Being in the Right Business at the Right Time

by Mitchell Clark, B. Comm.

Earnings season is upon us and it’s the best news the stock market can have. Even if corporate earnings aren’t good, the stock market is prepared for this and I think it’s increasingly likely that the current bear market rally will continue.

Earlier in the year, I wrote in this column about a very interesting micro-cap company that’s in the business of building small energy generating power stations in China. This stock is quite liquid and could be an attractive security for those of you who like trade.

I’ve written several times in this column about A-Power Energy Generation Systems, Ltd. (NASDAQ/APWR). This U.S.-listed Chinese stock helps design and build micro power grids for industry and small communities in China. The company is now also selling large-scale wind power generating systems.

In China, there really isn’t a nationwide energy grid. Many cities and many industrial sectors opt to build their own small generation plants in order to get more reliable electricity. According to the International Energy Agency (IEA), China’s primary energy demand will increase 3.2% annually from 1,742 million tons of oil equivalent (MTOE) in 2005 to 3,819 MTOE by 2030. The IEA projects that China’s energy demand will grow more rapidly in the near term, projecting a 5.1% annual increase from 2005 to 2015. Based on these growth rates, China will overtake the U.S. as the world’s largest energy consumer shortly after 2010. The IEA estimates that China needs to add more than 1,300 gigawatts (GW) to its electricity-generating capacity over the coming years, more than the total currently installed capacity within the United States.

A-Power recently reported that its revenues grew 94% to $81.4 million in the fourth quarter of 2008. Gross margin grew to 17.8%, as compared with 11.2% in the fourth quarter of 2007.

Net income grew a substantial 198% to ten million dollars over the fourth quarter of 2007.

For all of 2008, A-Power’s total revenues grew 74% to $264.9 million. Gross margin was 13.9%, as compared with 13.5% in 2007. Net income grew 87% to twenty-eight and a half million dollars.

Going forward, A-Power will continue to build small electricity generation plants, but the company also wants to make a major push into wind power. The company recently signed a deal with GE Drivetrain to supply it with 2.7MW wind turbine gearboxes and to establish a joint venture partnership for a wind turbine gearbox manufacturing plant in China.

As I mentioned, this stock is liquid and, like many U.S.-listed China stocks, it seems to be reasonably valued. Now that we’re coming into first-quarter earnings season domestically, the market doesn’t need to see growth in earnings, but only an end to the bleeding. Corporate visibility is going to be questionable, but it will be very interesting to see what the financial sector has to say. There is growth out there but only in very select businesses.