Key Takeaways:

Xinjiang Goldwind has announced a new tie-up worth nearly $3 billion with the city of Wenzhou involving deep-sea wind power
Move will allow the company to develop technology in a major new emerging area, and also help it diversify geographically beyond its controversial home base

By Doug Young

Buckle up for some deep-sea fishing!

Wind energy equipment maker Xinjiang Goldwind Science & Technology Co. Ltd. (OTC:XJNGF) has just announced a massive new tie-up worth nearly 19 billion yuan ($3 billion) that will see it develop a major deep-sea wind power base with the affluent coastal city of Wenzhou in East China’s Zhejiang province.

Most offshore wind power to date has been in relatively shallow waters where generation towers can be anchored to the ocean floor, much like traditional onshore generators. But this newer form uses floating equipment to house such generators, providing more flexibility but also extra technical challenges.

Goldwind is hoping the massive new investment can breathe some wind back into its stock, which now trades near a 52-week low and is quite undervalued compared with its global peers. Investors were upbeat on the latest development, with the company’s Hong Kong- and Shenzhen-listed shares rising 4.6% and 2.1%, respectively, in early Thursday trade.

Its status as a world-class wind power equipment maker has helped Goldwind attract a number of major global investors in recent years. Many of those have increased their holdings in the company over the last six months, led by fund house giant BlackRock, which has built up its position to nearly 23% of Goldwind’s Hong Kong shares from a previous 21% over the last six months. Citigroup and Singaporean wealth fund GIC have also boosted their positions over that period, though JPMorgan has sold down its stake.

The bulls could be attracted by Goldwind’s valuation that looks quite weak at the moment. The company currently trades at a forward price-to-earnings (P/E) ratio of just 10 for its Hong Kong-listed shares, and a slightly better 14 for its Shenzhen shares. Those are far below the 27 for Canadian rival TransAlta Renewables (OTC:TRSWF) and a sky-high 128 for Denmark’s Vestas (OTC:VWDRY). Even smaller domestic rival Ming Yang (601615.SH) trades at a higher forward P/E of 16.

We’ll explore shortly why investors aren’t so bullish on Goldwind these days. But first we’ll review the details from the company’s new blockbuster tie-up with the city of Wenzhou, one of China’s lesser-known wealthy metropolises that is famous for its entrepreneurial spirit.

The five-year strategic framework agreement with the city is divided into two main parts. The larger of those will see Goldwind and Wenzhou’s Oujiangkou Industrial Cluster Zone Management Committee develop a deep-sea offshore wind power base with total investment of 16.2 billion yuan, according to a company filing to the Hong Kong Stock Exchange late on Wednesday.

That project will be divided into two phases, the first involving construction of an R&D headquarters as well as manufacturing and export bases for deep-sea wind floating technology. That first phase will involve 5.2 billion yuan in investment, with Goldwind providing less than 2 billion yuan.

The second part of the deal will see Goldwind team up with Wenzhou’s Dongtou district to establish a “deep-sea marine engineering equipment manufacturing and services industry cluster.” That will involve an investment of 2.6 billion yuan, all from Goldwind. The two projects are part of Wenzhou’s larger plans to build 12 GW worth of capacity powered by offshore wind and tidal flat solar energy.

Leaving Xinjiang

This particular plan has two interesting elements, and looks somewhat similar to another major investmentworth more than $5 billion announced last December by solar panel materials maker Daqo New Energy (NYSE:DQ) in the Inner Mongolia city of Baotou. Both Goldwind and Daqo are global leaders in their respective new energy categories, and both are based in western China’s Xinjiang region.

The Xinjiang factor has become a lighting rod for controversy lately due to Western allegations of rights abuses – something China has repeatedly denied. The U.S. even went so far as to ban imports from Daqo last year, though the company said the move would have minimal impact since it has very few U.S.-based customers.

Goldwind has yet to fall afoul of the U.S. in that regard, but a similar ban is always a possibility. The company got about 12% of its 50.4 billion yuan in revenue last year from overseas markets, which included the U.S., Australia and Germany, according to its latest financials for 2021.

Both Daqo’s and now Goldwind’s new investments are outside of Xinjiang, suggesting both companies realize the political risk of manufacturing in their home area and are taking steps to mitigate that.

The second interesting thing about Goldwind’s new investment is that it comes after China has officially phased out all central government subsidies for wind power. Onshore wind power subsidies were phased out first, and offshore subsidies officially ended at the end of last year. That means that going forward, wind farm developers won’t get any special central government support. In that kind of environment, companies like Goldwind may need to look increasingly to wealthy local government sources to fund this kind of massive new project.

Goldwind could certainly use the new business. Despite a surge in orders from new projects taking advantage of the last year for offshore wind farm subsidies, Goldwind’s overall revenue actually fell by 10% last year from 2020. Still, the company’s gross profit margin improved notably for the year to 22.2% from 17.2% in 2020, as it sold more large wind turbines that typically carry higher margins. As a result, its profit last year rose 18% to 3.5 billion yuan from 3 billion yuan in 2020.

At the end of the day, this new investment will cost Goldwind a pretty penny, or as much as 4.5 billion yuan in the first phase, to be precise. But that money could be well spent if it achieves the dual purposes of helping the company to diversify geographically and also obtain government support to develop cutting-edge deep-sea wind generation technology. Only time will tell if the investment will pay off in terms of new revenue and profits. But if you believe that it might, then the stock could look quite attractive at its current valuation.

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