Monday 7 December 2009

Investment: What's after Solar? Wind Power

What's after Solar? Wind Power

As some of you might still remember that I have written 3 articles (part 1, part 2, part 3) on why I seriously consider solar power to be a better alternative than wind power, but that doesn't mean I do not admire the power of the wind.

Support for the wind power industry

On the 26th November, Beijing announced that it aimed to boost the country's energy efficiency as part of its contribution to the fight against global warming. China pledged to cut carbon dioxide (CO2) emissions per unit of gross domestic product by between 40% and 45% by 2020 compared with 2005 levels. [1] And what do you think will contribute to this large reduction in CO2?

Charm of Longyuan

As the IPO (international public offering) of Asia's largest wind power generator, China's Longyuan Power Group, drew to a close, locking in over HK$200 billion for its 230 times oversubscription and making its IPO this year's fourth-largest deal in terms of frozen liquidity[2], Hong Kong environmentalists finally have the channels to play a part in healing the world through investing in the largest solar and wind power companies in Asia. (Why Investing in these companies allows you to participate in saving the world?[3])

The attraction of Longyuan Power is more than obvious. Longyuan Power has charmed cornerstone investors such as the China Investment Corp. (CIC), WL Ross & Co. LLC, founded by billionaire Wilbur Ross, and companies linked to China Life Insurance Co., Bank of East Asia Ltd. Chairman David Li and Hong Kong-based asset manager Value Partners Group Ltd.[4]

Riping Fruit

But all these come nothing close to the importance of the company's fundamental, and the good news is, the fruits are riping. In simple words, since in the wind power business, constructions require a lot of starting capital, but once the facilities are installed, wind starts turning the turbines and electricity starts generating and money starts following in. Quoting from the prospectus of Longyuan, "its operating profit as a percentage of our total operating profit increased substantially from 13.3% in 2006 to 69.4% for the six months ended June 30, 2009"[5], "For the years ended December 31, 2006, 2007 and 2008 and the six months ended June 30, 2009 ...our wind power business’s operating profit accounted for 13.3%, 39.6%, 75.7% and 69.4%, respectively, of our total operating profit, and its adjusted operating margin (as defined below) amounted to 32.9%, 45.8%, 53.9%, and 56.5% during those periods."[5](page 11)

Problems faced by the wind power industry

Government has full support for this renewable energy industry so I am not worried about the future of this company at all. The only thing I am more concerned is what I have read from Discovery New, that as global warming continues to worsen, wind speed is actually slowing down across the globe[6], and if the turbines do not move, there is no power. You might think it is quite impossible for wind completely not to blow -- which is true, but in the long run, it seems that wind will keep losing its speed[7]. Solar power will not have similar problem.

Either too strong or too weak of the wind speed is not beneficial for the wind power companies. Looking carefully through the prospectus of Longyuan, you will find on page 40 that, "Currently, wind turbines will only begin to operate when wind speeds reach a certain minimum (approximately three to four meters per second), and must be disconnected when wind speeds exceed a certain maximum (approximately 20-25 meters per second). Therefore, if wind speeds are outside these limits, the electricity output from our wind farms will decrease or cease."[5] Which is another reason why I prefer solar to wind power.

Pricing of Longyuan

Some said Longyuan is offering its shares at 16 to 19 times the year 2010 Price-to-Earning ratio (PE)[8], some said 28.9 times [9], the difference is quite large, so whatever it is, there is certain risk in this investment, so the question is, how strong is your belief in your investment decision?

Hereby I leave you with the wise words of Benjamin Graham, which might have been read by Warren Buffett also,

"You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right—and that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else."

pledge -- to make a serious or formal promise to give or do something
lock in -- to make money not able to be moved / flowed around in the market
oversubscription -- The excess number of shares or bonds that investors want to buy but are not available due to high demand.
frozen liquidity -- money which is not able to be moved for a period of time
play a part in -- to help to achieve something
charm -- to attract someone or persuade someone to do something because of your charm
cornerstone investors -- investors of great importance which everything else depends on
substantially -- to a large degree
cease -- to stop something

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