China High Speed Transmission Equipment Group Co Ltd, the mainland's largest producer of wind turbines, plans to diversify its product mix after reporting a dip in its first-half earnings to June 30.

"We need to keep launching new products to guarantee future growth. We will venture into areas like precision machine tools, coal mining equipment and diesel engine," said Hu Yueming, chairman of China Transmission, at the group's interim results presentation on Thursday.

Hu said that the company will not commit to heavy and extensive investment at this stage but new products will represent a greater weight of its product mix in the future.

For the six months ended June 2011, revenue increased 2.8 percent to 3.18 billion yuan compared with a year ago. Core profit, excluding convertible bonds and equity swap, fell 27.5 percent to 374 million yuan.

However, including losses from the company's settlement of its convertible bonds and equity swap, China Transmission's net profit tumbled 49.2 percent to 286.5 million yuan and earnings per share fell sharply to 0.21 yuan versus 0.45 yuan a year ago. The company declared no dividend. Sales of wind gear transmission equipment, which accounted for 70 percent of total revenue, slid 0.5 percent to 2.18 billion yuan in the first half.

China Transmission's gross profit margin was 27 percent, 3.4 percentage points lower than the same period last year and its net margin contracted 9.8 percentage points from 18.2 percent to 9 percent. It said the drop was mainly due to a decrease in the average selling price of wind power gearbox products. Meanwhile, some customers delayed pick-up of ordered products in May and June, since less power was generated as the central government requested a quality check on wind turbines.

According to Hu, the average selling price dipped as much as 10 percent in the first half and the company tried to mitigate its margin compression through purchase cost controls and output expansion.

"We think that the price has bottomed out at this stage and will not go down further in the second half," said Hu, adding that "what we have seen is temporary industry volatility due to overcapacity. In the long run, we are optimistic towards the wind power sector which is a energy source being encouraged in China as well as overseas."

However, analysts believe that China Transmission's profitability woes will not ease any time soon as overcapacity still weighs.

In a research note released after the results, Ivan Lee, analyst at Nomura Equity Research, said that in the second half of 2011, China Transmission could face continuing downward pricing pressure on its wind gearboxes, resulting in a further contraction of its gross margin.

Compared to wind equipment providers, wind farm operators are preferred, given that their margins should have bottomed out and grid connection should improve while tariffs stabilize, said the note.

Min Li, an analyst with Yuanta Securities (Hong Kong), also thinks that prices will deteriorate in the coming months.

"Overcapacity will linger on for a while. The wind equipment sector has not entered consolidation period, with major manufacturers still competing fiercely in the market," said Li.

Li thinks that wind gearboxes will remain China Transmission's primary revenue source and it will be at least one or two years before new products start to contribute to the bottom line.

joyli@chinadailyhk.com

China Daily

(HK Edition 09/02/2011 page2)