Goldwind Science&Technology Co., Ltd. (002202) Earnings Call Transcript & Summary

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[Interpreted] Good afternoon, dear investors. Welcome to Goldwind 2019 Annual Results Briefing. I am Manager Monica Guo, the moderator today. We are very honored to having invited several company executives for joining us today. There are company President, Mr. Cao Zhigang; Company Vice President and Company Secretary, Ms. Ma Jinru, Chief Financial Officer; Mr. Liu Chunzhi; and Vice President, Mr. Li Fei.

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[Interpreted] We'll firstly introduce company's business development and performance in 2019, followed by financial results, industry outlook and company prospects. We will enter a Q&A session afterwards. My name is Stephanie [Lu]. I'm on IR team, and I will do the consecutive translation during the whole meeting today. A kind reminder to our audience, please listen carefully to operator's instruction if you intend to raise questions later.

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[Interpreted] Now let's welcome Ms. Ma Jinru to begin.

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[Interpreted] Dear investors and shareholders, unfortunately, we cannot visit you in person at this special time and choose to brief the 2019 annual results in the form of conference call. We thank you very much for your participation and kind support all along.

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[Interpreted] I'll firstly briefly introduce 2019 global wind power market. According to Bloomberg New Energy Finance data, global cumulative wind power installation has seen 21.56% CAGR since the beginning of the 21st century. By the end of 2019, total installations of global onshore and offshore wind power reached 637.4 gigawatts in total. In 2019, 53.2 gigawatt onshore wind was added, increasing 17% year-on-year. Asia Pacific region, Americas and several European countries were the most productive. Also 7.5 gigawatt offshore wind power was newly installed in 2019, with China, the United Kingdom and Germany being top three, reaching -- installing more than 1.5 gigawatt in 2019.

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[Interpreted] Slide #4 exhibits the continuous expansion of China's wind power market. In 2019, China recorded 25.74 gigawatt new grid connection, increasing 25% year-on-year. Cumulative grid-connection of wind power totaled 210 gigawatts as of the end of 2019, taking 10.4% in China's power mix. In 2019, Chinese wind power production totaled 405.7 billion kilowatt-hours, an increase of 10.9% year-on-year.

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[Interpreted] Slide 5 exhibits National Energy Administration data, stating that national average wind utilization was 2,082 hours in 2019, decreasing 13 hours relative to 2018. Wind curtailment totaled 16.9 billion kilowatt-hours in 2019, decreasing by 10.8 billion kilowatt-hours relative to 2018. National average curtailment rate was 4%, decreasing by 3 percentage points year-on-year. Wind penetration rate was 5.6% in 2019, increasing by 0.3 percentage points. According to Wind Europe, wind energy was 15% of the EU's electricity demand in 2019. Denmark has the highest share of wind in its electricity demand last year, which was 48%, followed by 33% in Ireland and 27% in Portuguese, demonstrating China's potential in further penetrating wind power.

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[Interpreted] Slide 6 shows that demonstrate -- domestic public tender totaled 65.2 gigawatts, increasing 94.6% relative to 2018, reaching a record high level. Onshore public tender totaled 49.6 gigawatts and mainly domiciled in North China. Offshore public tender totaled 15.6 gigawatts. Average bidding price was driven up by the change of demand supply dynamic as a result of acceleration of construction. Average bidding price for all types of turbines was over RMB 4,000 per kilowatt in December 2019.

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[Interpreted] The graph on the left side on Slide #7 is our important feed policies that has been published. With the arrival of grid-parity era, national policies become more market oriented. For instance, in May 2019, the NDRC announced a policy regarding feed-in tariff change in grid-parity. In 2020, the government announced policies on wind subsidies doing significant renewable power consumption guarantee mechanism as well as policies supporting to repay auction, distributed and offshore wind power projects. The graph on the right explains the gradual phaseout of feed-in tariffs. From now to 2021, on-grid tariff projects approved and connected to the grid in different time lines will decline by sequence.

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[Interpreted] Now let's move onto business review. Slide #9 lists our company's 4 major business segments and R&D advantages. Company's 2,826 R&D technicians across 7 R&D centers in the globe have dedicated to continuous research on 2S, 2.5S, 3S and 6S wind turbines. In 2019, the company released GW 155-4.5 megawatt and GW 136-4.8 megawatt turbines that are adaptable in medium to high-wind speed regions. Prototype of GW 184-6.45 megawatt turbine obtained type certificate. We've also successfully launched the prototype of GW 175-8.0 megawatt turbine. The key technology and application of large-scale, low-speed and high efficient PMDD Wind Turbine project was awarded the second prize by the 2019 National Technological Invention award. The company added 796 new domestic and foreign patent applications in 2019, and owned 2,752 authorized patents by 2019. We are also a constituent of MSCI ESG Leader index, FTSE4Good Index Series, Hang Seng Corporate Sustainability benchmark index and Hang Seng A-share Sustainable development index, CSI Sustainable 100 index, and Beautiful China ESG 100 index. As a result of corporate practices in sustainability and development in ESG, we received prestigious ESG rating results, including MSCI ESG rating A, FTSE Russell ESG rating 2.9, Hong Kong Quality Assurance Agency Sustainability rating A+, SynTao Green Finance ESG rating A-, China Alliance of Social Value Investment Sustainability Value rating A-.

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[Interpreted] Slide #10 lists our segmental results. In 2019 wind turbine manufacturing and sales recorded RMB 18.87 billion revenue, taking 75.5% out of total. Wind Farm Investment and development booked RMB 4.267 billion revenue becoming 11.2%. Revenue for Wind Power Services business totaled RMB 3.578 billion, 9.4% out of total and other business took the rest 3.9%.

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[Interpreted] Slide #11 shows steady increase of sales volume, which benefited from demand surge and product competitiveness and reached 8,171 megawatts in 2019, increasing 39.4% year-on-year. Sales volume of 2S platform turbines totaled 4,733 megawatts, an increase of 8.6% year-on-year, accounting for 57.9% out of total sales volume. 2.5S platform turbines booked 2,353 megawatt sales, an increase of 215.8% year-on-year, accounting for 28.8%. And sale volume for 3S platform and 6S platform has been increased as well.

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[Interpreted] Now let's turn to Slide #12. As of the end of 2019, company's external order backlog totaled 20.3 gigawatts, including 5.8 gigawatts of successful bid and 14.4 gigawatts of signed contract, and the structure of order backlog has seen improvement.

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[Interpreted] The map on Slide #13 tracks the company's global business road map. As of the end of 2019, company's overseas external order backlog increased by 132% year-on-year to 1,520 megawatts. Orders scatter in Vietnam, Canada, the United States, Pakistan, Chile and Australia. Overseas attributable under-construction and pipeline capacity totaled 1,277 megawatts, mainly domiciling in Argentina and Australia.

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[Interpreted] The next slide demonstrates our market-leading position. The NEF data tracks company's 8.01 gigawatt nationwide new installations, with 28% domestic market share that made us the largest OEM for 9 consecutive years. We also earned 13.6% market share with 8.25 gigawatt worldwide new installations, and we ranked among top 3 for many consecutive years.

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[Interpreted] Slide #15 presents company's Power Generation business performance. As of the end of 2019, company's attributable self-owned grid-connection wind power capacity totaled 4,687 megawatts, of which 34% domiciled in North China, 33% domiciled in Northwestern region and 22% domiciled in Eastern China and Southern regions. Company added 291 megawatts attributable connection wind power capacity in 2019. And these additions mainly domiciled in the Southern region and Eastern China. As of the end of 2019, the company's under-construction capacity at home and abroad totaled 2,922 megawatts. Company's approved yet unconstructed capacity totaled 2,057 megawatts.

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[Interpreted] Affected by poor wind resource in 2019, national average wind utilization decreased in 2019 relative to 2018. Company's self-run wind farms recorded 2,212 hour utilization, 130 hours higher than the national average. Company's consolidated power production totaled 7.8 billion kilowatt-hours, an increase of 2% year-on-year, 38.4% of Tianrun's total power production was directly traded on power markets.

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[Interpreted] With the increase of wind power installations and the changing demand of O&M market, O&M service has ushered into an era of rapid development. Attributing to company's installed fleet and O&M experience, company's wind power O&M business maintained a stable growth rate. Slide #17 shows that as of the end of 2019, company's under operation capacity totaled 10.99 gigawatts, an increase of 57.7% year-on-year. Order backlog totaled RMB 818 million, an increase of 67% year-on-year.

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[Interpreted] Now let's welcome Chief Financial Officer, Mr. Liu Chunzhi to introduce 2019 annual results.

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[Interpreted] Now we'll continue with company's annual financial results. Slide #19 shows the company's annual financial results. In 2019, company's revenue increased sharply by 33.1% year-on-year to RMB 38.25 billion. Due to the decrease of segmental businesses, company's gross profit decreased by 2.5% year-on-year. EBITDA decreased by 10.2% year-on-year and EBITDA margin dropped 6.9 percentage points year-on-year to 14.1%. Attributable net profit totaled RMB 2.21 billion. Net profit margin dropped 5.4 percentage points year-on-year to 5.8%.

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[Interpreted] Moving on to quarterly financial results. Quarterly revenue in Q4 2019 totaled RMB 13.51 billion, representing an increase of 23.8% year-on-year. Quarterly gross profit in Q4 2019 totaled RMB 2.259 billion with 16.7% margin. Quarterly recurring net profit in Q4 2019 totaled RMB 192 million, with 1.4% margin. Quarterly attributable net profit in Q4 2019 totaled RMB 619 million, with 4.7% margin.

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[Interpreted] The next 4 slides present company's segmental business revenue. Segmental revenue from the sales of WTGs and components totaled RMB 28.87 billion in 2019, representing an increase of 29.8% year-on-year. The proportion of the sales of WTGs took 71%, and the sales of components out of total revenue was 4.5%, respectively. Segmental gross profit margin was 12.5%, representing 6.4 percentage points increase -- decrease year-on-year.

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[Interpreted] Benefiting from improved wind curtailment and advanced product efficiency, company's total revenue from power generation business totaled RMB 4.27 billion in 2019, an increase of 9% year-on-year.

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[Interpreted] Slide #23 presents the performance of company's Wind Power Services business. Revenue from Wind Power Service totaled RMB 3.58 billion in 2019, an increase of 116.5% year-on-year. This portion accounted for 9.4% of total revenue, a lift of 3.6 percentage points. According to our previous communication with investors and shareholders, Wind Power Services include EPC and operation and maintenance business, and they have both increased very rapidly in 2019.

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[Interpreted] Other businesses mainly refer to water treatment business and financial leasing, which realized RMB 1.53 billion revenue in 2019, up 65.8% year-on-year. The company owned 54 water treatment projects in 2019. Revenue from this segment increased by 25.6% year-on-year, and revenue from financial leasing business increased by 33.8% year-on-year in 2019.

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[Interpreted] Slide #25 shows company's working capital performance. Net operating cash flow totaled RMB 5.93 billion in 2019, an increase of 89.7% year-on-year, mainly due to more cash collected from commercial activity as a result of reinforced management of receivables. In 2019, company has seen improvement in operational assets turnover efficiency, with cash conversion shortening 29 days year-on-year to 61 days from 90 days in previous year. Inventories turnover extended 4 days year-on-year to 84 days for the increased delivery of turbines. Receivables turnover shortened 67 days year-on-year, demonstrating acceleration in collection receivables, and short-term receivables turnover shortened 44 days year-on-year to 145 days, excluding notes with higher cashability and liquidity.

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[Interpreted] Throughout 2019, company's debt service indexes remained within reasonable range. And in 2019, company maintained a healthy capital structure with cash and cash equivalents increased to RMB 7.248 billion. Company's net debt increased -- decreased resulting to lowered net gearing ratio to 43% in 2019.

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[Interpreted] Now let's welcome Ms. Ma to introduce industrial Outlook.

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[Interpreted] Now let's proceed to business outlook. IRENA forecasted that through 2020 to 2050, global installations will keep up the upward trend. For example, onshore wind power additions in 2030 will be roughly 147 gigawatts. Also 11% and above CAGR of global offshore wind power through 2019 to 2050 was also forecasted. Other than huge potential in global markets, the graph on the right exhibits China's growth potential. The NEF data exhibits roughly 47.5 gigawatts under construction subsidized projects both onshore and offshore. Public data also shows 3.6 gigawatts approved auction project, 4.51 gigawatts approved grid-parity projects, 12 gigawatts approved or planned distributed project, 32 gigawatts financially secured large wind energy base projects and roughly 33 gigawatts of approved offshore projects. Other than the above-mentioned 132 gigawatt projects, some approved before the end of 2018 are unconstructed, and more approval for auction and grid-parity projects will be added in 2020. All the above-listed projects will support the steady development of China's wind power industry.

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[Interpreted] We've also noticed the potential of O&M business. Wood Mackenzie forecasted the Chinese O&M market to reach USD 3.7 billion by 2020 -- 2028, I'm sorry, with a 9.2% annual average growth rate. More than 67 gigawatts of operating onshore wind turbines were older than 5 years as of the end of 2019. This includes the earliest legacy megawatt and sub megawatt turbines, which are now out of warranty. With more servicing costs of maintaining increasing aging turbines born by asset owners and their pursuit of optimized levelized cost of energy throughout turbine life cycle, O&M business presents huge market opportunities for OEMs.

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[Interpreted] Slide #30 shows the company's prospect. Year 2020 unveils the China's grid parity era and basing on 20-year of entrepreneurial culture and strategic trends, the company will focus on product innovation, energy service capacity with digitalization in the core, internationalization and diversification centering core businesses. We aim to consolidate our market-leading position and strengthen our core competitiveness, and dedicate ourselves to becoming a comprehensive solution provider in terms of clean energy and energy use conversation. We've promoted the sustainable development of renewable energy industry together with industrial partners.

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[Interpreted] Now we move on to Q&A session. You can ask no more than 2 questions. Please let us know your name and company name before questions. Thank you so much.

[Foreign Language] [Operator Instructions]

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[Interpreted] The first question is regarding company's turbine gross profit margin. The investor has asked that 2.5 megawatt has taken a large proportion in company's order backlog. However, its gross profit margin has seen adjustment. So what's the company management's outlook on the company's 2020 gross profit margin, especially gross profit margin on 2.5 megawatt turbines? And the second question is regarding company accounts receivables with a -- what kind of financial policy will the company be continuing in the future in the context of wind power industrial expansion?

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[Interpreted] Thank you for your question. The first question -- the first -- the answer to the first question was answered by Chief Financial Officer. In 2019, company's annual results showed that the cost of 6 megawatt platform turbines have increased slightly. However, that's because the platform has multiple turbines. And especially in the initial stage of the release of new products, the gross profit margin of them will be relatively lower. However, continuing with delivery and R&D, the cost reduction will be more prominent in the later stage of that product sell. And as for our gross profit margin outlook in 2020. In the past year, we've seen increase in the second half of 2019, which was better than the first half of 2019. And then we forecast that gross profit margin for 2020 will be better than 2019. And there are 3 factors influencing this conclusion: the first one will be the optimization of order structure, especially when we're processing those low-priced orders we have gained in the past, the proportion of those low price to order will take smaller proportion as we deliver them gradually; and then the second factor will be the delivery of more new products, which have higher gross profit margin; and then the third, we'll be concentrating on our R&D and continue cost reduction efforts, especially together with our suppliers. And then regarding the second question, which is company's accounts receivable, we've seen increase in terms of company's operating net cash flow in terms of 2019 rather -- when compared with 2018. That's because that accounts receivables management is the key focus of company's management. And then while we acquire -- we require our clients to pay on a timely manner and we emphasize on our accounts receivables management, we are expecting to lower accounts receivables in total, especially in 2020. And then the second factor is our inventory management turnover. With the delivery of different types of turbines, we've seen improvement. However, in 2019, the delivery has -- our inventories have increased because of our increasing demand for delivering those turbines. However, there is still space for improvement, which is a very important factor in terms of inventory management. That's why we -- in 2020, we forecast net operating cash flow to improve further, which is in compliance with the macroeconomic situation in -- currently in China.

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[Interpreted] Also the Company President added some answers to the second question regarding company's account receivables and cash flow. We have seen improvement regarding company's cash flow in terms of 2019, which seem that our cash conversion turnover has accelerated. And our management reinforcement on accounts receivable, especially those have been on consolidated financial statement for a long time with more sort of power on managing them. In the context of supplier region, our accounts receivable has seen improvement, which was helped by that demand-supply dynamic change as well. So we have used those cash in terms of investing in capacity expansion together with our suppliers in the upstream. And thirdly, we expect to change our negotiation in terms of commercial activity with our suppliers and clients to maintain a very sustainable development and management of cash flow in the future.

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[Interpreted] The question is from Eva Hou from Morgan Stanley. And the first question is regarding company's selling expenses, which have seen expansion in terms of 2019, which has basically doubled comparing with 2018, especially warranty provisions. The investor is asking, why the selling expenses have increased? And then the second question is regarding company's wind farm addition. In 2019, company roughly added 300-megawatt attributable wind farm, which is slower than guidance in previous year. The investor is actually curious about company's wind farm investment and development plans in the future.

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[Interpreted] The first question was answered by the company's chief financial officer. So regarding warranty provision, 2019 has seen an increase comparing with 2018. But that was mainly because of the structure of products delivered. As a very responsible and stably developing company, we've seen stringent policies regarding warranty provision, especially for new products such as 6-megawatt turbines. 6-megawatt turbines have taken higher proportion in terms of total delivery. However, its warranty provision percentage is actually higher than the other kinds of turbines. And then the second factor is regarding warranty provision conversion. So every year, company will actually convert those warranty provisions that are not used. However, comparing with 2018, 2019 has seen less warranty conversion. That's the reason contributing to the increase in warranty provision. In general, our outlook for warranty provision will be, that we will maintain a very stable, within our range, warranty provision sort of volume and percentage as a very responsible company in the industry.

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[Interpreted] As all of you have known that in 2019 and 2020, the policy of the national government have seen dramatic changes, especially the policy released in 2019, 21st of May. And then that policy has impacted the industry in a very large extent, especially irrational marketing behaviors of adding wind farms and buying turbines, which accelerated our company risks. So we are taking a very prudent attitude in terms of managing warranty provisions, especially for the future usage of warranty provision. We will be very strict with ourselves and deliver our promises to clients as well.

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[Interpreted] Our wind farm addition in 2019 is lower than expectation, which is relevant with the prudent principle of the company's business management. In 2019, we consider quality and risk identification and risk control in terms of wind farm construction as a very important factor affecting our business activity.

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[Interpreted] We wish to grab the opportunity of development in China's wind power industry. However, we take construction risks and the deadline for a grid connection as very important factors. That's why we expect to add roughly 500 megawatts to 1 gigawatt attributable wind farms in 2020.

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[Interpreted] Also in 2019 and 2020, we emphasize on adding distributed wind farms and grid parity projects, especially their development and approval. So our strategy for laying out wind farms would be concentrating on both the subsidized projects and distribute and grid parity projects as well, especially those will be developed after 2021.

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[Interpreted] The following up question is regarding company's warranty provision in 2019, especially the rate of [ affection ] on company product structure and warranty provision conversion. Considering that 6-megawatt turbines only take 5% of total sales capacity, the investor is curious about company's response on warranty provision structure.

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[Interpreted] Chief Financial Officer answered the follow-up question regarding warranty provision. And normal warranty provision include provisions on materials and service and depending on different types of turbines, it will be 7% or 2%. However, that -- the specific data is not within the disclosure scope of the company.

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[Interpreted] We appreciate your participation. Material will be uploaded to the company's website. Thank you very much, and this is the end of today's meeting.

[Foreign Language] [Statements in English on this transcript were spoken by an interpreter present on the live call.]