American Superconductor's shares plunged 44 percent on Wednesday, a day after the maker of electrical systems for wind farms said its largest customer refused to accept shipments, a move that could trigger a series of problems for the U.S. company.
The loss of business from China's Sinovel <601558.SS>, which accounts for nearly three quarters of AMSC's revenue, could prompt the company to slow down production, raise more capital to complete a recently announced acquisition and push the company back to losses.
Late on Tuesday, AMSC said Sinovel -- the world's third largest wind turbine maker -- would not accept shipments till it reduced its inventory levels and refused to make payments for some shipments made in this fiscal year.
This rekindles fears of slowing growth in China's wind market, which is the largest in the world.
Citigroup analyst Timothy Arcuri estimates AMSC has about 2.5-3 gigawatts of excess inventory of produced for Sinovel.
It will take about six months to work through this inventory before AMSC's production would start to return for a more normalized level, Arcuri said.
The analyst, who cut his price target on the stock to $17 from $25, also said AMSC would have to raise about $100-$200 million to complete the buyout of a Finnish rival.
In March, AMSC said it would buy The Switch Engineering Oy for $266 million -- $79 million of which would be paid in stock.
But with the drop in AMSC's stock value on Wednesday, it would require more shares to complete the deal, said Robert W Baird analyst Michael Horwitz, who halved his price target on the stock to $11.
AMSC's stock slumped 44 percent to $13.95 in pre-market trade on Wednesday. Through Tuesday, the stock lost 23 percent of its value in the last six months on fears of slowing growth in China and customer concentration in that region.
CUSTOMER CONCENTRATION FINALLY BITES
For months, analysts have warned that AMSC's customer concentration is a huge risk.
AMSC, which benefited from an explosive growth in China's wind turbine market, has been trying to diversify to other markets and customers but not with any great success.
The company's sales to Sinovel accounted for 73 percent of the company's revenue in the third quarter, down only slightly from the 79 percent in the second quarter.
AMSC posted its first-ever profit in fiscal 2009. But on Tuesday it warned of a fourth-quarter loss and slashed its full-year revenue outlook -- the second time in less than a month.
China's wind turbine sector has surged in the past few years as turbine makers, aided by hefty government subsidies, rushed to build new turbines. But the growth is slowing and the market is expected to be flat in 2011.
Baird analyst Horwitz said the $445 million-contract with Sinovel could face timing risk. Delivery was scheduled to begin in early 2011.
We believe the lack of visibility into AMSC's Chinese operations and the significant customer concentration risk could prevent the stock from moving higher, said Horwitz.
(Reporting by A. Ananthalakshmi in Bangalore; additional reporting by Megha Mandavia; Editing by Maju Samuel and Saumyadeb Chakrabarty)