Financial fraud investigation into Chinese wind energy giant Sinovel after a few years of explosive growth

07.11.2013 18:48

Post-Boom Blowdown for Wind Energy’s Sinovel

A wind energy giant is in trouble with regulators, customers and investors after a few years of explosive growth

Pu Jun and Yu Ning

(Beijing) — Wei Wenyuan’s sudden resignation stunned his colleagues at Sinovel Wind Group but started making sense two weeks later when securities regulators announced a financial fraud investigation targeting the company. Wei’s departure May 13 after just two months as chairman and eight months as acting president also mirrored the turbulent atmosphere at Sinovel, one of China’s largest wind turbine manufacturers as well as a developer of wind farms locally and overseas.A business slump that began in 2011 led to a management reshuffle last August that put Wei – one of Sinovel’s pioneer investors – in the president’s office.

He replaced company founder Han Junliang, who built Sinovel from scratch to create what became the world’s third-largest wind turbine manufacturer, with factories and 4,400 employees across China. Sinovel installed China’s first offshore wind farm, and it’s worked on major wind energy projects in Sweden, Turkey and Brazil.

Han attracted investors to Sinovel’s side by, for example, overseeing a 2011 initial public offering on the Shanghai Stock Exchange that raised 9.45 billion yuan.

But in its May 29 announcement, the China Securities Regulatory Commission (CSRC) said Sinovel under Han’s leadership may have misrepresented its financials in 2011, the year the company reported net profits of 776 million yuan on revenues of 10.4 billion yuan. A source said an internal company probe found that anticipated, not actual, sales from pending contracts had been figured into the annual report, inflating revenues by up to 929 million yuan and adding 176 million yuan to the company’s profit.

Sinovel admitted a business downturn that year. But the skid from the company’s 2.8 billion yuan in profits on revenues of 20 billion yuan in 2010, investigators say, was far steeper than reported.

In 2012, Sinovel reported a 600 million yuan loss on revenues of 4 billion yuan.

In the wake of CSRC’s announcement and Wei’s resignation, investors reacted by pushing Sinovel’s stock and corporate bond values lower. And China Lianhe Credit Rating Co. cut its rating on 2011 Sinovel bonds to AA from AA+.

Last year, investors had cheered Han’s ouster and Wei’s takeover, which was coupled with a new business strategy, cost-cutting and thousands of layoffs. They’d lost confidence in the company founder, who made a name for himself via an aggressive business expansion.

Today, investor confidence is on the line again. Wei’s adjustments improved Sinovel’s cash flow, but the company’s revenue outlook is still weak. And the CSRC investigation has intensified the turbulence.

Growth Model

Wei was replaced internally by two executives. Wang Yuan, a member of the company’s board of directors since 2008, was appointed chairman. He is also a vice president at Dalian Huarui Heavy Industry Group Co., a subsidiary of Sinovel’s largest shareholder, with a 17 percent stake, Dalian DHI DCW Group.

Sinovel’s new president is Liu Zhengqi, who had been serving as company vice president since 2006.

The new executives have been handed the baton following Wei’s shakeup of the Han business model.

Han made a name for himself by forging strong relationships with government leaders, thus tapping policy support for the wind power industry.

That support came in response to what had been foreign domination of the Chinese wind power market. In 2004, for example, foreign companies controlled 80 percent of all wind turbine manufacturing in China.

As president of the Dalian Heavy Industry Design Institute, Han arranged for a subsidiary of the institute to buy a production license for a 1.5 megawatt wind turbine from the German company Fuhrländer. And a few months later, in July 2005, the Chinese government’s National Development and Reform Commission (NDRC) ruled that 70 percent of all wind power equipment components for domestic wind farms had to be manufactured in China.

In February 2006, four investors including Wei agreed to invest 70 million yuan each to establish Sinovel in partnership with the Dalian institute. And soon, Sinovel had won a contract to provide 46, 1.5-megawatt turbines for the Huaneng Weihai Wind Farm, China’s first.

More pro-wind energy policies ensued, leading to a surge in wind power capacity. Newly installed capacity climbed to 3,400 megawatts in 2007, and 6,140 megawatts the year after.

Dozens of wind power suppliers opened shop in China, but none could catch Sinovel’s leading market position. Most newcomers got started by buying product licenses from foreign companies.

In 2008, Sinovel’s sales rose to No. 1 in China, pushing rival Goldwind Science and Technology Co. to second place. The company formed an alliance with one of the country’s biggest power generators, Beijing-based China Huaneng Group, which subsequently became the largest buyer of its turbines between 2007 and 2009.

Pushing wind energy development was Zhang Guobao, then NDRC vice chairman and director of the National Energy Administration (NEA). He issued an influential call for building seven, 10 million kilowatt wind power bases around the country.

Zhang’s brainchild prompted Chinese turbine manufacturers including Sinovel to start forging more powerful turbines for wind farms. Some industry experts called the base approach uneconomical and risky, but Sinovel surged ahead anyway by ramping up equipment production and soon became the world’s second-largest wind energy supplier behind Denmark’s Vestas Wind Systems.

Government officials at the time spoke about “creating a Chinese version of Vestas on more than one occasion,” said a wind industry marketing expert who asked not to be named. “Everyone knew they were referring to Sinovel.”

The industry’s development peaked in 2010, the year the nation added 18,900 megawatts in installed capacity. Of that amount 4,386 megawatts were added by Sinovel, up from 3,510 for the company in 2009.

Han predicted Sinovel would conquer markets overseas and become the world’s largest wind power company by 2014. He also declared in 2010 that foreign sales would rise to “more than 30 percent” of the company’s business.

But in 2011 signs of strain appeared in the domestic industry, giving the earlier critics of big-box wind farms reason to crow. Problems with China’s power transmission system meant that much of the energy generated at wind farms could not reach power users. And fast growth for turbine manufacturers led to factory overcapacity.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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