18850	Mu
Greenhouse Land Area/Total Arable Land area	15.60%	18.90%	23.40%
Total production output	57085	69240	98076	Tonnes
Production Yield	3.6	3.9	5.4	Tonnes/Mu
Revenue Per Mu	9611	11167	15497	RMB

As we can see from the above table, the greenhouse land area had grown rapidly to cover 23.4% of total arable land area. The revenue per mu also increased significantly, changing from 9611 RMB to 15497 RMB, representing a CAGR of 17.3%.
 

The latest SEC filing also shows that the company’s revenue had increased 35% year over year to 280 million RMB ($41 million) and profit for the year soared 79% to 110 million RMB ($16.3 million).
 

Agriculture is supported by China’s national policy and the growth of the domestic vegetable market is very large. With the continuous improvement of quality of life of ordinary people, the demand for high-quality brand of vegetables will also increase and offer a fantastic return for the GAGA shareholders.
 

The double benefit of GAGA is of course the stronger Chinese Yuan. The revenues and costs in GAGA are mostly denominated in the Renminbi, and a significant portion of financial assets are also denominated in the Renminbi. According to a note issued by Auriga this week, total scale of Yuan appreciation is estimated to be between 25% and 40% in five years. Those picking U.S.-listed Chinese stocks that are focused on domestic consumption, such as GAGA in the agriculture industry, will be generously rewarded. In the short term, I expect GAGA to reach $13-15 and $20-22 in the next two years.