SECTOR REPORT EQUITY RESEARCH. Capital goods. Market performer. Facing headwinds. Europe

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1 EQUITY RESEARCH Capital goods 13 April 2012 Europe Market performer Source: Natixis av r-09 août-10 janv -12 DJ St oxx Indust. Goods and Serv. Rel. DJ Stoxx Analyst(s) Antoine Azar (33 1) Ludovic Debailleux (33 1) Arnaud Schmit (33 1) Facing headwinds We are initiating coverage of the wind turbine manufacturing sector with a Market Performer rating as for the entire capital goods sector. As part of this report, we propose a Long/Short Gamesa (Buy, target price: 2.8)/Vestas (Reduce, target price: DKK45), in order to focus on Gamesa s exposure to fast-growing countries and its management s fine track record In the short term, the sector is likely to continue to see overcapacity leading to stiff pressure on prices. Indeed, the sovereign debt crisis is bound to have a negative impact on aid for renewable energies in Europe, including wind power. The emergence of shale gas in the US is making wind energy in that country uncompetitive, even though 2012, like 2011, will be a good year due to fears surrounding the non-renewal of the PTC (subsidy). Finally, the slowdown of the Chinese market, the world s largest, could lead Chinese wind turbine manufacturers to develop internationally, which would put further pressure on prices. Some regions, however, will see substantial growth in 2012, notably Brazil, India, Mexico, Turkey and Eastern Europe. Hence, wind turbine manufacturers have to adapt their business model. Gamesa has been the quickest to respond by refocusing its activity on these fast-growing regions as of 2010, which allowed it to post sales growth and a positive EBIT margin in Long-term growth drivers still remain, however: 1/ grid parity should be reached in 2015, if the cost of producing wind-generated electricity continues to fall and fossil fuel prices continue to rise; 2/ the take-off of offshore wind energy, which we expect in 2016; and 3/ in the longer term (2020 by our estimates), the arrival on the market of electricity storage solutions, solving the problem created by the intermittent nature of wind-generated electricity. Is the writing on the wall for independent wind turbine manufacturers? Wind energy is undergoing a change of scale in terms of the size of both wind farms and turbines, and will require ever greater financial resources. For this reason, in the medium term we expect consolidation in the sector driven by big generalist industrial groups. Equity Markets Bloomberg access equity.natixis.com NXSE Distribution of this report in the United States. See important disclosures at the end of this report. Company Rating Price Target P/E (x) EV/EBIT (x) EV/Turnover (x) Vestas Reduce DKK50.65 DKK Gamesa Buy Median EQUITY MARKETS CORPORATE & INVESTMENT BANKING / INVESTMENT SOLUTIONS / SPECIALIZED FINANCIAL SERVICES

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3 Contents 1. Investment case 4 2. No rerating in sight 7 Abrupt cycle downturn in Valuations converging towards those of the capital goods sector 9 Strong re-rating potential in the medium term 11 Play exposure to strong growth zones A business model that needs adapting 14 World overcapacity dragging on prices 14 European turbine manufacturers still very exposed to their domestic markets 15 Margins still under pressure medium term 16 Three ramparts to margin pressure: innovation, services and outsourcing 18 Will independent turbine manufacturers disappear? 22 The specific case of China Overcapacity on historical markets 26 European market penalised by the sovereign debt crisis 26 Emergence of unconventional gas in the US 30 The potential threat from Chinese exports Several zones will nevertheless show strong growth in 2012/13 41 India: already the world s third-largest market 41 Brazil: considerable wind energy potential of 350 GW 43 Mexico: a still nascent market offering strong potential 44 Poland: the most promising country in eastern Europe 45 Turkey: a promising market Three long-term drivers 47 Grid parity in 2015 in onshore? 47 Offshore wind energy likely to take off in the long term 50 The storage of wind-generated electricity Appendices Company profiles 69 Vestas 71 Gamesa 105 Capital goods I 3

4 1. Investment case We initiate coverage of Vestas (Reduce, TP DKK45) and Gamesa (Buy, TP 2.8) We initiate coverage of the European wind turbine manufacturer sector with a Buy rating on Spanish player Gamesa (target price: 2.8) which offers the most favourable geographic exposure plus quality management boasting a fine track record. However, we adopt a Reduce stance on Vestas (target price: DKK45), the sector leader, which has to deal with some execution problems with the industrialisation of its new V MW turbine which will undermine the costs structure in Between 1996 and 2010, wind-derived world electricity production rose fourfold to reach TWh, compared with a rise of 65% to 21,333 TWh for total world electricity generation. Thus, from the end of 2010, the share of wind energy in world production reached 1.92%, versus just 0.09% in Chart 1: Growth in the share of wind energy in worldwide electricity production and growth of wind-generated electricity 1.6% 1.9% 1.3% 1.0% 0.8% 0.7% 0.5% 0.6% 0.1% 0.1% 0.2% 0.2% 0.2% 0.3% 0.4% % 30% 20% 10% 0% Share of w ind-generated electricity Grow th in w ind-generated electricity generation Source: IEA a period of euphoria, but is one of excess capacity Despite a world energy mix which is obliged to shift towards renewable energies, this proportion is still very low compared with fossil fuels, notably owing to the challenges with wind (intermittence, variability, unpredictability), substantial financing requirements and still high production costs. The main wind energy markets are Europe (41% of the total installed base), China (26%) and the US (20%). The wind industry enjoyed a period of euphoria between 2005 and 2008 with average annual growth for new installations in the world of 30% and 18% outside Asia. In the wake of the crisis, European turbine manufacturers have been faced with slowing demand (2009/2011 CAGR of 4.9%), on limited access to financing sources and uncertainties as to the renewal of state aid in Europe, the advent of shale gas in the US and the ramp-up for the Chinese wind turbine manufacturing industry on its local market. They now have to deal with overcapacity leading to a sharp fall in margins and ROCE. Moreover, turbine manufacturers have burned a lot of cash owing to major investments and a steep rise in WCR linked to diminished negotiating power with clients, notably in terms of prepayments. Hence, wind turbine manufacturers have to adapt their business models. We view Gamesa as the most reactive manufacturer with a strategic shift towards countries showing strong growth as of This strategy has paid up till now as Gamesa is the only group in our coverage to have posted sales growth and a positive EBIT margin in Capital goods I 4

5 Over 2011/2013 (expected CAGR of 1%), this overcapacity situation is likely to last given the uncertainties on the sovereign debt crisis in Europe, renewal or not of the PTC in the US and some stability on the Chinese market. Some markets, however, still harbour substantial potential such as Brazil, India, Mexico, Turkey and Eastern Europe. Several catalysts, but only in the medium term The stiff competition is likely to last In the medium/long term, several items are likely to re-ignite demand i.e. 1/ the reaching of grid parity as of 2015 thanks to the stated fall in the production cost for wind energy faced with the ongoing rise in fossil fuel prices, 2/ the take-off for offshore wind as of 2016 and 3/ the arrival more long term (2020 in our view) of electricity storage solutions to palliate the intermittence problem for wind electricity. So wind electricity is likely to represent 8.9% of world electricity generation by 2020 versus 1.92% at present. Hence we slate growth of 11.2% per year for the wind market between 2013 and The wind turbine manufacturer sector is still very fragmented with 15 players which shared 89% of the market at the end of 2010 but few of them look really credible with an international reach and a broad range of products. In particular, there are 7 Chinese turbine manufacturers in the top 15 which generate all their sales on their domestic market and, at this stage, do not possess truly proven technology. The most credible players in terms of technologies, track record and international presence are Vestas, Enercon, Gamesa and Suzlon (thanks to REpower). General Electric and Nordex are also major, credible players, but they still have a weak international presence. Siemens is still not very present in onshore, but is world number one in offshore. Chart 2: Market share breakdown in 2011 for the 10 leading wind players (new base capacity in MW) Sewind (Ch) Hara Xemc (Ch) Mitsubishi (JP) Others 1% 1% 2% 11% Nordex (Ger) 2% Mingy ang (Ch) 3% United Power (Ch) 4% Siemens (Ger) 6% Gamesa (Sp) 6% Dongfang (Ch) Suzlon Group (Ind) 6% 7% Vestas (DK) 15% Sinovel (Ch) 11% GE Wind (US) 9% Goldwind (Ch) Enercon (Ger) 9% 7% Source: BTM Consult Competitive intensity will probably continue to increase over the next few years with the arrival on the market of many Korean and French players in particular and the development of the Chinese players outside their domestic market. In the short term, this could aggravate the overcapacity situation and pricing pressure. Medium-term, however, the wind market will necessarily have to consolidate. We think that this consolidation will stem from the large industrial groups, which will have no choice except to proceed via acquisitions in order to build market share and expand abroad. In this context, Gamesa and Vestas shape up as targets. Severe stockmarket underperformance since end-2008 The sector s stock market performance in the last few years has reflected this trend with a clear outperformance for the Stoxx Industrials from 2005 to mid-2008, then an almost continuous under-performance. In 2011, the Fukushima disaster only underpinned sector performance temporarily. Capital goods I 5

6 Chart 3: Stock market performance base 100 in January Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Vestas Gamesa Stox x Industrials Source: Datastream For 2012, we remain cautious owing to short-term uncertainties on the sector, medium-term catalysts not being expected before three or four years. Valuation multiples for wind turbine manufacturers now in line with those of traditional capital goods players look justified and could even deteriorate further. We propose a long Gamesa/short Vestas in order to play exposure to sharp growth zones versus a player that has remained too European and is prey to execution problems. Table 1: Summary of the strengths/weaknesses of each player Exposure to US Exposure to emerging countries ex China Flexibility of the production base Management Consolidation opportunities Technological edge Vestas Gamesa Source: Natixis Financial mgt. Table 2: Summary of the main characteristics for the two groups in our sample m Vestas Gamesa 2011 sales (MW) 5,217 2,850 Production capacity (MW) 10,000 3,850 World market share (%) sales 5,836 3, operating profit operating profit (%) adjusted net profit Sales CAGR 11/14e (%) Revenues of 7,000m in 2011 (including deferred effect of 1,200m) Sources: Natixis, companies Capital goods I 6

7 2. No rerating in sight No return of a premium on traditional capital goods in the near term Over the last decade, we identify two different periods in terms of growth momentum for the wind market. The first spreading over 2005/2008 is characterised by demand well over supply, leading to a shortages on the supply chain in turbine manufacturing and substantial pricing power for turbine manufacturers. However, as of 2009, in the wake of the financial crisis and major investments made in ramping up production capacity, abroad in particular (mostly the US and China), the industry has reverted to a situation of overcapacity. This situation has accentuated with the expansion of Chinese industry on the local market, leading to major pricing pressure (-20% between 2009 and 2011 according to Bloomberg New Energy) and dwindling margins. In March 2011, we saw a stock market rebound for the renewable energies sector as a whole in the wake of the Fukushima disaster. However, the lack of clear decision in favour of renewables, and wind in particular, rapidly led to a sharp stock market correction for wind turbine manufacturers in H2 11. In valuation terms, after posting premiums over 40% on traditional capital goods, owing to strong growth prospects, European wind turbine manufacturers are now trading on equivalent multiples. This derating could even build up in the short term owing to the stiff pricing pressure on the Chinese market, stagnation on the European market and the possible collapse of the American market in The sector is unlikely to see a rerating before 2 or 3 years coinciding, in our view, with a recovery for the American market, the start to takeoff for offshore wind and a return to a subsidy policy for renewables. We propose a long Gamesa/short Vestas to play exposure to strong growth zones versus a player that has remained too European and prey to execution problems. Abrupt cycle downturn in /2008: demand well over supply Demand exceeded supply in 2005/2008 From 2005 to 2008, the wind sector experienced exponential growth owing to demand well over supply owing to enthusiasm for renewable energies. This demand led to major supply problems notably for ball bearings and gear boxes. Hence, there was under-capacity in the wind industry and strong pricing power. European turbine manufacturers thus chalked up record growth level plus relatively strong margins. Table 3: 2005/2008 Sales CAGR and average EBIT margin over the period for Vestas and Gamesa % CAGR 2005/2008 Average EBIT margin 2005/2008 Vestas Gamesa Traditional capital goods sector New annual installed capacity 35 Sources: Companies, BTM Consult, GWEC Capital goods I 7

8 In stock market terms, this led to a clear outperformance for the sector compared with the DJ industrials. Hence, the Vestas stock rose 10-fold and Gamesa over 3-fold, while over the period the DJ Industrials only rose 33%. The outperformance for Vestas over this period is due to its leader position which made it the ideal vehicle to play the take-off for wind. Chart 4: Comparative performance for wind players and the DJ Stoxx Industrials from 2005 to 2008 base 100 in Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Vestas Gamesa Stox x Industrials Source: Datastream 2009/2010: overcapacity situation Excess capacity in 2009/2010 In order to meet demand, wind turbine manufacturers invested massively in new production capacity and notably in the US and China. However, as of 2008, the crisis, the arrival of shale gas in the US and the ramp-up for the Chinese WTM dragged on demand and led to overcapacity. This situation further deteriorated with the sovereign debt crisis in Europe which triggered the introduction of austerity measures including reductions in subsidies for renewable energies. As a result, since 2009 the wind industry has had to deal with strong pressure on prices The European wind turbine manufacturers have thus clearly under-performed the DJ Industrials index since the end of Share prices at Vestas and Gamesa lost almost 90% of their value while the DJ Industrial only fell 6.6% over the period. Chart 5: Comparative performance for wind players and the DJ Stoxx Industrials from 2005 to 2008, base 100 in Sept Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Vestas Gamesa Stox x Industrials Source: Datastream Capital goods I 8

9 2011: Fukushima has not saved wind energy Fukushima provided a slight rebound, but one that did not last The share prices of wind players profited from nuclear development halt announcements, notably in Germany, in the wake of the Fukushima disaster in March However, these announcements were not followed by measures in favour of wind and it now looks as if the big winner on the programmed withdrawal from nuclear power is gas and not renewable energies. Wind turbine manufacturers thus under-performed the DJ Industrials in H2 11. Chart 6: Comparative performance for wind players and the DJ Stoxx Industrials in 2011, base 100 at 1 January Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Vestas Gamesa Stox x Industrials Source: Datastream It is unlikely that the sector will rebound in 2012 and outperform the index owing to a climate that will remain unpropitious for wind in 2012/2013 (debt crisis in Europe, shale gas and possible demand collapse in 2013 in the US and the unprofitable Chinese market owing to pressure on prices). The only player which could outperform the index, in our view, is Gamesa which is likely to deliver growth and margins over those of its peers thanks to its exposure to higher growth countries (51%e of sales generated in emerging countries, excluding China). Valuations converging towards those of the capital goods sector Since 2009, wind turbine makers have been trading in line with the capital goods sector From 2006 to mid-2008, European wind turbine manufacturers traded on an average premium to the traditional capital goods sector of respectively 45%, 44% and 35% in terms of PE, EV/EBIT and EV/EBITDA owing to the promising growth prospects that this sector offered. These premiums were justified till 2009, as average annual growth for turbine manufacturer sales was over 20% vs. 9% for traditional capital goods. However, with the financial crisis, which has undercut demand, and the growing competition on this market, growth prospects for wind turbine manufacturers are much less attractive and their margins are under pressure. These premiums are thus no longer justified and virtually disappeared as of November We saw a blip at the start of 2011 owing to Fukushima. Capital goods I 9

10 Chart 7: Historic 12 months forward valuation ratios (x) over 2006/2012 for European turbine manufacturers and capital goods, and the premium trend 35x 30x 25x 20x 15x 10x 5x 0x PE 200% 100% 0% -100% Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 Premium (discount) Average wind power Av erage traditional capital goods Average premium 25x 20x 15x 10x 5x 0x EV/EBIT 200% 100% 0% -100% Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 Prime (décote) Av erage w ind pow er Av erage traditional capital goods Av erage premium 25x 20x 15x 10x 5x 0x EV/EBITDA 200% 100% 0% -100% Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 Premium (discount) Av erage w ind pow er Av erage traditional capital goods Av erage premium Source: Datastream The wind sector is likely to remain difficult in the short term and notably in 2013 if the PTC subsidy in the US is not prolonged (expiry in December 2012). In this context, we do not expect a rerating for the multiples at European wind players before 2 or 3 years when the medium term catalysts that we have identified (grid parity and ramp-up for offshore) will being to materialise. Even if current valuations look appealing and ripe for a necessary consolidation movement, we do not think that this will take place in the short term owing to the major uncertainties dragging on the sector at this stage. Our target price for Gamesa stems from an average between a DCF which allows us to value the group s future value creation potential and the application of average capital goods sector multiples, which also factors in the obstacles that Gamesa faces short term. For Vestas, we have not used valuation methods by multiples owing to aggregates that have deteriorated too much at this stage, owing to execution problems we think temporary. Capital goods I 10

11 We note that apart from EV/EBITDA, valuation multiples are much higher than for traditional capital goods. This is due to sharp deterioration in line items and the presence of fast-growing wind turbine manufacturers such as the Chinese companies Sinovel and Goldwind. The use of this sample is therefore not relevant and we have thus used the median value of the capital goods sector to value Gamesa. Table 4: Valuation table for our capital goods universe of coverage at 04/11/2012 x Rating Currency Cap. PE EV/EBIT EV/EBITDA ( m) 2012e 2013e 2014e 2012e 2013e 2014e 2012e 2013e 2014e ABB Ltd Buy CHF 34, Alstom Buy 7, Legrand Neutral 6, Philips Buy 13, Schneider Electric Neutral 24, Siemens Reduce 66, Large cap average Ansaldo STS Neutral 1, Faiveley Buy Mersen Buy Neopost Neutral 1, Nexans Buy 1, Prysmian Buy 2, Rexel Buy 4, Saft Neutral Mid cap average Sector average Vestas Reduce DKK 1, Gamesa Buy Nordex Suzlon INR na na na Sinovel $HK 3, na na na na na na na Goldwind $HK 1, na Wind median Premium (disc.) (%) Source: Natixis Strong re-rating potential in the medium term If, as expected, we see a return to strong growth in wind energy in 2015/2016, thanks notably to a normalisation of the US market, reaching grid parity and the take-off of offshore, valuations of wind turbine manufacturers could return to the historic average. Thus, using historic multiples in our 2015/2016 estimates for Gamesa and Vestas discounted at their WACC, we obtain a valuation of 5.4 for Gamesa versus a TP of 2.8 and DKK77 for Vestas versus a TP of DKK45. Capital goods I 11

12 Table 5: Summary of valuations Methods Vestas (DKK) Gamesa ( ) 2012e 2013e 2012e 2013e DCF Terminal operating margin (%) Infinite growth (%) 2 2 Beta WACC (%) Value per share Weighting (%) PE Ratio applied (x) 9.6x Value per share 2.8 Weighting (%) 12.5 EV/EBIT Ratio applied (x) 7.5x Value per share 1.7 Weighting (%) 12.5 Average target price Rating Reduce Buy Upside (%) Discounted cycle peak valuation 2015e 2016e 2015e 2016e PE Ratio applied (x) Value per share EV/EBIT Ratio applied (x) Value per share Cycle peak valuation Source: Natixis Play exposure to strong growth zones Our stock hierarchy for 2012 focuses on exposure to geographic zones showing strong growth which favours Gamesa (51%e of its sales in emerging countries outside China). Even if Vestas is the turbine manufacturer present in the most countries, it is still very dependent on the European, US and Chinese markets (85% of sales). Long Gamesa /Short Vestas We propose a long Gamesa /short Vestas (respective target prices of 2.8 and DKK45 i.e. potential of +22% and -11%) to play the geographical diversification towards strong growth countries. Our priority goes to Gamesa, whose geographical exposure is oriented towards high-growth countries Gamesa is the most diversified group in our sample with exposure to Europe of just 28% (of which 18%e in Eastern Europe) and a strong presence in fast growing regions like India (19%) and South America (14%). Hence, Gamesa will be the only one to post growth in 2013, if the American market slides owing to the probable non renewal of the PTC. Gamesa is also a very reactive player. It has known how to rapidly shift its geographic mix in terms of sales and means of production. Indeed, Europe which represented 73% of the sales and 100% of its production capacity in 2004 now only represents respectively 28% of its sales and 32% of its capacity. The group also has as a trump in Capital goods I 12

13 the form of its main shareholder Iberdrola which is also its largest client (13% of the MW sold per year on average over the next ten years). Iberdrola will also be able to sustain Gamesa in its development in offshore as it has a project portfolio of almost 10 GW. Finally, in the past Gamesa has shown the soundness of its financial management and its management s fine track record, as it is the sole player in the last seven years: 1/ not to have made a single share issue, 2/ never to have generated losses, 3/ to pay a dividend each year and 4/ not to have issued a profit warning in Vestas, however, despite a presence in 67 countries, is very exposed to European (45% of sales in MW of which 7%e in Eastern Europe) and American markets (30%), two markets which will see difficult years in 2012/13. Moreover, Vestas has shown little responsiveness with regard to the crisis by adopting something of a wait-and-see stance. Indeed, since the crisis of 2008, Vestas has not altered its strategy and has continued to operate without factoring in the new climate. Vestas has also struggled to grasp the industrialisation of new products as the entry into production of the new V MW series and the GridStreamer systems has met with many operating problems such as the delay of several months in the implementation of a new generator production plant. These problems have led to extra costs that management had not expected, which will undercut the margin in 2012, as the turbine activity (its core business) will not have reached breakeven. Finally, the string of profit warnings (5 in 2 years) has severely dented management credibility. Capital goods I 13

14 3. A business model that needs adapting Wind turbine makers must develop their business model under difficult conditions The overcapacity situation facing wind turbine manufacturers, since the crisis of 2008, on the sector s historic markets that are Europe, the US and now even China, has pushed down margins and led to substantial cash outlay to finance increasingly large investments and the rise in WCR. They have thus shifted their business models towards greater innovation, more services and more outsourcing. At the same time, they have to invest on a large scale to take part in the expected takeoff for offshore wind expected towards 2015/2016 alongside industrial groups that have recently arrived on this market. In our view, Gamesa is the group that has shifted its strategy the fastest to this environment by investing in steep growth zones like India and Brazil. Vestas is the group that looks the least adapted to this environment and above all gives the impression of simply absorbing the blow over the last three years. In a climate of increasingly large projects with delayed financial returns, sector consolidation looks inevitable in the medium term. Vestas and Gamesa thus look like prime targets. World overcapacity dragging on prices Surplus capacity weighs heavily on prices In 2008, wind turbine manufacturers invested massively in extending their production capacity, notably in the US and China which are the two largest markets. However, they have to cope with: 1/ the arrival of new entrants, 2/ the advent of shale gas in the US which has made electricity wind much less competitive than gas and 3/ a ramp-up for the local Chinese industry. Finally, the European market is sluggish at present owing to the sovereign debt crisis. Wind players have thus been in a situation of overcapacity since 2009 which drags on prices and margins, and this could last as in the short term we do not see any real catalysts likely to alter things. Chart 8: Trend for the average selling price for wind turbines since 2004 outside Asia ( m/mw) H1 04 H2 04 H1 05 H2 05 H1 06 H2 06 H1 07 H2 07 H1 08 H2 08 H1 09 H2 09 H1 10 H2 10 H1 11 H2 11 Source: Bloomberg New Energy Contrary to received opinion on the market, the pressure on prices does not just stem from the Asian competition but mainly overcapacity at manufacturers which have to develop multi-local strategies. The Chinese barely export 1% of their production and even though they have serious ambitions in terms of exports, their products are still ill adapted to international demand. It is thus mainly industry overcapacity throughout the world which is forcing each maker to adopt very aggressive commercial Capital goods I 14

15 policies. To stand out from the competition, large industrial groups like GE and Siemens, offer financing to their clients, but the independent turbine manufacturers have no other choice but to lower their prices. Owing to the imposing nature of the turbines and the scale of costs of transport, there are relatively few exports on this market. For example, to deliver a 1 MW turbine to Brazil from China costs about $200k, i.e. about 20% of the turbine price. Competition on the wind market is thus much healthier than on the solar market, where Chinese exports have hit western manufacturers hard. At present, even with such high transport costs, the Chinese manage to undercut western players by 10%, but this price gap is generally offset by a sounder performance for western turbines at equivalent power. These substantial transport costs thus oblige manufacturers to adopt a multi-local strategy and to build production capacity in most countries where their clients are located. Protectionist measures do not improve this situation. Though many countries are ready to introduce incentives for renewable energies via subsidies or repurchase tariffs, this is for ecological reasons but mainly to create jobs. So more and more countries, including Brazil and Turkey in onshore for example and France and South Korea in offshore, make it obligatory for a large proportion of the wind turbines sold on their territory to be produced there. This raises a real challenge in terms of flexibility for production capacity, as the under-load for units will not be easily offset by exports. European turbine manufacturers still very exposed to their domestic markets Vestas is overly dependent on the European market Vestas is the most international player, present in 67 countries. However, Vestas still chalked up 45% of its 2011 sales in Europe (o/w 7%e in Eastern Europe). The turbine manufacturer offering the most diversified geographical sales spread is Gamesa, with exposure to Europe of just 28% (o/w 18%e in Eastern Europe versus 56% in 2008), thanks to fast expansion in emerging countries notably India and Brazil. Moreover, the group has managed to cut its dependence on its domestic market as its sales made in Spain only represent 8% of total 2011 sales versus 42% in Chart 9: Geographical breakdown for sales (MW) at Vestas and Gamesa in 2011 Vestas Gamesa USA 14% Europe 45% USA 30% Europe 28% China 23% Rest of world 10% China India 10% 5% Rest of world 2% Latam 14% India 19% Sources: Companies Note also that the turbine manufacturers most at risk faced with the drying up of credit for their clients are the independents like Vestas and Gamesa. However, large groups with heavy financial firepower such as Siemens and GE are likely to be penalised less by this phenomenon as they can stand in for banks as providers of financing. Market share losses in favour of players with a financial division such as GE or Siemens and at the expense of the pure players is thus highly likely. Note Capital goods I 15

16 that in this context, Gamesa has a trump card with the presence in its capital of Iberdrola which is also Gamesa s largest client (13% of sales). Margins still under pressure medium term Margins are under tension due to pricing pressure and rising capex Owing to intensification of the competition, internationalisation of the market and the arrival of wind offshore, European wind players have invested hugely as of 2008 in new capacity and turbines. Hence, investments have risen on average from 5.3% of sales in 2007 to 8.9% in From 2012, they are likely to gradually diminish as, given surplus capacity, turbine manufacturers no longer need to invest in fixed assets. But they will remain at a relatively high level (>7% on average versus maintenance capex at about 4%) owing to R&D capex. Note that the level of capex of Vestas is structurally higher than at Gamesa owing to its business model which is much more vertically integrated and a larger capitalisation that its rivals in R&D expenditure (almost 80% versus about 60% in average). Chart 10: Comparison of investment levels for wind turbine manufacturers since 2007 (capex/sales) 18% 15% 12% 9% 6% 3% 0% e 2013e 2014e Vestas Gamesa Sources: Company, Natixis estimates This rise in investments occurred when volume growth was slowing sharply. The increase in depreciation has thus dragged on EBIT margins, down from 7.3% on average in 2008 to 0.7% in Margins should recover as years go by, but at a very low pace owing to depreciation, volume weakness and pressure on prices. Hence, we believe that EBIT margins will not exceed 3.3% on average in In this strategy, we draw a distinction between Vestas which has invested hugely in extending their capacity fruitless with the fall in demand and Gamesa which has focused its investments on the reallocation of capacity to fast-growing regions (India and Brazil notably). Capital goods I 16

17 Chart 11: Comparison of EBIT margins for wind turbine manufacturers since % 10% 8% 6% 4% 2% 0% -2% e 2013e 2014e Vestas Gamesa Sources: Companies, Natixis estimates Another consequence of the rise of investments and the weakness of margins is the sharp deterioration in ROCE. In view of the weak volume growth expected over , we do not expect a return to ROCE levels exceeding WACC medium term for any of the turbine manufacturers. Note that ROCE levels were much higher before 2009 as balance sheets were still not over-sized. Chart 12: Comparison of ROCE for wind turbine manufacturers since % 30% 20% 10% 0% e 2013e 2014e Vestas Gamesa Sources: Companies, Natixis estimates We also see a constant rise in WCR for players since 2007, owing to weak negotiating power with clients owing to sector overcapacity. Hence prepayments have fallen a great deal (they are variable as a function of the turbine manufacturers and clients but generally there at least 3, one at order intake, one at delivery and one at installation) and at present the largest prepayment is the one made on delivery of the turbine. Moreover, they have even disappeared in the case of reservations or conditional orders. Indeed, only Vestas being the world leader, with a positioning that is slightly higher than its rivals, has greater negotiating clout with its clients in terms of prepayments, allowing it to post negative WCR in Capital goods I 17

18 Chart 13: Comparison of WCR / sales for wind turbine manufacturers since % 40% 30% 20% 10% 0% -10% -20% e 2013e 2014e Vestas Gamesa Sources: Companies, Natixis estimates However, even though Vestas has managed to avoid a surge in its WCR over the last few years, this has not prevented it from burning cash like Gamesa. We do not see a return to cash generation and a normative margin before normalisation of the US market and a return of government subsidies for renewable energies. We do not believe that this situation will emerge before 2-3 years. Chart 14: Comparison of FCF for the wind turbine manufacturers since 2007 ( m) e 2013e 2014e Vestas Gamesa Sources: Companies, Natixis estimates Wind turbine makers must invest massively in innovation and services to offset pricing pressures Three ramparts to margin pressure: innovation, services and outsourcing Faced with the price pressure triggered by global overcapacity, European manufacturers have to shift their business models towards greater innovation, more services and more outsourcing. Vestas is the best placed in services with an EBIT margin of about 15%, while Gamesa has a margin of just 5%. However, this does not suffice to offset the very low margins on their turbine sales. Innovation has allowed turbine manufacturers to improve their product mix and to maintain quite stable average selling prices. However, without calling on outsourcing, innovation is expensive in capex and weighs on cash generation, as is shown in the case of Vestas. Gamesa, which has greater recourse to outsourcing than Vestas, invest less without this preventing them from releasing new turbines. Capital goods I 18

19 The average selling prices for turbines for each European manufacturer looks relatively stable owing to their favourable geographic mix (strong exposure to Europe) and the improvement in their product mix with the release of new top end turbines. Chart 15: Change in the average selling price in m/mw Vestas Gamesa Sources: Companies, Natixis This does not mean, however, that prices are holding up: since peaking in H1 09 (at 1.21m/MW excluding Asia), wind turbine prices have fallen by almost 20% according to Bloomberg New Energy. Price differences of 100% can be seen in some cases, depending on: The country where the turbines are sold: compared with the average sale price in Europe, prices are 25% lower in the United States and 50% lower in China, reflecting labour costs and the technical characteristics of the turbines. In areas with more wind (the US and China), turbines do not have to be as complex or technically advanced. Chart 16: Prices as a function of geographic zones, base 100 for Europe Europe USA China Sources: Industry, Natixis The capacity of the turbines. The more powerful the turbine, the larger and more efficient it will be. For instance, one 5 MW turbine generates more electricity than five 1 MW turbines, and is cheaper to make. That said, a manufacturer will charge more for one 5 MW turbine than five 1 MW ones, since the 5 MW model is more efficient, allowing operators to generate higher IRRs on projects. In sum, turbine manufacturers keep a portion of the additional efficiency by charging higher prices. This means that investments in ever more efficient wind turbines are going a long way toward keeping price pressure at bay. Capital goods I 19

20 Table 6: Share of turbines sold as a function of their power % Power (kw) > Source: BTM Consult R&D spending up sharply European turbine manufacturers are investing massively in R&D to set themselves apart from competitors and bring ever more efficient products to market. Another factor behind the sharp increase in R&D budgets is the development of offshore turbines, which require steep investments. Vestas is planning to introduce a 7 MW offshore turbine in 2015 and Gamesa a 5 MW turbine in 2013 then a 7 MW model in 2015, while Nordex should have a 5 MW turbine available in 2013 and another one of 7 MW available in Note that Vestas spends considerably more on R&D than Gamesa since: 1/ a higher percentage of its R&D expenses are capitalised (about 80% vs. around 60%), and 2/ Vestas is the most vertically integrated manufacturer, meaning it cannot share investments with its subcontractors. Table 7: Comparison of turbine manufacturers R&D budgets in 2011 vs m Amount % of sales Amount % of sales Vestas Gamesa Natixis estimates Sources: Companies Services powering ahead Services are another means for turbine manufacturers to considerably increase their profitability, since EBIT margins on services are 15% vs. 5% for turbines. Moreover, services are growing at a much faster pace than turbines. Table 8: Share of services in manufacturers revenue and EBIT margins in 2011 % Services/Sales EBIT margin Vestas Gamesa 12 6 Sources: Companies Some players are innovating as well. Vestas, for instance, is offering performance guarantees. When turbines exceed guaranteed performance levels, a portion of the outperformance is recovered by the manufacturer, and vice versa. Lastly, manufacturers can sell new optimisation services to existing customers, making installed bases bona fide war chests for them. With the largest installed base in the world, Vestas has the most advantageous position in the segment. Capital goods I 20

21 Table 9: Ranking of the ten largest installed bases in the world Rank Country 2010 installed base (MW) 2010 installed base (%) Vestas 1 Denmark 45, GE Wind 2 US 26, Enercon 3 Germany 22, Gamesa 4 Spain 21, Suzlon 5 India 17, Siemens 6 Germany 13, Sinovel 7 China 10, Goldwind 8 China 9, Nordex 9 Germany 6, Dongfang 10 China 6, Others 19, Total 199, Source: BTM Consult Outsourcing to become increasingly common Vestas must outsource more to lighten its cost base The wind energy industry is still young, which is why the firms that have entered the market are perfectly vertically integrated. Going forward, growing competition, and the arrival of numerous SMEs in the market thanks to state subsidies, will make reliance on subcontractors more and more common. This will notably allow turbine manufacturers to share some of the risk they incur with suppliers and also give them more flexible cost structures. The change will happen gradually, but it must happen if manufacturers want to be able to withstand a crisis in the future. In periods of excess capacity, outsourcing will attenuate the impact of volume contractions on margins. Wind turbine manufacturers can thus be expected to shift increasingly toward the same models as assemblers, producing only components that generate the biggest share of the value added in turbines. Vestas has not given any targets with regard to subcontracting, but says it plans to rely more on it going forward. The group has shown a real lack of flexibility when it comes to its production capacity and has until now been unable to adapt to the market environment. Since it provides so little information about outsourcing, we have assumed that the group does not truly intend to strive toward a more flexible business model. Gamesa has adopted a better strategy of scaling back capacity in Europe and relocating to higher-growth areas through outsourcing. In less than two years, this approach has reduced the share of capacity based in Europe to 32% from 69% in Chart 17: Outsourcing usage target for Gamesa out to % 85% 88% 50% 53% 41% 35% 38% 28% 12% 3% 31% 62% 60% 39% Blades Gear box Generator Moulded parts Electronic components e Source: Gamesa Capital goods I 21

22 Table 10: Overview of the main steps in turbine manufacturing and outsourcing levels Component Comment Vestas Gamesa Assembly of nacelles Not capital intensive at all, therefore never outsourced Not outsourced Not outsourced Blades Gearboxes Very critical part of turbine with high level of value added, therefore usually manufactured in-house Less and less important component following the development of direct drive systems Not outsourced Not outsourced 28% outsourced 35% outsourced Generators Value-added component usually manufactured in-house, Not outsourced 12% outsourced with some reliance on parts made by ABB or Siemens in particular Power converters Not very capital intensive, value added component Not outsourced 62% outsourced Control systems S Towers Sources: Industry, Natixis Not very capital intensive, high value added component, therefore rarely outsourced Low value added component, usually outsourced to local firms to avoid transport costs Not outsourced Partially outsourced Not outsourced Outsourced Will independent turbine manufacturers disappear? Robust growth in the wind energy market starting in 2005 attracted many new entrants. The biggest independent players were created in China, thanks notably to significant aid offered by the state in terms of financing wind farms and industrial operations. In the past two to three years, a number of large Korean and French companies also moved into the segment to take advantage of the anticipated boom in offshore wind. However, market growth has slowed so much since 2009 that consolidation will be the only option over the medium term. It will likely happen through a combination of bankruptcies, as we are currently seeing more of in China, and takeovers of independent turbine manufacturers by large, generalist firms. Indeed, independent manufacturers do not have solid enough balance sheets to conquer the offshore wind energy market and keep pace with ever larger wind farms. Against this backdrop, Vestas and Gamesa will be prime takeover targets for larger industrial firms. Market still highly fragmented 15 players shared 89% of the market in 2010 Wind turbine manufacturing is still a very scattered market. At the end of 2010, 15 companies shared 89% of the market, but few of them had the credibility that comes with international scope and broad product ranges. The top 15 turbine manufacturers include seven Chinese firms deriving all of their revenue from their domestic market, and none has a truly proven technology for now. As of today, the most credible players in terms of technology, track record and international scope are independents: Vestas, Enercon, Gamesa and Suzlon (thanks to REpower). General Electric and Nordex are also large firms with some credibility, but they do not have real international bases. Siemens is not very active in the onshore segment but is No. 1 worldwide in offshore. Siemens and General Electric are the only generalist industrial firms found among the top 15. Capital goods I 22

23 Chart 18:Geographic and market share positioning for the 10 leading global turbine manufacturers Market share (%) 14 Vestas (Denmark) Sinovel (China) Goldwin (China) Dongfang (China) GE Wind (USA) Siemens Wind (Denmark) Enercon (Germany) Suzlon (India) Gamesa (Spain) 4 5 United Power (China) National positioning Regional positioning Global positioning Source: BTM Consult More generalist industrial firms moving into wind energy market As wind projects eat up more capital, we will be seeing the smaller players drop out Competition should get even fiercer in the years ahead as new players, notably from Korea and France, move into the market. In the short term, this could lead to even more excess capacity and price pressure. Many of the new players are large generalist industrial firms already established in electricity generation (gas, coal or nuclear power plants), but not in wind energy. They are taking advantage of protectionist policies at home to set up wind energy businesses and establish track records before setting out to conquer international markets. Table 11: Characteristics of the main industrial groups on the wind market Companies Origin Entry year Entry type General Electric US 2002 Acquisition of Enron s wind assets Siemens Germany 2004 Acquisition of the Danish group Bonus Alstom France 2007 Acquisition of Spanish player Ecotècnia Areva France 2007 Acquisition of 51% of German player Multibrid, then the remaining 49% in 2010 Hyundai Heavy Industries South Korea 2008 Acquisition of the American Superconductor Windtec licence Samsung Heavy Industries South Korea 2008 Independent Daewoo Shipbuilding South Korea 2009 Acquisition of German player DeWind Doosan South Korea 2009 Independent United Technologies US 2009 Acquisition of 49.9% of US player Clipper Windpower in balance in 2010 Sources: Companies Capital goods I 23

24 As of today, Siemens and General Electric are the only generalist industrial firms that count among the top 15 wind turbine manufacturers. Two key factors suggest that recent evolutions in the wind energy market will attract more industrial firms: The development of offshore wind will force turbine manufacturers to step up their investments considerably. Until recently, offshore turbines were mere derivatives of onshore models. Today, however, offshore wind generation requires specific turbines that are much more powerful than onshore models. In sum, the business will involve steeper investments and additional risk, since returns will not come as quickly. It is easier for groups with solid financial bases to make such investments than independent companies. In offshore and onshore alike, wind energy projects are involving ever more installed capacity. This means that they require more recourse to debt than in the past, a trend that should carry over as technological advances continue to be made. When credit is tight, as is the case today, large industrial groups have a real advantage since they can provide guarantees and secure better financing terms than independents. In sum, large industrial firms have two advantages over independent turbine manufacturers: their balance sheets are more robust, and they have the ability to create synergies between different businesses in terms of selling (same clients) and costs, since R&D spending can be streamlined and made to benefit multiple divisions. Generalist manufacturers could start making acquisitions to speed their development in the wind market Sector consolidation to be driven primarily by these groups The wind energy market is much too fragmented and consolidation will be necessary for it to be able to withstand situations of excess capacity and price pressure in the future. We see this consolidation being driven by large industrial firms that will only be able to win market share quickly and develop internationally through acquisitions. For instance, Siemens and Areva are very active in offshore wind but not very involved in onshore. It would not be surprising if they used acquisitions to speed up their development in the latter segment. Likewise, General Electric and Korean manufacturers may have solid positions in their domestic markets, but not internationally. They are therefore likely to target manufacturers with robust positions in regional markets. Meanwhile, Alstom is active in both offshore and onshore, but its market share is still low. Table 12: Needs for large industrial groups to pad out their wind portfolio Companies Country Strong position Needs Siemens Germany Offshore International onshore Areva France Offshore International onshore Alstom France Potentially offshore International onshore General Electric US Domestic market European onshore and offshore United Technologies US Domestic market European onshore and offshore Hyundai Heavy Industries South Korea Domestic market European or US onshore and offshore Samsung Heavy Industries South Korea Domestic market European or US onshore and offshore Daewoo Shipbuilding South Korea Domestic market European or US onshore and offshore Doosan South Korea Domestic market European or US onshore and offshore Sources: Companies Capital goods I 24

25 Nordex, Gamesa and Vestas the main candidates for takeover In our view, Gamesa has more speculative appeal than Vestas At the end of the day, not many takeover targets can meet the criteria of the large generalist industrial firms. Indeed, most potential targets are either Chinese or relatively small, local players. This leaves Vestas, Gamesa and Nordex. Vestas alone has a 100% free float. Given the major uncertainties facing the sector, we do not see any M&A deals of this size happening in the near term, even if valuation multiples may seem low. They will be inevitable, however, over the medium term. Gamesa has a more international profile and broader product portfolio than Nordex. It is solidly anchored in Europe (28% of the MW sold in 2011), China (23%), India (19%), the US (14%) and Latin America (14%). It would therefore be an ideal target for a Korean or Chinese firm. Other potential predators include Areva and Siemens, whose presence in the onshore market would be a good fit with that of Gamesa. It should nonetheless be noted that Iberdrola owns 20% of Gamesa and is its largest client, such that a tie-up with another firm would have to receive the blessing of Iberdrola. Vestas is No. 1 worldwide in wind energy with positions in all product segments and geographic areas. It would be a perfect target for an industrial firm with small or no existing positions in wind energy, for instance industrial firms from Korea. On the other hand, a tie-up with a European or American group would not make sense since there would be a good deal of overlap in terms of product offerings and geographic footprints, meaning extensive and costly restructuring would be required. With a free float of 100%, there is nothing to prevent another firm from making a takeover bid. However, there is a strong corporate culture in this Danish firm, a factor that could complicate the integration process. Nordex would probably be the easiest prey given its small size (market cap of 303m as of 04/01/2012). However, the buyer would have to convince SKION, the family holding company of entrepreneur Susanne Klatten, which has purchased 24.99% of the capital at an average price of about according to our estimates, i.e. almost 5 times the current price. That being said, a buyer could potentially acquire all of the free float (75%). Nordex would be an ideal target for a group seeking to bolster its positions in onshore wind in Europe (for instance GE), an industrial firm from Korea, or Areva, which is totally absent from the onshore segment for now. The specific case of China It could seem logical for Chinese firms to make acquisitions in Europe or the US, as this would be the easiest way for them to establish international bases, but we do not believe the current climate is conducive to this type of move. Moreover, cultural and political considerations could make it very tough for Chinese firms to snatch up European ones. Lastly, it would be difficult for a Chinese buyer to take control of the combined entity since the businesses being merged would be completely different: Chinese manufacturers mass produce low-cost turbines for local markets and provide no related services, while the potential targets are established globally and sell high-end turbines. The fact that the Chinese market itself is still very fragmented also suggests that manufacturers from there will not be making forays into other countries until consolidation has taken place in their domestic market. Capital goods I 25

26 4. Overcapacity on historical markets Despite the still low penetration rate for wind energy in worldwide electricity generation (less than 2%) and an energy mix that necessarily has to switch towards renewable energies in the medium term, since 2009 the wind turbine market has experienced a slowdown in demand in the main zones, namely Europe, the US and China, which is set to last for the next two years. Indeed, the European sovereign debt crisis, which will probably result in a contraction in credit and a temporary reduction in subsidies for renewable energies, will weigh on demand. Debt is an integral part of the wind energy business model (wind farms are more than 70% debt financed). The industry will also have to cope with the strong volatility of the US market stemming from fears of a non-renewal of the PTC (subsidy of $22 /MWh, which expires in December 2012) and lastingly low gas prices as a result of the emergence of shale gas. Last, the Chinese market is likely to slow and be increasingly served by the local industry. Chart 19: Breakdown of newly installed wind energy capacities by continent 20% 6% 21% 25% 28% 33% 41% 55% 53% 50% 53% 51% 50% 23% 23% 29% 34% 30% 17% 22% 26% 19% 20% 21% 73% 56% 52% 42% 33% 29% 28% 25% 24% 28% 28% 29% e 2013e 2014e 2015e Europe, Africa & Middle East Americas Asia Pacific Sources: BTM Consult, GWEC, Natixis Therefore, in 2012 and 2013, European wind turbine manufacturers are likely to continue to suffer from overcapacity due to their strong presence on the European and American markets. In 2011, the production capacity utilisation rates of Vestas and Gamesa were respectively 50%, 73%. Gamesa should be the least affected thanks to its exposure to fast-growing countries (India and Brazil, notably). The European market still has three difficult years ahead due to the sovereign debt crisis European market penalised by the sovereign debt crisis The European market is currently the leading market in terms of the installed base, with 97.8 GW (40% of the worldwide installed base) and the number 2 market in terms of new capacities installed per year, behind China, with 10.3 GW installed in 2011 (25% of annual worldwide capacities installed). Insofar as the financing of wind farms is 70% based on debt, a credit crunch could result in a genuine slowdown in the growth of wind energy in Europe. After average annual growth of 8.4% between 2005 and 2011, we expect the wind energy industry to grow by 5.6% per year between 2011 and Growth will be driven mainly by Germany, which will particularly favour Vestas (19% market share and 8% of sales), and Eastern Europe and Turkey, which will mainly benefit Gamesa (around 15% of sales). Capital goods I 26

27 Credit crunch and widening of interest rate spreads: a double whammy The business model of wind farm operators is based on bank financing for more than 60% (and generally 80%) of the total project amount over an average duration of 15 to 20 years. Activity in this sector is therefore highly dependent on the ability of the banks to supply financing as there is no alternative source. To date, no bond financing has been issued for this type of project. What is more, financing needs are steadily increasingly due to ever bigger and ever more powerful onshore wind farm projects with the arrival of giant 3 MW turbines, and the emergence of offshore projects up to 9,000 MW in size (equivalent to nearly 7 EPRs). The inevitable consequence of the drying up of credit that we have seen in the euro zone since June 2011 will be delays to wind farm projects. Chart 20: Financing conditions in Europe (supply of credit by the banks and demand for credit from companies) Credit crunch 0-20 Improvement in access to credit -40 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Sources: ECB, Bloomberg For example, EDF chose to delist its subsidiary EDF Energies Nouvelles given the scale of the financial resources needed to respond to the tenders issued in France for wind farms with capacity of at least 500 MW, i.e. an investment of around 1.5bn per farm spread over four years. Insofar as EDF EN bid for four wind farms, this represents a potential investment of 6bn over four years, or 1.5bn per year just for French offshore tenders, while the group s total capex in 2010 represented 1.2bn. It is thus easy to see that, without a merger with EDF, EDF EN would not have had a sufficiently solid balance sheet to enter the offshore wind farm market while remaining in the onshore wind energy market. What is more, wind farm developers and operators have to cope with soaring interest rate spreads. Capital goods I 27

28 Chart 21: Trend in interest rate spreads versus the German Bund in basis points since January Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Italy France Greece Portugal Ireland Spain Belgium Source: Datastream In the current environment, we believe that credit conditions could return to 2009/10 levels, with spreads of 300bp, higher arrangement fees and possible recourse to the parent company, whereas the situation had returned to normal at the end of In addition, it is highly probable that the banks will demand shorter loan periods. Table 13: Credit terms for a wind farm project Borrowing terms 2007/ / / /2012e Share of the project financed by debt 80/90% 65/75% 80/85% 65/75% Arrangement fees (one-time payment) bp bp bp bp Interest rate spread bp bp bp bp Duration of the loan years years 15 years years Debt with recourse No Possible No Possible Source: Natixis Project Finance These financing problems put pressure on the IRR of operators and move grid parity further away (cost of a wind-generated MWh of power equivalent to the retail purchase cost of electricity). If this situation continues, it is likely to result in orders being delayed or even projects being cancelled in Table 14: Sensitivity of the equity IRR of a wind farm project depending on the cost of debt and share of bank financing % Borrowing rate Share of debt in the project 4% 5% 6% 7% 8% Source: Natixis Capital goods I 28

29 Renewable energy support policies increasingly at risk Due to the crisis, renewable energy support policies, which are still vital to the financing of wind energy for as long as grid parity has not been reached, could be called into question in Europe. For example, Europe is reportedly getting ready to drop its 3x20 plan (20% clean energy, 20% reduction in emissions and 20% of energy consumption by 2020) as a result of the crisis and the high cost resulting from the change in the mix (on 17/01/2012, Siemens announced that it estimated the cost of the abandoning of nuclear power in Germany at 1,400/1,700bn between now and 2030). Solar energy is the hardest hit, with a number of countries announcing reductions in feed-in tariffs. Wind energy is also starting to be affected, notably in Spain, where the new government of Mariano Rajoy decided in January 2012 to suspend, without retroactive effect and until further notice, subsidies for new facilities to produce electricity from renewable sources, waste and cogeneration. This measure follows a cut with retroactive effect in feed-in tariffs in February 2011 and a 40% reduction in aid for the wind energy sector in October The Spanish wind energy market is therefore set to remain at a virtual standstill until We expect just 1,450 MW in total new capacities to be installed between 2011 and 2015 vs. 1,050 MW installed in Italy could be the next country to reduce subsidies for wind energy, which are among the highest in the world at 140 /MWh, via a system combining feed-in tariffs and green certificates. Annual growth of 6%e in 2010/2015 in Europe versus 12% in 2005/2010 We believe that the capex programmes of wind farm developers are now at risk in the countries hardest hit by the crisis, namely: Spain, Italy, Ireland, Portugal and Greece. We expect a compound annual growth rate (CAGR) for new wind energy installations in Europe of 6% in 2010/2015 compared with 12% from 2005 to 2010 and after a fall of 6.6% in Table 15: Growth in new wind energy installations in Europe MW e 2013e 2014e 2015e CAGR 05/10 (%) CAGR 10/15 (%) Austria Belgium Denmark Finland France ,200 1,104 1, ,000 1,100 1,200 1, Germany 1,808 2,233 1,667 1,665 1,917 1,551 2,086 2,100 2,300 2,450 2, Greece Ireland Italy ,010 1, Netherlands Norway Poland , Portugal Romania na 15 Spain 1,764 1,587 3,100 1,739 2,331 1,516 1, Sweden ,000 1, Turkey ,000 1,200 na 18 UK ,077 1,522 1,293 1,700 1,800 1,900 2, Other ,050 1, Total Europe 6,373 7,681 8,290 9,180 10,740 11,060 10,328 10,330 11,520 12,990 14, Growth (%) Total World (%) Sources: BTM Consult, EWEA, Natixis estimates Capital goods I 29

30 Emergence of unconventional gas in the US In the US, the world s third-biggest wind energy market (16% of new installed capacity in 2011) after China (43%) and Europe (27%), the emergence of shale gas has taken a considerable toll on gas prices since 2009, favouring the development of gas-fired power stations at the expense of a revival of nuclear power and the development of wind energy. We believe that this situation is set to continue in the medium term. In 2012, the wind energy industry should, however, benefit from a windfall effect caused by fears surrounding a possible non-renewal of the PTC (subsidy of $22 /MWh). The backlash is likely to be felt in 2013 due to progress in a number of projects in We therefore expect the US market to grow 18% in 2012, and then fall 50% in In addition, we believe that the US market will not return to its 2009 peak of 9.9 GW installed in the medium term. Vestas is the most exposed to the US market, which accounts for 30% of its sales. Insofar as Vestas is the most vertically integrated wind turbine manufacturer in our universe of stocks, it also has the least flexible production operations. Hefty restructuring costs are therefore to be expected at Vestas in 2012 and 2013 (respectively 50m and 32m vs. 22m in 2011). Gamesa (14% of sales) are also exposed to this market but to a lesser extent. The USA and the discovery of unconventional gas Since the appearance of shale gas, gas prices have fallen by 40% in the US since 2007/2008 In the last few years, advances in drilling techniques have enabled the US to develop unconventional gas deposits and significantly increase domestic natural gas resources. Unconventional gas notably includes: 1/ coal bed methane, which is the gas associated with coal seams; 2/ tight gas, which lies in small pockets in sandy reservoirs; and 3/ shale gas, which is present in small pockets in rocky shales (such as slate, for example). Unconventional gas is today the main contributor to the growth in energy production on the US market. Whereas it accounted for around 30% in 2000, gas production from unconventional deposits in the US is expected to amount to 66% in 2015, rising to 75% in Furthermore, unconventional reserves have an estimated life of over 90 years compared with 30 for conventional reserves. Table 16: Breakdown of world gas reserves in 2010 Potential resources Tight gas Shale Coal bed Total Conventional in 1,000 bcm (bcm bn) reservoirs gas methane unconventional Europe Latin America Africa & Middle East Former Soviet Union North America Australia & Asia Total world , Source: E.ON Thus, gas prices in the US are today 40% below the levels in 2007/2008 while oil prices have risen 145% in the same period. Consequently, electricity producers have an incentive to invest in gas-fired power stations rather than other sources, including renewable energies, which are notably suffering from strong downward pressure from PPAs (Purchase Price Agreements, contracts between the wind farm operator and a utility concerning the purchase of the electricity by the latter). Note, for example, that the US has still not set any targets or framework for renewable energies. In 2010 therefore, there was a sharp drop in new wind energy installations (-48%) to 5,115 MW. Capital goods I 30

31 Chart 22: Trend in gas prices ($/MMBTU) with a lag of one year and in new wind energy installations in the US Annual installations (MW) Av erage annual gas price w ith a 1-y ear lag Sources: Datastream, AWEA, Natixis Fears of a non-renewal of the PTC will buoy activity in 2012 A risk that the PTC is not renewed at year-end, triggering market collapse in was a much better year than 2010 with a progression in new installations of 33% to 6,800 MW mainly due to fears among wind farm operators that the PTC (Production Tax Credit) would not be renewed. This level of growth was, however, much lower than that in 2008/09. Chart 23: Quarterly growth in new wind energy installations in the US since 2008 (MW) Q1 Q2 Q3 Q4 Source: AWEA At the federal level, there are three types of tax credit designed to favour the creation of wind farms: The PTC (Production Tax Credit), which consists in a subsidy of $22 /MWh produced by the farm for the first 10 years of operation and which is set to expire in December For example, the average wholesale electricity price is around $50 /MWh. The PTC therefore enables wind farm operators to receive around $72 /MWh (wholesale price + PTC). The ITC (Investment Tax Credit). This is a tax credit amounting to 30% of the initial investment. This tax credit is granted once, when the wind turbine is put into operation. To take advantage of it, the operator has to be profitable. Otherwise, he has to call on a Tax Equity Partner, generally a bank, which by investing in the project, can monetise the tax credit. This tax credit is also set to expire in December Capital goods I 31

32 The CITC (Convertible Investment Tax Credit) works in exactly the same way as the ITC, the only difference being that the 30% is not paid in the form of a tax credit but directly in cash. It was created in 2009, in the midst of the financial crisis, when Tax Equity Partners were hard to find. This subsidy expired at the end of These three tax credits cannot be combined and wind farm operators have to choose one of them. They have roughly equivalent repercussions for wind farms project IRR. Consequently, the expiry of the CITC at the end of 2011 is likely to have little impact on the industry. Conversely, it is vital that the PTC or the ITC be renewed. Table 17: Summary of tax incentives in the US Expiry Mechanism Comments date PTC Dec Tax credit of $22 /MWh for 10 years The investor will choose this credit if they expect strong production from the wind farm ITC Dec Tax credit of 30% of the initial investment This credit will be chosen if the initial investment is particularly high CITC Dec % of the investment paid in cash This credit will be chosen if the initial investment is particularly high é Source: Natixis The US market is volatile because PTC is never renewed for more than three years The PTC makes the US wind turbine market highly volatile. The PTC has existed since As Table 18 below shows, each time that it was renewed with a lag of a few months after its expiry, the consequences were catastrophic for the wind energy industry, with a plunge in new installed capacities of 82% on average. Because of this system of renewal, the US market is highly volatile, with strong increases followed by sharp drops, which creates real problems for industrials to adjust their production operations to demand. Table 18: Renewal and expiry dates for the PTC since 1999 and consequences for new installations Expiry data Renewal date Lag between the 2 dates Impact on new installations June 1999 December months after -93% in 2000 December 2001 February months after -76% in 2002 December 2003 October months after -77% in 2004 December 2005 August months before +525% in 2005 December 2007 December year before No impact December 2008 October months before No impact as there was no shale gas yet December 2009 February months before No impact December 2012??? Source: Natixis Since 2005, the PTC has been renewed several months before expiry, which has returned the market to normal. Today, there is genuine concern on the market regarding its renewal due to the crisis and the presidential elections at the start of November We expect the PTC to be renewed in H2 12. New installations should therefore continue to increase in 2012 (+18% after +33% in 2011), as a result of the acceleration in project construction in 2012 in order to take advantage of the PTC, followed by a 50% fall in A renewal of the PTC in H1 12 would lead us to revise our figures with a slightly more normal trend in 2012/ is, however, already almost done (around 8 GW, an increase of +18% on 2011, currently under construction). The worst-case scenario would be non-renewal or renewal during 2013, which could result in a fall in new capacity installed in 2013 of more than 80%. A sharp fall in the profitability of this zone is therefore to be expected in 2013 as a result of the low factory utilisation rate and potential restructuring costs stemming from a probable reduction in production capacities. The abruptness of this fall in demand Capital goods I 32

33 will pose a real problem for wind turbine manufacturers in that they will not be able to prepare for it gradually in advance. Chart 24: Growth in new wind farm installations in the US since 1999 (MW) Sources: AWEA, BTM Consult, Natixis Vestas and Siemens are particularly exposed to the US market Siemens and Vestas massively invested in production capacities in the US in As a result, they were the hardest hit by the fall in 2010 and will be exposed if the PTC is not renewed. This overcapacity situation has resulted in strong pressure on prices in this market, which is very price sensitive compared to Europe. This strong sensitivity to turbine prices stems from the fact that the US has major wind resources, which require less complex, and therefore less expensive, turbines than sites with less powerful winds, such as in Europe. In addition, foreign wind turbine manufacturers are up against GE Wind, a powerful player that still had 44% of the market in Chart 25: Market share by manufacturer in the US in 2010 Suzlon Group Gamesa 5% 6% Mitsubishi 10% Nordex 3% Others 2% Siemens 13% GE Wind 44% Vestas 17% Source: BTM Consult Capital goods I 33

34 The potential threat from Chinese exports The Chinese market has seen exponential growth in the last six years (CAGR 2005/2011 of 82%) propelling it to the number one spot on the world wind energy market in terms of new installed capacities. It is an ultra-competitive market with strong pressure on prices and is largely closed to foreign wind turbine manufacturers. Thus, despite its size and the investments made by foreign wind turbine manufacturers on this market, their market share has shrunk steadily to the benefit of domestic producers, and they too are today suffering from overcapacity. Furthermore, with the slowdown of the Chinese market since 2011, domestic wind turbine manufacturers will have to seek other outlets abroad. They probably will not be able to enter the European market in the short term due to the lower quality of their turbines and, more importantly, the total absence of solutions and services in their offerings. On the other hand, they could capture market share in emerging markets such as South America. If this threat were to materialise, it could accentuate and intensify pricing pressures. The Chinese are already the world s leading wind turbine manufacturers Chinese turbine makers already occupy 36% of the world market Chinese wind turbine manufacturers overtook European manufacturers for the first time in 2010 with a worldwide market share of 35.7% in newly installed turbines vs. 35.5% for European players, a big change from 2005, when the Chinese wind turbine industry was still completely non-existent. Chart 26: Growth in the market share in MW of wind turbine manufacturers by origin between 2005 (left) and 2010 (right) Europe 68.5% US China 18.1% 33% India 6.3% US Japan 9% 2.1% Other 5.1% Europe 36% India 7% Other 15% Source: BTM Consult Emergence of veritable sector giants: even though China s industrial fabric is still highly fragmented with more than 60 wind turbine manufacturers on the Chinese market, giants are emerging. In 2010, five Chinese wind turbine manufacturers ranked in the world top 10, versus zero in Capital goods I 34

35 Chart 27: Growth in market share by manufacturer between 2005 (left) and 2010 (right) in newly installed turbines Mitsubishi (JP) 2% Nordex (Ger) 3% Siemens (Ger) 6% Gamesa (Sp) 13% Suzlon Group (Ind) 9% Alstom Wind (Fr) 2% Enercon (Ger) 13% Others 5% Vestas (DK) 29% GE Wind (US) 18% Nordex (Ger) 2% Mingy ang (Ch) 3% United Power (Ch) 4% Siemens (Ger) 6% Gamesa (Sp) 6% Others 16% Suzlon Group Dongfang (Ch) (Ind) 6% 7% Vestas (DK) 14% Sinovel (Ch) 11% GE Wind (US) 9% Goldwind (Ch) 9% Enercon (Ger) 7% Source: BTM Consult Table 19: Overview of Chinese wind turbine manufacturers Company Entry on the market Year of IPO Capitalisation ( bn) 2010 sales ( bn) MW installed in 2010 Sinovel /01/ ,386 Goldwind /01/ ,007 Ming Yang /10/ ,203 Source: Companies Substantial support from the Chinese government, which offers financing at highly beneficial rates to both buyers and sellers Thanks to major support from the Chinese government The rise of Chinese industrials in the wind turbine sector coincided with the introduction of major support policies for renewable energies since In its most recent five-year plan, the Chinese government notably set a target for renewable energy of 11.4% of total energy production in 2015 and 15% in 2020, versus around 7% at present. China therefore set a target of 90 GW newly installed between now and 2015, i.e. 18 GW per year over 2011/2015, and 150 GW by 2020, or 12 GW per year in 2016/2020. To meet these targets, the National Energy Bureau plans to invest CNY5,000bn ( 569bn) over the next 10 years in electricity generation, 30% of which will go to wind energy, i.e. 17bn per year. This support for wind energy results in: The introduction of feed-in tariffs, which vary from $cts5.6 /kwh for the windiest regions to $cts6.8 /kwh for the regions with the least wind in onshore and between $cts7.8 and $cts8.1 /kwh in offshore but via a tender process. The allocation of guaranteed financing to industrials to enable them to increase their production of turbines and to operators for their purchases of wind turbines. For example, Sinovel, Goldwind and Ming Yang, the three largest Chinese wind turbine manufacturers, have already received more than $20bn in loans from state-owned banks. The government is thus encouraging the emergence of a strong local industry and the development of its wind energy network in order to achieve its greenhouse gas reduction targets. China, the world number 1 in the operation of wind farms. Thanks to this policy of incentives, in 2010 China became the leading country in the world in terms of newly installed capacities (18.93 GW in 2010, i.e. 38% of newly installed capacities in the world) as well as cumulative installed capacities with GW installed, or 22% of the worldwide installed base. Cumulative installed capacities in China therefore doubled every year from 2004 to Capital goods I 35

36 2011/2015 nevertheless looks difficult The market is set to stagnate between 2011 and 2015 due to problems connecting to the grid In 2011, we noted a pause in the growth of newly installed capacity, since it fell 5% to 18,000 MW. We expect this pause to continue in 2011/2015 and believe that installed capacities will remain stable in the period at 18,000 MW, versus a 2005/2010 CAGR of 107% (from 498 MW to 18,928 MW). Chart 28: Growth since 2004 of newly installed capacities (left) and cumulative installed capacities in China (right) (MW) % 114% 54% -6% % % % % % % % -10% e 2013e 2014e 2015e e 2013e 2014e 2015e Installed capacities in China Growth in installed capacities Worldwide share of Chinese installed capacities Cumulative installed capacities in China Growth in cumulativ e capacities Worldwide share of Chinese cumulative installed capacities Sources: BTM Consult, Natixis There are four main reasons for this slowdown: More than 50% of the capacities installed in 2010 (around 30% of cumulative capacities installed) were not connected to the grid, because of a seasonal effect, which means that it may take up to one year for a wind farm to be connected to the grid after construction, but, more importantly, because installed capacities are growing too fast, and T&D infrastructure cannot keep up. For this reason, the Chinese network manager (the equivalent of RTE in France) planned to invest more than CNY4,000bn ( 457bn) between now and 2020, i.e. more than 45bn per year, in the installation of 6,000 km of 800 kv and 1,000 kv transmission lines. This is good news for the industry, but it will take time for the full effects to be felt. 11% of the electricity produced by wind farms was rejected in This was due to intermittent nature of the electricity produced by the wind farms and the weakness of the infrastructure. Indeed, if the wind blows strongly in the middle of the night when no-one is using electricity, the grid cannot handle this surplus, hence it is rejected. Greater severity on the part of China vis-à-vis turbine quality. In July 2011, the Chinese government required domestic wind turbine manufacturers to fit the main sites with low voltage ride-through (LVRT) capabilities (to cope with problems caused by the occurrence of short circuits on the grids), to address a problem that had resulted in several dozen incidents in the space of a few months. Although they did not create any major problems, these incidents could potentially have a huge impact given the growing importance of wind energy in electricity production. Providing LVRT capabilities is not cheap, costing around CNY500,000 per wind turbine (nearly 54,000), which is prohibitively expensive for operators managing wind farms comprising thousands of turbines. This is therefore likely to contribute to a slowdown in wind farm installations. However, it will tend to favour foreign wind turbine manufacturers, whose turbines already meet these standards. Capital goods I 36

37 Access to financing is becoming more difficult. China is facing high inflation, which the authorities are seeking to combat by tightening monetary policy via increases in interest rates and reserve requirements. With more than 70% of wind farm projects financed via debt, this will inevitably weigh on operators IRR and thus on the growth of wind energy. A difficult market for foreign wind turbine manufacturers A tough market for foreign turbine makers due to severe pricing pressure Local wind turbine manufacturers have a number of advantages, first and foremost the support of domestic banks, which supply them with substantial amounts of financing to help them develop their production operations and enable them to provide financing to their clients. They also have excellent relations with operators, if for no other reason than cultural affinities. In addition, even though foreign manufacturers produce their turbines locally, their products remain around 10-15% more expensive than those of Chinese wind turbine manufacturers due to the financial help provided to local wind turbine manufacturers by the government and more difficult access to certain raw materials, such as rare earths. Wind energy uses two main technologies, one based on a gear box, and the other based on the more recent, direct-drive technology. Wind turbine manufacturers are increasingly moving towards direct-drive technology as it requires fewer parts and therefore in theory fewer maintenance operations. The main drawback of this technology is that it requires large quantities of rare earths, supplies of which are entirely controlled by the Chinese (97% of worldwide production). Some Chinese wind turbine manufacturers such as Goldwind have joint ventures in this segment so as to secure their supplies. Chart 29: Average selling price in m/mw in China Foreign manufacturers Sinov el Ming Yang Goldw ind Sources: Companies, Natixis Foreign manufacturers that viewed China as the new Eldorado for wind energy are therefore finding that the reality is more difficult than they anticipated. Their market share has fallen from 72% in 2005 to around 12% in 2010 (2,470 MW installed in 2010 by foreign wind turbine manufacturers). However, it should be noted that this share has been stable at 12% since 2009, and could remain at this level, due to the Chinese authorities more severe stance on turbine quality. However, this level is too low to justify their maintaining their presence in this market. Capital goods I 37

38 Chart 30: Growth in the market share of foreign wind turbine manufacturers in China since % 61% 51% 27% 12% 12% 28% 39% 49% 73% 88% 88% Chinese w ind turbine manufacturers Foreign w ind turbine manufacturers Source: BTM Consult Vestas plants are running at only 25% of their production capacity Vestas (9.6% of sales in China and 2.8% market share) is the group most affected by this trend. The Danish group invested heavily in the Chinese market in 2009, notably deciding to close down production plants in Denmark and the UK and open factories in China and the US. This strategic redeployment has not paid off, since Vestas market share in China is just 2.8% (501 MW delivered in 2011). The group does not provide details on the level of its production capacities, but we estimate them at around 2,000 MW in China, i.e. a utilisation rate of just 25% in this zone. Conversely, Gamesa (23% of 2011 sales in China and 3.6% market share) is faring much better in this situation, thanks to its offering, which is better suited to the Chinese market, and a strategy that consists in developing wind farms for its own account and then selling them, regardless of how advanced the projects are. Thus, Gamesa may sell a project for which only the land has been secured at cost price and, in return, the Chinese wind farm developer undertakes to install Gamesa turbines, on which the group will generate its margin. With production capacities of 1,000 MW in China, Gamesa has a utilisation rate of around 65%. Gamesa therefore sells more turbines (650 MW in 2011) than Vestas for production capacities that are not even half as big. Chart 31: Production capacities and utilisation rate of each wind turbine manufacturer (MW) % 50% 25% Vestas Gamesa Nordex Production capacities MW sold Utilisation rate Sources: Companies Capital goods I 38

39 As the Chinese market slows, local turbine makers will switch their strategies towards exports The risk is low in Europe, an area with little price sensitivity, but it is much higher in the US and emerging countries Are Chinese exports a real threat for European groups? Following the slowdown in 2011, the supply of wind turbines will far outstrip demand in China and utilisation rates will plummet. We estimate production capacities in 2011 at around 30 GW compared with just over 20 GW in 2010, i.e. a utilisation rate of 53% versus 75% in The Chinese market is therefore increasingly competitive with rising pricing pressures. The market, which includes more than 60 wind turbine manufacturers, could become streamlined thanks to bankruptcies or mergers. The first victim is German group REpower (Suzlon group), which decided last October to sell its majority stake in a wind turbine manufacturer in Inner Mongolia. The sector heavyweights therefore have big international ambitions. For example, Goldwind aims to export 30% of its production in 2015, i.e. around 2 GW, compared with less than 1% today, which seems ambitious. Low risk in Europe and India. In Europe, Chinese wind turbine manufacturers do not, in our view, constitute a threat for European groups, in that Europe is one of the markets least sensitive to wind turbine prices. Due to the high cost of labour, operators aim to have the most reliable turbines possible. The fact that the Chinese wind turbine industry is at the emerging stage is therefore an insurmountable obstacle from this point of view. The European market is also more complicated and more tightly regulated than the Chinese market, and it is therefore difficult for a new entrant to carve out a place for itself. Last, the windiest sites are already exploited in Europe. In order to be able to exploit sites where there is less wind, operators have to install big, powerful turbines, which by definition are therefore much more complex. Furthermore, the manufacturer has to be able to offer services so as to minimise the lost production factor (share in % of the non-availability of the turbine depending on the wind). For example, thanks to historical data and meteorological models, the most advanced manufacturers manage to carry out their maintenance operations when the wind is weakest so as to minimise the loss of potential electricity production. Now, in this segment, the Chinese are still a long way behind European players, even though manufacturers such as Goldwind or Sinovel are today building turbines with capacity of over 2 MW. The European market is therefore a market with high entry barriers, particularly as a number of players, such as Vestas, Enercon, Siemens, Gamesa, and Nordex, hold dominant positions depending on the country. In India, entry barriers are also high, notably due to the dominant position of several local players such as Suzlon, Vestas RRB and other local players (market share of more than 65% for local players). Table 20: Average size in kw of the turbines installed each year since 2005 on the main wind energy markets India China USA Spain Sweden Germany Denmark UK ,466 1,105 1,126 1,634 1,381 2, ,667 1,469 1,138 1,848 1,875 1, ,079 1,669 1,648 1,670 1,879 1,850 2, ,220 1,677 1,837 1,738 1,916 2,277 2, ,117 1,360 1,731 1,904 1,974 1,976 2,368 2, ,293 1,469 1,875 1,929 1,995 2,047 2,514 2,568 Source: BTM Consult The risk in the US is moderate, but it still exists. The US market is one of the most price sensitive as there is no system of national feed-in tariffs. There is either a system of PPAs (Purchase Price Agreements), or market prices. As electricity prices are relatively low thanks to the abundance of shale gas, wind-generated electricity has to be as competitive as possible. This is why the low cost of Chinese wind turbines (even after adding in transport costs) is a real advantage. This Capital goods I 39

40 could be accentuated if the PTC were not renewed. For example, an order for MW turbines was won by Goldwind from Mainstream Renewable Power in Illinois last year. In addition, Chinese wind turbine manufacturers have ready access to financing, thanks to the support of Chinese banks. However, things will not be straightforward for Chinese wind turbine manufacturers in the face of the positions of Vestas (17.3% market share) and Siemens (13.1% market share) and, more importantly, General Electric (43.2% market share) on this market. General Electric holds more than 148 patents relating to wind energy is prompt to sue groups that infringe them. Major risk in emerging countries with no local industry. The countries where Chinese wind turbine manufacturers may be a real threat and take market share from European manufacturers are developing countries that lack a strong local industry and with very windy sites. In these countries, the windiest sites and those easiest to connect to the grid are still available. And, on these sites, Chinese turbines are sufficiently powerful and offer a relatively high IRR. These countries include Brazil (2010/2015 CAGR of 36%), Australia (2010/2015 CAGR of 41%), and Eastern Europe (2010/2015 CAGR of 26% in Poland, for example). These markets, which may have looked promising for European wind turbine manufacturers, could therefore prove to be more competitive. The only thing that might slow the expansion of Chinese players in these countries would be protectionist measures obliging turbine manufacturers to produce their turbines locally. The Chinese could also step up their international expansion via acquisitions or partnerships, such as with the recent acquisition of a stake in EDP. China Three Gorges, a Chinese group, will become the leading shareholder in Portuguese electricity producer EDP, after winning the tender for a 21.35% stake for 2.7bn in December It should be noted that EDP is also the world number 3 in wind energy, via 62%-owned subsidiary EDP Renovaveis. At the end of June 2011, EDP R operated wind farms with total output capacity of 7.1 GW in eight countries with a further 400 MW under construction, and a project portfolio amounting to 30 GW. In addition, Three Gorges announced that it planned to invest 8bn in EDP in the years ahead, but more particularly in EDP R. Via these investments, Three Gorges could impose use of Chinese wind turbine manufacturers for future wind farms as of 2013 (EDP R has signed a frame contract with Vestas for 1,500 MW in firm orders and an option for a further 600 MW in 2011/2012). However, EDP R is mainly active in Europe (68% of sales), where Chinese turbines do not yet meet the required quality and safety conditions. Capital goods I 40

41 5. Several zones will nevertheless show strong growth in 2012/13 In 2012/2013, growth will come from emerging countries With the European market set to suffer for the next two years from the sovereign debt crisis, the US market proving highly volatile and strongly impacted by low gas prices, and the Chinese market practically inaccessible, wind turbine manufacturers looking for growth will have to turn to other countries (mainly emerging countries) that offer strong wind energy potential and which are still accessible to foreign companies, such as India, Brazil, Mexico, Turkey and eastern Europe. Table 21: Growth and debt indicators for a sample of emerging countries % GDP growth 2010 public debt as % of GDP India Brazil Mexico Poland Turkey Source: Natixis Economic Research Gamesa is our top pick to play this theme. It is the only stock in our sample to have shown a strategy resolutely focused on fast-growing countries by considerably reducing its exposure to mature countries. In 2011, Gamesa generated 58% of its sales outside of Europe and the US with notably a strong presence in India (19% of sales in 2011) and Latin America (14%). Conversely, Vestas and Nordex still generate the bulk of its sales in Europe and the US. Table 22: Overview of newly installed capacities per country and market share of each turbine manufacturer MW New wind energy capacities installed in 2010 CAGR (%) New wind energy capacities installed in 2015 Vestas 2011 mkt. sh. (%) Gamesa 2011 mkt. sh. (%) India 2, , Brazil ,350 0 Mexico Poland , na Turkey , na Source: BTM Consult, GWEC, Natixis estimates India: already the world s third-largest market Wind installations in India should grow by 17% per year in The Indian wind energy sector grew at an average annual rate of 17.5% between 2004 and In 2011, 2.7 GW were installed (i.e. an increase of 26% in one year), lifting total installed capacity to 15.7 GW. This strong growth was made possible by: The favourable regulatory framework put in place over the last 10 years by the government. The Accelerated Depreciation policy enables investors to benefit from depreciations that can be as high as 80% of the cost of a project in year 1, and profits are exempt from tax for the first ten years. Capital goods I 41

42 The introduction of a price subsidy, approved by the Ministry for New and Renewable Energies, which adds 8 /MWh to the electricity selling price, for a period of 10 years for eligible wind farms installed before 31/03/2012. The Central Electricity Regulation Committee also introduced Renewable Energy Certificates (REC) with a value of 1 MW and the government has created a tax on coal produced or imported in India. However, certain problems arise: access to financing, notably for small and medium-sized companies, the time needed to obtain land, the modernisation of grid infrastructure and the multitude of regulatory agencies, which creates confusion. Average annual growth in new installed capacities is therefore projected to be 17% between 2011 and 2015 compared with 6.1% worldwide. Chart 32: Growth in newly installed capacities in India between 2004 and 2015 (MW) e 2013e 2014e 2015e Sources: BTM Consult, GWEC, Natixis Where wind turbine manufacturers are concerned, the Indian market is highly fragmented with more than 70 players. The four largest have nearly 80% of the market and include Suzlon, Vestas, Enercon and Gamesa. Since the acquisition of the management team of Vestas India by Gamesa in 2009 (19% of 2011 sales), Gamesa has steadily gained market share, reaching 19% in 2011, at the expense of the leader Suzlon and Vestas. Gamesa has big ambitions on this market since, by 2013, the group will have 800 MW in production capacities in this region versus 0 MW in Graph 33: Comparative growth in the market shares of Suzlon and Vestas in India since 2005 and market shares of the different manufacturers in % 69% 60% 54% 52% 42% 27% 22% 23% 17% 18% 13% Gamesa 5% Vestas 13% Other India 19% WinWinD 1% GE Wind 1% Suzlon 42% Suzlon Vestas Enercon 19% Sources: BTM Consult, Natixis Capital goods I 42

43 Brazil: considerable wind energy potential of 350 GW Grid parity has already been reached in Brazil Brazil has considerable wind energy potential of 350 GW according to the Global Wind Energy Council (GWEC), the global wind industry trade association, while the country s total capacity all energies taken together was 113 GW in At present, hydroelectricity accounts for 70% of Brazilian electricity production. The government therefore introduced in 2002 the PROINFA programme aimed at lifting the share of renewable energies to 10% by The potential is particularly great in Brazil since grid parity has already been achieved. Brazil therefore conducted three calls for tender in 2009, 2010 and 2011 via ANEEL (Brazilian Electricity Regulation Agency), for a total of over 7.7 GW by At present, the Brazilian Wind Energy Association forecasts that wind energy will account for 20% of the country s electricity production in Brazil has not introduced feed-in tariffs, but has set up a system of low-interest-rate financing, via the Brazilian Development Bank (BNDES), for projects in which more than 60% of the equipment is produced in Brazil. Table 23: Details of the Brazilian calls for tenders Date Name of the tender Size (MW) Date for end of construction 2009 Auction LER , Auction LER /09/2013 Auction LFA ,519 01/01/ Auction , Minus ,000 Minus Total 7, Sources: GWEC, BTM Consult, Natixis However, the Brazilian wind energy sector will have to overcome a few obstacles: invest in its T&D network, secure more financing and increase demands in terms of logistics in supply chains. We have therefore adopted a more cautious stance in our estimates (lag of one year relative to the targets set in the ANEEL tenders) so as to take these factors into account. We therefore expect cumulative installed capacities of 6,200 MW versus cumulative tenders out to 2015 of 6,775 MW. We believe that wind energy in Brazil will really take off in 2012 as numerous wind farms resulting from the call for tenders issued in 2009 come on stream. Chart 34: Growth of newly installed capacities in Brazil from 2005 to 2015 (MW) e 2013e 2014e 2015e Sources: GWEC, BTM Consult, Natixis Capital goods I 43

44 Growing energy demand, competitive production costs and relatively short distances between production zones and demand centres are attracting a growing number of foreign wind turbine manufacturers. In order to comply with ANEEL demands (60% of wind farm equipment has to be made in Brazil), Alstom Wind, Siemens, GE Wind and Gamesa have built production sites in Brazil, Vestas plans to set up an assembly plant, and Suzlon has announced the construction of local factories. Certain Chinese groups are also trying to break into this market. Sinovel recently succeeded, signing a contract with Brazilian wind farm operator Desenvix to supply MW turbines. Following this announcement, Sinovel announced that it plans to open a factory in Brazil. The turbine manufacturer currently best placed on this market is Gamesa with a market share of around 28% and 300 MW in production capacities. Wind installations in Mexico are set to grow by 14% per year in Mexico: a still nascent market offering strong potential The Mexican government estimated the country s potential at 71 GW, of which 11 GW concerns zones with load factors over 30%, which could make Mexico one of the first countries, with Brazil, to reach grid parity. Nevertheless, the procedures relating to wind energy projects are still lengthy, the regulatory framework is still incomplete and the transmission infrastructure is inadequate. In addition, the government has not yet launched a call for tenders. For this reason, we adopt a more cautious scenario than for Brazil in the short term, although we do not question the country s long-term potential. We therefore assume average annual growth in new capacities of 14% between 2011 and 2015 compared with 6.1% worldwide. Chart 35: Growth in newly installed capacities in Mexico from 2007 to 2015 (MW) e 2013e 2014e 2015e Sources: GWEC, BTM Consult, Natixis Few wind turbine manufacturers are as yet present on the Mexican market. Vestas had a 32% market share in 2010, but did not sell a single turbine in Gamesa does not provide information on its installed capacity by country but by zone. However, the group makes no secret of its ambitions in Mexico and it may benefit from the support of Iberdrola Renovables, its best client, which is set to install 103 MW in Mexico in 2011, i.e. potential sales of 80m for Gamesa. Capital goods I 44

45 Wind installations in Poland are set to grow by 23% per year in Poland: the most promising country in eastern Europe Despite its heavy reliance on coal (90% of total production), Poland is among the countries harbouring the greatest wind energy potential in Europe. In addition, starting in 2010, the government has obliged electricity producers to generate at least 10% of their production using renewable energies (12.9% from 2017). Currently, installed capacity is only around 1.5 GW, nevertheless, in August 2009, the government published its Energy Policy of Poland up to 2030 strategy plan, which calls for the share of renewable energies to rise to 15% in 2020 and 20% in 2030 versus 7.2% in The Polish Bureau of Energy Regulation has thus received a large number of applications for wind farm licences. Recent estimates point to the installation of 4.9 GW over the next five years, and an acceleration in projects thereafter, thanks to the increase in financing provided by the EU Cohesion Fund and the regional funds. Nevertheless, regulations remain vague as regards the sharing of costs between grid operators and electricity producers. Moreover, measures requiring electricity producers to invest in wind energy producers and improvements to grid infrastructure are needed. We therefore expect this market to show average annual growth of 23% between 2011 and This should particularly benefit Vestas (17% market share in 2011), but also Gamesa, which has an extensive presence in Eastern Europe but does not give a breakdown of its sales by country. Chart 36: Growth in newly installed capacities in Poland from 2004 to 2015e (MW) e 2013e 2014e 2015e Sources: GWEC, BTM Consult, Natixis Turkey: a promising market Turkey has set a target of 20 GW in installed wind energy by 2023 With growth of around 8/9% per year in electricity consumption in the last few years, Turkey urgently needs to invest in electricity generation. The Turkish government has set an ambitious target of generating 30% of the country s electricity needs from renewable sources in 2023 and 20 GW in installed wind energy capacity at the same date. In order to achieve this target, the government has introduced a feed-in tariff for wind-generated electricity of /MWh for a period of 10 years. This is a relatively low price, and for this reason a number of operators choose to sell the electricity on the market, even though by so doing they run the risk that prices might plunge. Last, the government is considering adding between 3 /MWh and 18 /MWh to this tariff (i.e /MWh) for operators that use equipment produced in Turkey. If this new law enters into force, it could trigger strong growth over the next four years. We therefore expect a CAGR of 26% in the period compared with 6.1% worldwide. The new law could prompt a number of manufacturers to set up production units in Turkey, such as Vestas or GE. German manufacturers, such as Enercon and Nordex, have a competitive advantage on this market given the inability of Turkish banks to Capital goods I 45

46 provide financing for wind energy projects. Indeed, German manufacturers have access to financing at very competitive rates for wind farm projects on export markets set up by the German government. For a project to be eligible, the turbines have to be produced in Germany, which is why Siemens cannot take advantage of this cheap financing as its turbines are made in Denmark. Besides Enercon and Nordex (36.2% market share in 2011, or 18% of sales), the two main players on this market, Vestas (38% market share in 2011, or 3.5% of sales), GE and Suzlon also have a big presence in Turkey. Chart 37: Growth in newly installed capacities in Turkey from 2004 to 2015 (MW) e 2013e 2014e 2015e Sources: GWEC, BTM Consult, Natixis Capital goods I 46

47 6. Three long-term drivers The wind sector could take off in the medium term thanks to grid parity, offshore wind energy and storage solutions Despite a difficult short-term environment, we see three long-term drivers, namely the achievement of grid parity from 2015, the take-off of offshore wind energy around 2016 and the arrival of reliable energy storage solutions within the next ten years or so. Grid parity would mean that the wind energy industry no longer has to rely on government subsidies. By virtue of its importance, notably in the North Sea, offshore wind energy benefits from government support to create jobs. It is not expected to take off until 2016 coinciding with the arrival on the market of turbines generating power of over 5 MW. It remains to be seen whether the market will be big enough to cope with the arrival of numerous rival groups. Last, the arrival on the market of energy storage solutions will remedy the intermittence problem inherent to wind-generated electricity production. Energy storage is a nascent industry that has yet to settle on a business model. For this reason, we do not expect a credible solution to emerge for around 10 years. Grid parity in 2015 in onshore? Grid parity is one of the most important growth drivers for the sector. Grid parity is reached in a country when the cost of producing a MWh of wind-generated electricity equals the selling price of base-load electricity. In view of the steady decline in the cost of producing wind-generated electricity in the face of fossil energy prices, which are climbing steadily, we believe that grid parity could be reached around Once wind energy has achieved grid parity, the sector will no longer depend on government aid but solely on the demand for renewable electricity. Insofar as all governments are obliged to shift the balance of their energy mixes to increase the share of renewable energy, and that wind energy is currently the most credible form of renewable energy, this could be a genuine trigger for this industry. Grid parity would enable the industry to do without government aid Grid parity is the biggest trigger for the wind energy industry Today, the energy mix is largely dominated by fossil energies, the prices of which are currently too low (gas and coal mainly) for wind energy to be able to compete without government help. Wind energy has therefore not yet reached grid parity. What is more, the growing importance of environmental issues, which must necessarily shift the world energy mix toward energies that emit less CO2, favours nuclear power for the time being. Nuclear power does not emit any CO2 and, according to electricity producers, is the cheapest to produce. However, nuclear power has three major disadvantages: 1/ the risk of accidents (Chernobyl, Three Mile Island, and Fukushima); 2/ the cost and length of decommissioning, which are underestimated; and 3/ the long-term storage of radioactive waste. In the long term, the achievement of grid parity for wind energy and the development of reliable storage solutions should enable wind to close the competitiveness gap with nuclear power. Capital goods I 47

48 Chart 38: Breakdown of electricity production costs depending on the technology used and assuming a carbon cost of 30 /t 100% 80% 60% 40% 20% 0% Nuclear Coal Gas - CCGT Wind Capex and operation Fuel Carbon Sources: Areva, Natixis Table 24: Characteristics of the different means of electricity production CO2 emissions Cost/MWh Predictability of costs Predictability of production Decommissioning Useful life Wind Zero High Very high Very low Quick and inexpensive 20 years Solar Zero Very high Very high Very low Quick and inexpensive but recycling problem 20 years Nuclear Negligible Low Very high Very high Very long, costly and storage problem >40 years Coal Very high Low Low Very high Long and costly >30 years Gas High Low Very low Very high Quick and expensive 20 years Hydro Zero Very low Very high Low (climate factor) Long and costly >50 years Source: Natixis In 2015 grid parity could be reached in much of the world The grid parity issue cannot be approached globally because of the wide disparities in electricity prices between countries resulting from each country s energy mix and fuel costs. Similarly, the cost of producing one MWh of wind energy is very different from one country to the next depending on wind conditions. Chart 39: 6-month moving average change in electricity prices in the US and Europe in /MWh since Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Electricity price in Europe (EEX) Electricity price in the US (PJM) Sources: Datastream, Natixis Capital goods I 48

49 For example, electricity prices in the US are lower than in Europe due to: 1/ the shale gas effect, which triggered a collapse in gas prices; 2/ the strong contribution from nuclear power with a high kd (around 90%); and 3/ the total absence of regulations concerning CO2 emissions, while in Europe, electricity prices include the cost of CO2 emissions. Good progress is being made towards grid parity since it has already been achieved in Brazil. Brazil has very windy sites where the wind turbine utilisation rate can average as much as 40% compared with 25% in Europe and 30% in the US. In Brazil s most recent wind energy tender, the feed-in tariffs for wind-generated electricity were therefore for first the time proposed at a lower level than electricity from gas-fired power station projects. Wind energy is already competitive in some countries and costs less than solar In addition, we note that on average and depending on certain assumptions, the cost of producing wind-generated electricity is not far from being as competitive as that of electricity produced by nuclear, coal-fired and gas-fired power stations. Note that with the exception of hydroelectricity, onshore wind-generated electricity is by far the most competitive renewable energy. As regards offshore wind energy, it is a still-recent technology that we expect to really take off around 2015/2016 with the arrival on the market of new-generation turbines. However, given the major investments made by wind turbine manufacturers and governments in this technology, offshore wind energy could achieve grid parity around Chart 40: Range of production costs in $/MWh depending on the technology used Thin film solar Offshore w ind Onshore w ind Nuclear pow er station Coal-fired pow er station CCGT gas-fired pow er station Sources: Bloomberg New Energy Finance, Areva, Natixis Grid parity in wind energy depends on a number of factors: Electricity prices. The prices of turbines and their performance. Wind strengths. The useful life of the turbines. Wind electricity costs are steadily coming down while those of fossil fuels are steadily rising We can therefore see that there are two opposite trends with, on one hand, a steady increase over time in the price of fossil-fuel-based electricity, as a result of the growing scarcity of fossil fuel resources, leading to an almost-structural rise in fuel costs, whether coal, gas or oil, and the cost of CO2 emissions. On the other hand, we see a steady downward trend in wind-generated electricity prices as a result of economies of scale, and more powerful and reliable turbines, with longer useful lives. Thus, the cost per MWh of wind-generated electricity has fallen by 91% since 1986, while in Capital goods I 49

50 the same period oil prices have risen by 445%. Since 2005, wind-generated electricity production costs have fallen at a less strong pace than in the previous 20-year period as the potential for economies of scale and technological improvements is smaller. Today, cost reductions mainly come from improvements in quality, which lead to lower maintenance costs and improve turbine availability rates. In addition, manufacturers are putting in place solutions to control turbine performances, which maximise turbine production. The fall in production costs will therefore slow but will continue, as indicated by Gamesa s target, which is to reduce its costs by 30% between 2009 and 2015 (-20% from 2009 to 2013 then -10% from 2013 to 2015). Chart 41: Trend in the price per MWh of wind-generated electricity since 1986 (base 100 = 2005) % Economies of scale and technological dev elopment t h l i 522 Reduction in times to market for new products and improv ement in production methods Fall in the potential for production cost reductions and technological improv ements. But fall in maintenance costs and improvement in service contracts -32% % % % % Sources: National Renewable Energy Laboratory (NREL), BTM Consult Chart 42: WTI prices ($ per bbl) % Source: Datastream Offshore wind energy likely to take off in the long term Offshore wind will be a true catalyst since it requires turbines with greater valueadded Despite government enthusiasm for the development of offshore wind energy, which creates jobs that cannot be relocated, this segment is unlikely to really take off until 2015/2016, due to short-term financing problems, the lack of experience in this field, which is likely to result in overruns in construction times, and the fact that utilities are waiting for more powerful turbines to reach the market. Capital goods I 50

51 The take-off of the offshore segment will be a genuine trigger for the wind energy industry as it requires more complex turbines, which therefore have higher value added, constituting stronger barriers to entry that stave off pricing pressures. In addition, offshore wind farms are bigger than onshore farms, and orders are therefore sizeable. In 2011, offshore wind energy represented 3% of new wind energy installations, and this share should increase to 6.6% in 2015 by our estimates, i.e. a CAGR of 29% versus 5.9% in onshore. Between 2014 and 2016, depending on the production timetables of wind turbine manufacturers, numerous reliable turbines with output capacity of more 5 MW will reach the market, which will strongly stimulate activity. It remains to be seen whether the market will be big enough to absorb the arrival of numerous rivals. Today, the market is divided between four players, Siemens, Areva, Vestas and REpower, but the number of manufacturers is expected to increase to over 40 in 2015 including Alstom, Gamesa, Nordex and GE. Europe, the world champion in offshore wind energy According to the EWEA, 40 GW will be installed in Europe in 2020 According to the EWEA (European Wind Energy Association), 40 GW will be installed in Europe in 2020, i.e. around 3,700 MW installed per year versus 1,220 MW installed in 2011, according to our estimates. At the end of 2011e, of the 4,824 MW offshore wind energy worldwide installed base, 4,672 MW is located in Europe, i.e. 97%. This predominance of Europe in offshore wind energy stems from the huge potential of the North Sea (82 GW in projects) and its highly developed turbine manufacturing industry. Even though other countries such as China, South Korea and the US plan to expand on this market, the vast majority of the installed base (80%) is still likely to be in Europe in Total offshore wind farm projects in Europe currently represent 141 GW, thanks in particular to the UK (47 GW), Germany (over 30 GW) and Scandinavian countries (26 GW), which are historically heavily involved in offshore wind energy. Table 25: Pipeline of offshore projects per country in MW Country Installed end-2010 Under construction Agreement signed Planned Total projects Size of call for tender Germany ,725 21,493 31,247 na Belgium ,857 2,000 Denmark ,200 2,471 4,600 Finland ,502 4,294 na Spain ,804 6,804 na Estonia 0 0 1, ,000 na France ,000 6,000 6,000 Greece ,889 4,889 na Ireland ,600 2,155 3,780 na Italy Latvia na Malta Norway ,042 11,394 na Netherlands ,792 3,953 5,992 6,000 Poland na Portugal na UK 1,586 4, ,114 48,596 47,000 Sweden ,124 8,279 na Total Europe 3,294 5,603 17, , ,976 73,695 Sources: EWEA, Natixis Capital goods I 51

52 Protectionism that favours the arrival of new entrants Many countries are setting up protectionist measures to benefit local industrial players Turbines for the offshore wind energy segment are even more difficult to transport than those destined for the onshore segment due to their size, making it necessary to locate the production factories close to the final wind farm locations. This therefore represents real potential for creating jobs than cannot be relocated for governments ready to encourage this industry by issuing calls for tenders or setting feed-in tariffs that are much higher than the average price of electricity. Therefore, a number of countries such as the UK, Germany, France, South Korea and China have implemented systems favouring the emergence of a local offshore wind energy industry. Table 26: Overview of the main countries set to play a major role in offshore wind energy out to 2020 MW Regulations Current capacity 2020 target Wind turbine manufacturers present Germany Feed-in tariff of 130 /MWh + a sprinter bonus of 20 /MWh, i.e. 150 /MWh for 12 years ,000 Siemens, Vestas, REpower, Areva, Bard UK Tender system 2,619 47,000 Siemens, Vestas, REpower France Tender system 0 6,000 Areva, Alstom, Siemens South Korea Tender system 0 7,000 Doosan, Daewoo, Hyundai, Samsung China Tender system ,000 Sinovel, Goldwind, Dongfang Sources: Crown Estate, BTM Consult, EWEA, GWEC, Companies, Natixis Germany opted for a feed-in tariff as a number of wind turbine manufacturers are already present in Germany. In addition to a plan for 10 GW in offshore wind energy by 2020 confirmed by the government in August 2010, 10 GW to 15 GW of additional capacity is expected to be created between 2025 and The UK launched the biggest call for tenders in the world in three rounds. Since 2000, the UK has issued offshore wind energy calls for tenders amounting to 47 GW in order to attract foreign wind turbine manufacturers to the country. Siemens and Vestas plan to build their next offshore turbine in the UK, Areva is considering setting up a factory there and Gamesa plans to locate its offshore division in the country. Table 27: Details of the three rounds in the call for tenders issued in the UK Launch data Construction start dates Mini-maxi size of projects (MW) Capacities (MW) Rounds 1 and 2 Dec and July ,200 8,200 Extension May ,000 Round 3 January ,000 33,000 Scottish territorial waters January ,800 4,665 Total ,000 46,665 Source: Crown Estate According to the Crown Estate, the public body responsible for managing the portfolio of assets belonging to the British monarchy, the construction of these projects will be spread from 2009 to 2023 as shown in the chart. Capital goods I 52

53 Chart 43: Theoretical breakdown of the construction of the projects in the call for tenders (MW) Rounds 1&2 Scottish territorial w aters Round 3 Source: Crown Estate France slates 6 GW of installed offshore capacity by 2020 for a total cost of 20bn ( 3.33m/MW) divided into two calls for tender of 3 GW each. The flagged aim is the creation of a strong French offshore industry in all the links of the chain, notably in turbines. Alstom has been selected for 3 out of 5 sites and Areva on one site. The fifth field has been declared redundant. Remember that Alstom had indicated that it would be ready to invest 100m and generate up to 1,000 direct jobs and 4,000 indirect jobs if it was retained on at least 2 sites. The group is currently developing a 6 MW turbine with a rotor of 150m for which 2 prototypes will be installed in 2012 for a production in series expected in Even though Areva has been retained on a single site, the group has indicated that it is maintaining its project to set up 2 plants in Le Havre to profit from the projects of its partners Iberdrola and RES on the UK market. The second call for tenders is likely to be launched in H2 12. The entry into service of the farms is scheduled for 2015, but we think is more likely, owing to the weak experience curve for the various players in this domain. Table 28: Details of the first call for tenders of 3 GW in France Postulants Courseulles-sur- Mer - EDF/Dong Energy/WPD Offshore/Nass & Wind Offshore/Alstom - GDF Suez/CDC Infrastructure/Vinci/Areva Capacity (MW) open to the call for tenders Power (MW) developed by the laureate Winner EDF/Alstom Fécamp - EDF/Dong Energy/WPD Offshore/Nass & Wind Offshore/Alstom EDF/Alstom - GDF Suez/CDC Infrastructure/Vinci/Areva Le Tréport - GDF Suez/CDC Infrastructure/Vinci/Areva Declared Saint-Brieuc - EDF/Dong Energy/WPD Offshore/Nass & Wind Offshore/Alstom - Iberdrola Renovables/Eole-RES/Neoen Marine/Areva - GDF Suez/CDC Infrastructure/Vinci/Siemens d d t Iberdrola/Areva Saint-Nazaire - EDF/Dong Energy/WPD Offshore/Nass & Wind Offshore/Alstom EDF/Alstom - Iberdrola Renovables/Eole-RES/Neoen Marine/Technip/Areva Total 2,400-3,000 Sources: Companies, Natixis South Korea is also encouraging the emergence of a domestic industry. South Korea s Knowledge Economy minister announced an investment of KRW10,200bn ( 6.7bn) to build a 2.5 GW offshore wind farm, comprising 3 MW to 7 MW turbines. It will be developed in three phases. A first 100 MW phase, which should be completed in 2013 (estimated cost: 265m), a second Capital goods I 53

54 900 MW phase scheduled for 2016 ( 2.4bn) and a final 1.5 GW phase in 2019 ( 4bn). The eight turbine suppliers will include domestic industrial groups Doosan Heavy Industries and Construction, Daewoo Shipbuilding & Marine Engineering and Hyundai Heavy Industries. These industrials do not yet have a cutting-edge operating technology, but this project will enable them to carve out a significant place for themselves on this market. The government also plans to create an additional 4.5 GW in offshore capacity, but the details have not yet been decided. Table 29: Characteristics of the offshore turbines of Korean players Companies Current model Power (MW) Rotor size (m) Project Power (MW) Rotor size (m) Industrial production date Doosan Heavy Industries and Construction WinDS Daewoo Shipbuilding & Marine Engineering D Hyundai Heavy Industries AV HQ5500/ Samsung 25x Samsung 6 MW Sources: Companies China is also very ambitious in offshore wind energy, aiming to create 5 GW in offshore wind farms in 2015 and 30 GW by The National Energy Administration recently announced an investment of CNY100bn ( 12bn) to achieve the 2015 target. In May 2010, China issued its first call for tenders for 100 MW divided into four projects and exclusively reserved for Chinese companies. The wind turbine manufacturers selected are: Sinovel (3 MW model), Goldwind (2.5 MW) and Shanghai Electric (3.6 MW). Table 30: Characteristics of the offshore turbines of Chinese players Companies Current model Power (MW) Rotor size (m) Project Power (MW) Rotor size (m) Industrial production date Sinovel SL Goldwind 2.5MW PMDD MW PMDD 6.0 Dongfang Sources: Companies Take-off delayed The take-off will be delayed due to a short learning curve Even though offshore wind energy offers major growth potential, we believe that it will take longer than expected to put these projects into operation and that this industry will not really get going until 2016 for three reasons: 1/ financing problems; 2/ the lack of experience; and 3/ the current size of wind turbines. Capital goods I 54

55 Chart 44: Forecasts for new installed capacities in offshore in Europe in the period (MW) Av erage betw een 2016 and 2020 Belgium Denmark Finland Germany Netherlands Norw ay Sw eden UK Sources: BTM Consult, EWEA, Natixis estimates Financing problems are to be expected given the size of projects Financing is of capital importance in offshore wind energy. The business model of a wind farm, be it onshore or offshore, is based on the project being 70-80% financed by debt. Offshore projects are 5 to 10 times larger than onshore projects, with farms often exceeding 250 MW (600 MW on average for the French tender and 2,500 MW for a project in South Korea, which is the biggest in the world). With an investment cost almost three times higher than that for an onshore project ( 3.3m versus 1.3m per MW), recourse to debt in terms of absolute amounts is therefore much greater for offshore wind farms. In the current environment, gaining access to credit is more difficult and the banks are more cautious and demanding than for onshore projects. This clearly gives an advantage to wind turbine manufacturers with strong track records such as Vestas and Siemens. Even though they have a weaker track record, REpower and Areva are also considered reliable wind turbine manufacturers, and have the advantage of offering more powerful turbines. Turbine reliability is an extremely important point as the banks may not provide the financing, or demand higher interest rates, if the turbines used are made by a player that is too new to the market. For this reason, we believe that Gamesa will not be competitive on this market until 2016, i.e. two years after the launch of their first offshore turbines, so as to build up a sufficiently strong track record to win the trust of operators. And this timetable does not take into account possible setbacks, which would result in delays to the mass production of the turbines. Size and reliability represent a certain advantage in offshore. An offshore project costs three times more than an onshore project per MW ( 3.3m versus 1.3m, respectively) for turbines that are around 45% more expensive (between 1.3m and 1.6m /MW versus 0.9/1.1m /MW). Therefore, while the price of the turbine in an onshore project represents between 70% and 80% of the cost of the project, this ratio falls to 30/40% in an offshore project depending on whether the turbine has capacity of 3 MW or 5 MW. The potential for economies of scale in civil engineering and grid connection costs with powerful turbines is therefore substantial. In addition, maintenance operations at sea are expensive and it is vital for operators to have reliable wind turbines and to have as few turbines as possible for a given power output. Operators will therefore go for the manufacturer offering the best combination of power and reliability. Capital goods I 55

56 Table 31: Sensitivity of the turbine price per MW/ total project cost per MW ratio to turbine prices and power % Power of the turbine (MW) Turbine price (k /MW) , , , , , Source: Natixis (assuming that turbine installation costs are fixed at around 10m) Only four players currently share the market among them A monopoly or oligopoly market For this reason, there are currently only four credible players in this segment: Siemens, Areva, REpower and Vestas. Based on firm orders received in the last two years, the ranking is as follows: Siemens (62% of orders) well ahead of Areva (21%), REpower (12%) and Vestas (5%). The offshore market is and will remain a monopoly or oligopoly until a turbine model that is more powerful and more reliable than the others arrives on the market. Until the launch of Siemens 3.6 MW turbine, the market was divided between Vestas and Siemens, which each had 3 MW turbines. Now, however, Siemens enjoys a virtual monopoly. It is highly probable that this situation will increasingly turn to the advantage of Areva and REpower, which now have 5 MW and 6 MW turbines, respectively, with track records that are starting to become serious. Table 32: Characteristics of the offshore turbines of the four market leaders Companies Current model Project Production launch date Backlog (MW) % of total orders Siemens SWT SWT , Areva M5000 with 116 m rotor M5000 with 135 m rotor , REpower 6M, with 6.15 MW and 126 m rotor Vestas V V Total, Sources: Companies Siemens is by far the world leader thanks to its SWT MW turbine launched in September 2009, which is today the world s biggest-selling turbine, thanks to its good track record, since it uses the same platform as the SWT launched in Siemens thus has an installed base of 1,800 MW. Today, its 3.6 MW turbine is produced in Denmark and it plans to locate a factory in Hull in the UK to build its 6 MW model. Areva is rapidly becoming a major player. After the aborted bids for Bonus Energy in 2004 and REpower in 2007, Areva succeeded in acquiring German start-up Multibrid in 2007 (acquisition of the residual 49% in 2010). In 2010, the group also acquired German rotor manufacturer PN Rotor. Areva currently enjoys a real technological advantage since it is the only manufacturer, along with REpower, to produce a 5 MW turbine with a track record that is starting to become significant (more than two years). However, it plans to merely update this turbine with a 135 m rotor, slated to start production on an industrial scale in H2 14, which might not carry sufficient weight in the face of the arrival on the market in 2015 of a number of turbine models offering output of over 5 MW. Areva Wind makes its turbines in Germany (Bremerhaven and Stade) and plans to double its capacity (100 Capital goods I 56

57 to 120 machines per year, i.e. 500 MW). It is also looking to establish a factory at Le Havre in France (500 MW capacity), and in the longer term in the UK. REpower is the most technologically advanced turbine manufacturer. Right from the start, the group gambled on a 5 MW turbine, which it deployed at several test sites: Beatrice (UK ), Thornton Bank (Belgium ) and Alpha Ventus (Germany ). REpower today is focusing on selling a 6.15 MW model, two units of which were recently sold to RWE. REpower produces its turbines at Bremerhaven in Germany, and plans to increase its production capacity from 600 MW to 900 MW per year. The group also plans to establish operations in the UK. Suzlon, the parent company, which does not produce offshore turbines, could also facilitate REpower s access to the Asian market. Vestas losing momentum. Along with Siemens, Vestas is the player with the largest installed base (1,000 MW). The joint leader with Siemens until 2010, Vestas currently trails a long way behind in terms of orders (backlog of just 300 MW). This situation is due to the obsolescence of its most recent offshore model, the V MW, which was launched in September 2009 but has already been overtaken by more powerful rival turbines. Vestas market share could therefore rapidly fall to zero pending the arrival of its new model, the V MW, which is scheduled to start industrial production in Vestas produces its offshore turbines in Denmark, but its 7 MW turbine will be made in the UK. The storage of wind-generated electricity Storage solutions are needed to solve the problem of on-and-off wind energy The arrival on the market of storage solutions will be a major trigger for the wind energy industry. Indeed, wind energy s biggest defect is that it is intermittent, which makes it difficult to match electricity supply and demand. Therefore, until a storage solution has been found, wind energy cannot represent a majority share of a country s energy mix. We do not expect a credible solution to reach the market for another 10 years or so. Energy storage is a major challenge in the growth of wind energy Between 1996 and 2010, worldwide wind-generated electricity production increased by a factor of nearly 34, to TWh, compared with growth of 65% to TWh for total world electricity generation. Thus, at the end of 2010, the share of wind energy in global electricity production reached 1.92%, compared with just 0.09% in Chart 45: Growth in the share of wind energy in worldwide electricity production and growth of wind-generated electricity 1.6% 1.9% 1.3% 1.0% 0.8% 0.7% 0.5% 0.6% 0.1% 0.1% 0.2% 0.2% 0.2% 0.3% 0.4% % 30% 20% 10% 0% Share of w ind-generated electricity Grow th in w ind-generated electricity generation Source: IEA Capital goods I 57

58 Nevertheless, this share remains low relative to the contribution of fossil energies, notably because of wind-related issues (intermittence, variability, virtual unpredictability), which can cause several problems: grid congestion or decongestion, power cuts, and an inability to forecast production, which can create difficulties for managers seeking to match supply to demand in order to ensure the stability of the grid, or even force them to squander part of the production. These factors are the main obstacle preventing wind energy from accounting for a larger share of the world energy mix. Energy storage is therefore one of the solutions to this problem since it offers a way to reduce and even avoid these opportunity costs. Different solutions exist to store energy when generation exceeds demand and release it when demand outstrips production. Many technologies are being studied, but few of them are suitable for high voltage electricity Several technologies are currently being examined A number of technologies are currently being investigated, but few are suited to large amounts of power. The most widely-used technology is fluid storage, which includes PHS (Pumped Hydro Storage) and CAES (Compressed Air Energy Storage). In the case of PHS, water is pumped up to hydroelectric dams when electricity demand is low using the surplus electricity production from the wind turbines. Surplus electricity produced by wind turbines is also used in the CAES technique, where air is compressed and then stored in underground caves, abandoned mines or surface reservoirs, before being combined with natural gas and released to supply gas-fired power stations that then produce electricity, while using a significantly smaller quantity of natural gas. Batteries, as well as flow batteries also based on the battery principle but for which the active solutions are contained in different reservoirs. In the hydrogen technique, an electrolyte breaks down water into oxygen and hydrogen, using an electric current. The hydrogen is stored in underground reservoirs, then reinjected into a hydrogen turbine, which can then drive the generator of a wind turbine. But their development is still limited In practice, given their respective disadvantages, these technologies are little developed in large-scale storage. The hydrogen technique is inefficient as regards the release of the energy. Flywheels and SMES (Superconducting Magnetic Energy Storage) have low energy density, and batteries have a limited life. Furthermore, on the whole these technologies today are still too expensive and will not be ready to be used on a large scale until 2020 at the earliest. Moreover, CAES needs natural gas and, like PHS, requires particular sites. Consequently, fluid storage remains the most mature technology at present, and the most credible for the years ahead, as it is more profitable despite the initial investment. PHS thus accounts for more than 95% of world electricity storage capacities with more than 100 GW installed. The question of financing also has to be addressed In the years ahead, the large-scale development of energy storage, which is key to the growth of wind energy, will have to overcome several obstacles. Governments will have to pass legislation to create a favourable environment. In addition, capex and R&D outlays, which are too heavy for electricity producers to preserve their profitability, will absolutely have to be carried out by grid operators. Capital goods I 58

59 The Duke Energy project is the most advanced at this stage Duke Energy, a US utility group operating 986 MW in wind energy, signed a contract with Xtreme Power to create the biggest wind-generated electricity storage project to date. The project involves the integration of a 36 MW battery at a 153 MW wind farm in Notrees, Texas. This battery, which will start operations in 2012, will cost Duke Energy $44m. As part of the project, the group received a government subsidy worth $22m. It will therefore pay $22m, which represents $144k per MW, or around 10% more than a wind farm without such a system. To offset this extra cost, Duke will be able to store energy during periods of low consumption and inject its electricity into the grid in peak load periods, when electricity prices can be up to twice as high. Capital goods I 59

60 Table 33: Summary of the characteristics of the different viable technologies for wind-generated energy storage Technologies Electrochemical Flow batteries (Vanadium, Zinc- Bromine) Energy density (Wh/kg) Useful life Capacity Charge/discharge efficiency Electricity quality Electricity management 35 14, MWh 70-85% ** *** EnerVault, Premium Power, Primus Power, Prudent Energy, RedFlow Technologies, Sumitomo Electric Industries Lithium batteries kwh - 10 MWh % *** * Saft, A123 Systems, Hitachi Group, Johnson Controls, Altair Nanotechnologies, Electrovaya Sodium-sulphur batteries Fluid storage ,500-4,500 90% ** *** NGK Insulators Pumped Hydro- Storage - Significant 1-10 GWh 70-85% ** *** Black & Veatch, HDR, MHW Global Compressed air - Significant MWh 80% ** *** Bright Energy Storage systems Technologies, Dresser-Rand, Energy Storage and Power, General Compression, Iowa Stored Energy Park Chemical - Key players Maturity Cost Advantages Disadvantages ** $$ Capacity Low density *** $$ Density + efficiency Density + efficiency *** $ Cost per unit of capacity ** $ Cost per unit of capacity Hydrogen - 10 kwh - 10 GWh 40-50% *** *** Hydrogenics, ITM Power ** $$$ Duration of storage Source: Natixis Cost, requires recycling Cost, requires recycling Costs + special sites + environmental impact Special sites + environmental impact Cost

61 7. Appendices Table 34: Annual new installations of wind turbines (including offshore) by country MW e 2013e 2014e 2015e CAGR 05/11 (%) CAGR 11/15 (%) Austria Belgium Denmark Finland na na France ,200 1,104 1, ,000 1,100 1,200 1, Germany 1,808 2,233 1,667 1,665 1,917 1,551 2,086 2,100 2,300 2,450 2, Greece Ireland Italy ,010 1, Netherlands Norway Poland , Portugal Romania na 8 Spain 1,764 1,587 3,100 1,739 2,331 1,516 1, Sweden ,000 1, Turkey ,000 1,200 na 26 UK ,077 1,522 1,293 1,700 1,800 1,900 2, Other ,050 1, Total Europe 6,373 7,681 8,290 9,180 10,740 11,060 10,328 10,330 11,520 12,990 14, % Growth % World total Egypt Morocco Tunisia na na Other na 57 Africa & Middle East % Growth % World total USA 2,431 2,454 5,244 8,358 9,922 5,115 6,800 8,000 4,000 5,000 6, Canada ,300 1,500 1,800 2,200 2, Brazil ,100 1,250 1,300 1,350 na 23 Mexico na 14 Other na 19 Total Americas 2,671 3,515 5,814 9,527 11,433 6,639 9,437 11,450 7,950 9,800 11, % Growth % World total China 498 1,334 3,287 6,246 13,750 18,928 18,000 17,000 17,000 17,500 18, India 1,388 1,840 1,617 1,810 1,172 2,139 2,700 3,000 3,500 4,000 5, Japan Australia New Zealand na 14 Other ,050 1,400 1, Total Asia Pacific 2,455 3,712 5,607 9,257 15,614 21,608 22,050 21,750 22,900 24,450 26, % Growth % World total World total 11,543 15,017 19,794 28,191 38,104 39,405 41,965 43,930 42,920 47,890 53, o/w Onshore 11,453 14,819 19,594 27,847 37,415 37,961 40,695 42,550 41,140 45,480 49, % Growth % World total o/w Offshore ,444 1,270 1,380 1,780 2,410 3, % Growth % World total World total excl. Asia 9,088 11,305 14,187 18,934 22,490 17,797 19,915 22,180 20,020 23,440 26, % Growth % World total Sources: BTM Consult, Natixis estimates Capital goods I 61

62 Table 35: Annual new offshore wind turbine installations by country MW e 2013e 2014e 2015e CAGR 05/11 (%) CAGR 11/15 (%) Belgium na 8 Denmark na na Finland na na Germany na 15 Netherlands na na Norway na na Sweden na na UK , Total Europe ,405 1,220 1,280 1,430 1,910 2, % Growth % World total USA na na Canada na na Total Americas na na % Growth % World total China na 57 South Korea na na Total Asia Pacific na 86 % Growth % World total World total ,444 1,270 1,380 1,780 2,410 3, % Growth Sources: BTM Consult, Natixis estimates Capital goods I 62

63 Table 36: Growth in the wind turbine installed base (including offshore) by country MW e 2013e 2014e 2015e CAGR 05/11 (%) CAGR 11/15 (%) Austria ,013 1,086 1,186 1,316 1,456 1, Belgium ,147 1, ,747 1, Denmark 3,087 3,101 3,088 3,159 3,408 3,805 3,983 4,133 4,383 4,683 5, Finland France 775 1,585 2,471 3,671 4,775 5,961 6,836 7,836 8,936 10,136 11, Germany 18,445 20,652 22,277 23,933 25,813 27,364 29,450 31, ,300 38, Greece ,102 1,198 1,482 1,793 1,893 1,993 2,143 2, Ireland ,015 1,187 1,449 1,688 1, ,488 2, Italy 1,713 2,118 2,721 3,731 4,845 5,793 6,743 7,343 7,943 8,643 9, Netherlands 1,221 1,557 1,745 2,222 2,226 2,241 2,309 2, ,679 2, Norway , Poland ,231 1,667 2, ,067 5, Portugal 1,087 1,716 2,150 2,829 3,474 3,837 4,214 4,514 4,814 5,164 5, Romania , ,790 3,490 na 37 Spain 10,027 11,614 14,714 16,453 18,784 20,300 21,350 21,550 21,750 22,000 22, Sweden ,024 1,537 2,141 2,904 3, ,604 6, Turkey ,512 1,982 2,782 3,682 4,682 5, UK 1,336 1,967 2,394 3,263 4,340 5,862 7,155 8, ,555 14, Other ,678 1,881 2,231 2,771 3,601 4, Total Europe 41,069 48,651 56,853 65,999 76,583 87,674 97, , , , , % Growth % World total Egypt ,052 1, Morocco , Tunisia Other , Africa & Middle East ,116 1,214 1,364 1,764 2,314 2,964 3, % Growth % World total USA 9,181 11,635 16,879 25,237 35,159 40,274 47,074 55, ,074 70, Canada 683 1,459 1,845 2,371 3,321 4,011 5,311 6,811 8,611 10,811 13, Brazil ,261 1,844 2, ,494 6, Mexico ,123 1,473 1,873 2,373 2,973 na 28 Other Total Americas 10,062 13,577 19,391 28,917 40,351 46,990 56,427 67,877 75,827 85,627 96, % Growth % World total China 1,264 2,588 5,875 12,121 25,853 44,781 62,781 79,781 96, , , India 4,388 6,228 7,845 9,655 10,827 12,966 15,666 18,666 22,166 26,166 31, Japan 1,159 1,457 1,681 2,033 2,208 2,429 2,729 3, ,929 4, Australia ,587 1,886 2,084 2,584 3,184 3,884 4,684 5, New Zealand ,345 1, Rest of Asia Pacific ,290 1,940 2,990 4,390 6, Total Asia Pacific 7,889 11,590 17,192 26,445 42,037 63,645 85, , , , , % Growth % of World total World total 59,399 74,306 94, , , , , , , , , o/w Onshore 58,720 73,429 92, , , , , , , , , % Growth % World total o/w Offshore ,077 1,421 2,110 3,554 4,961 8,587 12,570 18,400 26, % Growth % World total World total excl. Asia 51,510 62,716 76,813 95, , , , , , , , % Growth % World total Sources: BTM Consult, Natixis estimates Capital goods I 63

64 Table 37: Growth in the offshore wind turbine installed base by country MW e 2013e 2014e 2015e CAGR 05/11 (%) CAGR 11/15 (%) Belgium na 23 Denmark Finland na na Germany na 47 Netherlands Norway na 235 Sweden UK , Total Europe ,405 1,220 1,280 1,430 1,910 2, % Growth % World total USA na na Canada na na Total Americas na na % Growth % World total China na 60 South Korea na na Total Asia Pacific na 77 % Growth % World total World total ,444 1,270 1,380 1,780 2,410 3, % Growth Sources: BTM Consult, Natixis estimates Table 38: Market share by manufacturers since 2003 in terms of annual new installations and the total installed base % Inst. Accu Inst. Accu Inst. Accu Inst. Accu Inst. Accu Inst. Accu Inst. Accu Inst. Accu Vestas (DK) Sinovel (Ch) GE Wind (US) Goldwind (Ch) Enercon (Ger) Suzlon Group (Ind) Dongfang (Ch) Gamesa (Sp) Siemens (Ger) United Power (Ch) Mingyang (Ch) Nordex (Ger) Mitsubishi (JP) Sewind (Ch) Hara Xemc (Ch) REpower (Ger) Ecotecnia (Sp) Neg Micon (DK) Acciona (Sp) Clipper (US) Others Source: BTM Consult Capital goods I 64

65 Table 39: Market share by manufacturer and by country (in terms of annual new installations) World (%) World market share in 2010 Vestas (DK) Sinovel (Ch) GE Wind (US) Goldwind (Ch) Enercon (Ger) Mitsubishi Sew ind. Hara Xemc Others Suzlon Group (Ind) % 2% 1% Vestas Nordex 11% Dongfang (Ch) % 2% Gamesa (Sp) Mingy ang Siemens (Ger) United Pow er 3% Sinov el United Power (Ch) % Siemens 11% Mingyang (Ch) % GE Nordex (Ger) Gamesa 9% 6% Mitsubishi (JP) Dongfang Goldw ind Sewind (Ch) Suzlon 6% Enercon 9% 7% Hara Xemc (Ch) % Alstom Wind (Fr) Acciona (Sp) UTC (US) Others China (%) Chinese market share in 2010 Sinovel Goldwind Dongfang United Power Mingyang United Pow er Vestas DongFang Vestas 9% Mingy ang Sewind % 5% 6% Gamesa Sew ind 3% Hara XEMC Gamesa Goldw ind CCWE % 19% CSIC Hara XEMC GE Wind % Nordex CCWE Others CSIC Suzlon Group Sinov el 3% 11% 2% REpower % WinWind Acciona Other China Others USA (%) US market share in 2010 GE Wind Vestas Siemens Mitsubishi Siemens Vestas 13% 10% Mitsubishi % Gamesa Gamesa % Suzlon Group REpower Suzlon Nordex % Acciona Nordex Others UTC % GE 2% Clipper % Others Capital goods I 65

66 India (%) Indian market share in 2010 Suzlon Group Enercon Other India Vestas Gamesa WinWinD WinWinD Gamesa 1% 5% Vestas 13% GE Wind 1% Kenersys (GE) 1% GE Wind Kenersys (GE) NEPC GE Wind Sinovel Other India 19% Enercon 19% Suzlon Group 41% Germany (%) German market share in 2010 Enercon Vestas Suzlon Group Nordex GE Wind Siemens Gamesa Fuhrländer Other Germany Others Enercon 55% Vestas Suzlon 16% 11% Nordex 4% GE 4% Siemens 4% Other Germany Others 4% 2% UK (%) UK market share in 2010 Siemens Vestas Gamesa Gamesa Vestas 9% Suzlon Suzlon Group % 7% Nordex Nordex Enercon Alstom Wind Acciona Sewind Siemens 37% 5% Enercon 5% Alstom 2% Acciona 0% Spain (%) Spanish market share in 2010 Gamesa Vestas GE Wind Nordex Alstom Wind Siemens Fuhrländer Acciona EHN/Ingetur Enercon Suzlon Group Vestas 18% Gamesa 57% GE 16% Nordex 3% Alstom 2% Siemens 2% Fuhrländer 1% Acciona 1% Capital goods I 66

67 France (%) French market share in 2010 Enercon Suzlon Group Vestas Gamesa Nordex Alstom Wind Ecotecnia Siemens Acciona Nordex 8% Alstom Wind 5% Gamesa 8% Vestas 18% Siemens 2% Acciona 1% Enercon 34% GE Wind Vergnet WinWinD Suzlon Group 24% Fuhrländer Italy (%) Italian market share in 2010 Gamesa Vestas Suzlon Group Enercon Nordex GE Wind Alstom Ecotecnia Acciona Siemens Nordex 10% Enercon 13% Suzlon 16% GE 4% Gamesa 29% Vestas 28% Canada (%) Canadian market share in 2010 Siemens GE Wind Enercon Vestas Acciona Suzlon Group Enercon 19% Vestas 17% Acciona 5% GE Wind 24% Suzlon Group 0% Siemens 35% Source: BTM Consult Capital goods I 67

68 Table 40: Regulatory developments in the main countries that have invested in wind energy Capacity at end-2010 (GW) national target (GW) Change in the legal, administrative and pricing framework Main equipment manufacturers 1 China 62.8 >150.0 National potential of 2,580 GW (onshore + offshore). National target of wind farm bases in 7 regions, with total output of 138 GW by % of onshore wind farms were not connected to the grid at end First offshore wind farm in June USA 47.0 na Production potential of 20% at the national level by 2030 (2% in 2010). 38 States out of 50 have presented significant wind farm projects. Wind installation cost became competitive vis-à-vis gas in However, there have been regulatory uncertainties since Extension of the Production Tax Credit until the end of 2012, and the alternative for a tax credit (Investment Tax Credit) until the end of Germany (o/w 10.0 offshore) 2 Introduction of feed-in tariffs in Regulatory uncertainty in 2010, now resolved. Rise of offshore since the mid-2000s. Incentives to improve yields (notably reengining). Prospect of a strong revival following the decision to abandon nuclear power in June 2011, notably in offshore. Spain Introduction of feed-in tariffs in Subsidies for wind energy discontinued, without retroactive effect. Estimate reduced to 200/250 MW/annum (vs. 1,500/2,000 MW/annum since 2004). India 15.7 > 65.0 CAGR of 29.5% in volume terms since Strong pricing incentives out to 31/03/12 or accelerated depreciation faculty in Wind energy potential of 65 to 100 GW in the long run. However, the T&D network is inadequate. Italy Buyback policy for green certificates out to 2016, for a price representing 70% of the difference between 180 /MWh and the electricity price. Post 2012, subsidies will be allocated based on a Dutch auction system. Feed-in tariff to be introduced in Estimated new capacities of 600/800 MW/year out to 2015 (vs. around 1,000 MW/year in 2008/2010). France (o/w 6.0 offshore) France represents the second-greatest wind energy potential in Europe. A call for tenders for 3 GW in offshore wind energy in three phases has been issued (phase 1 launched in May 2011). The 2020 target implies additions of 2 GW/year vs. 1 GW/year since Introduction of feed-in tariffs in Frequent changes to regulations are an inhibiting factor. Favourable zones are to be defined by June 2012 in each region. UK Feed-in tariffs of 100 /MWh for onshore and 120 /MWh for offshore. Leases awarded for 32 GW in capacities (Offshore Round 3) in January Introduction of feed-in tariffs for small wind farms (up to 5 MW) in April In December 2010, introduction of the electricity market reform (EMR) aimed at giving incentives to develop resources with low CO2 emissions, whether renewable or not. Canada 5.3 > 12.0 Non renewal of the ecoenergy programme intended for renewable energies in Incentives are mainly regional (Ontario in 2009, Nova Scotia and British Colombia in 2010), and federal government incentives are limited. More than 7,000 MW in contracts are underway between now and 2015 in Canada. We therefore expect average installations of 1,500/2,000 MW/year as of 2011 (vs. 500/1,000 MW/year until 2010). Transmission has to be adapted, however. Portugal according to the NREAP 3 Introduction of feed-in tariffs in They were set at 94 /MWh before 2005 and at 73 /MWh since Commission of 2.5% on revenues has to be paid to local municipalities. Offshore should be given the same tariffs, which does not look economically viable. A law was passed in 2010 introducing tougher penalties for excessive injection of reactive current in the grid. We expect the market to be reduced to 300/400 MW/year in 2011 and thereafter (vs. 400/700 MW/year from 2005 to 2010). Denmark 4.0 The legal, economic and industrial framework is favourable in Denmark, where wind energy accounted for 25% of electricity production in We expect potential to be reduced to 100/300 MW/year from 2011 (vs. a peak of 330/370 MW in 2009 and 2010). Japan 2.7 World na 2020 capacity targets lowered in Spain and Italy. 1 In decreasing order of size 2 German wind energy syndicate estimates 3 National Renewable Energy Action Plan (EU) Sources: GWEC, BTM Consult, Natixis Sinovel, Goldwind, Dongfang, United Power, Mingyang, Vestas, Sewind, Gamesa. Local content: > 80%. GE, Vestas, Siemens, Mitsubishi, Gamesa, Suzlon, Nordex. Local content: around 50%. Enercon, Vestas, Suzlon, Nordex, GE, Siemens. Gamesa, Vestas, GE, Nordex, Alstom. Local content: > 55%. Suzlon, Enercon, Vestas, Gamesa. Local content: > 45%. Gamesa, Vestas, Suzlon, Enercon, Nordex, GE. Enercon, REpower/Suzlon, Vestas, Gamesa, Nordex, Alstom. Siemens, Vestas, Gamesa, Suzlon, Nordex, Enercon. Siemens, GE, Enercon, Vestas, Acciona. Enercon, Vestas, Gamesa, Nordex. Vestas, Siemens. Capital goods I 68

69 8. Company profiles Vestas 71 Gamesa 105 Capital goods I 69

70 Capital goods I 70

71 Source: Natixis avr -09 nov-09 mai -10 déc-10 j ui n-11 j anv-12 Vest as Rel. DJ STOXX Small 200 Price 04/11/2012 DKK50.65 Target DKK45.00 Upside -11.2% Performance 1m 12m 1 Jan Absolute -9.7% -75.0% -18.3% Sector -3.5% -8.4% 9.7% DJS Small % -11.9% 8.4% 12-month high/low DKK202.90/DKK50.20 KFX DJS Small Market capitalisation DKK10.3bn Free float 100.0% - - Daily volume DKK294m Analyst(s) Antoine Azar (33 1) antoine.azar@natixis.com Ludovic Debailleux (33 1) ludovic.debailleux@natixis.com Arnaud Schmit (33 1) arnaud.schmit@natixis.com Equity Markets Bloomberg access equity.natixis.com NXSE Capital goods Vestas VWS.CO/VWS@DC Looking for a strategy 13 April 2012 Denmark Reduce We are initiating coverage of Vestas with a target price of DKK45 and a Reduce rating. Despite the group s position as a leader, we are adopting a cautious stance on the share due to: 1/ the lack of a strategy and any medium-term guidance; 2/ the management, which has to regain the confidence of investors following the string of profit warnings in 2010 and 2011; and 3/ the worrying guidance for Our target price is based on a DCF valuation, as the weak earnings expected in 2012/13 render an approach based on multiples inapplicable. Vestas is the world s number 1 manufacturer of wind turbines thanks to its geographic and product diversification. It is present in 67 countries and is among the top 3 in the world s 10 largest wind power markets, except in China and Canada. As regards its product portfolio, it is active in both onshore and offshore with a broad range of products (from 850 kw to 3 MW). However, the group has repeatedly disappointed the market since 2010, with 4 profit warnings and an accounting change (cost-of-completion accounting method instead of percentage of completion), which has made its earnings highly volatile. Despite the new organisational structure and the resignation of the CFO, investors have still not regained confidence in the group s management. Worrying outlook. Vestas 2012 guidance is very broad and therefore not reassuring: sales of between 6.5bn and 8bn and an operating margin between 0 and 4%. In addition, we find it disappointing given the substantial delayed recognition effect that the group should benefit from in 2012 ( 1.2bn in sales and 344m in EBIT). Therefore, by our estimates, this means that Vestas expects an organic fall in sales of -23 to -2.9% and an operating margin of -10.4/-2.4% for the main turbine manufacturing business. 2013/2015 a total lack of visibility. For the medium term, Vestas limited its guidance to a high-single-digit operating margin, with no further details. We hope that at the Q1 12 results presentation, the management will provide precise medium-term guidance and a clear strategy plan. Distribution of this report in the United States. See important disclosures at the end of this report. Close on 31/12 Revenues ( m) Reported net profit ( m) Adjusted EPS ( ) Chg. EPS (%) (x) (x) (x) (%) , na e 7, na e 6, e 6, P/E EV/EBIT P/CF Net yield

72 Contents 1. A leader losing momentum 77 A warranted underperformance by the share since the crisis in Target price of DKK45 based on a DCF valuation The world leader in wind power 82 More than 30 years experience in wind power 82 A presence in 67 countries 83 The broadest product range on the market 84 Market share losses expected, especially in offshore Confidence in need of rebuilding target stillborn 86 Guidance revised down 5 times in under 2 years 88 Production operations lacking flexibility 88 Is there someone at the helm? : a decisive year! : execution problems 92 Worrying 2012 guidance 94 FCF under pressure in Backlog will boost business activity in Geo-mix expected to be more favourable in Margins penalised by high R&D and production costs /2015: a foggy haze 100 Massive investments 100 Higher R&D and little use of outsourcing 101 An insufficient 150m cost-cutting programme 102 Financial Data 103 Vestas I 72

73 Natixis Nutshell Vestas Reduce Price 04/11/2012 DKK50.65 Target price DKK45.00 Capitalisation DKK10.3bn 2012 PE 27.6x 2012 Net debt 672.7m 2012 EV/EBIT 14.9x 2012 Revenues 7,188.3m 2011/2014 EPS CAGR na Profile - Business(es): Development, manufacturing, sale and installation of onshore and offshore wind turbines. Services (maintenance, wind farm projects, SCADA control system). - Main market(s) and state of consolidation: The turbines market is increasingly fragmented; in 2011, the top 5 companies commanded 47.2% of the market vs. 77.4% in Competitive positioning: The global leader with a 12.9% market share in 2011 (vs. 28.4% in 2005), Vestas is facing growing competition, mainly from China, followed by China's Goldwind (9.4%), GE Wind (8.8%) and Gamesa (8.2%). - Strategic thrust: Continuously develop more reliable products to counter growing competition from Asia, and improve margins on wind turbines to make them more competitive against conventional sources of energy. Porter's 5 forces Supplier power Barriers to entry Buyer power - Vestas mainly consumes iron but also aluminium, nickel and copper, and covers some of its own needs. - Vestas always aims for at least 2 suppliers for each component used to manufacture its turbines % of its production of converters and gear boxes (Siemens...) and 75% of towers are outsourced. - Since 2005, the group has been working together with its main suppliers to improve its supply chain (delivery times, component prices, risk of shortages, etc.). - High negotiating clout over suppliers due to weaker demand. - Experience and quality of equipment. - Services activities. - Incentives offered by governments. Degree of rivalry - A lot of competition from local players in regions with the most potential: China (81% market share for locals), India (61%), USA (43% for GE Wind), Brazil. - Fierce and increasing worldwide, especially in the offshore segment. - China (48% of installed capacity) is not very open to foreign turbine manufacturers. Threat of substitutes - Conventional sources of energy (nuclear, gas, coal, oil, etc.). - Renewable sources of energy (photovoltaic, hydraulic, thermal, biomass, etc.). - Well adapted to moderately-sized local clients in the past, Vestas has evolved over recent years and is cooperating more closely with utilities and with energy producers operating on a global scale. In 2010, their share of Vestas' 212-strong client base was 46%. Its biggest clients are EDF, EDP R and ENEL. - Customer loyalty index rose to 64% in 2009 and remained there in In 2010, Vestas introduced its Key Account Management service allowing direct access for its most important clients. - Significant pricing pressure due to surplus capacity. Vestas I 73

74 Investment case Theme - No real strategy, medium-term guidance too vague. - Management needs to restore investor confidence following the many profit warnings issued in 2010 and Operational problems in mass-producing new products could last. - Little exposure to fast-growing countries (Latam, India, China). Triggers - New business plan likely to be announced at the Q1 12 earnings presentation on 02/05/ Change of management. Risks to our scenario - Strong growth in wind power in Europe. - Takeover bid for the group. Guidance - March 2012: revenues between 6.5bn and 8bn, EBIT margin of 0-4%, FCF>0, 550m capex o/w 350m in R&D in March 2012: EBIT margin in high single digits in medium term. Consensus (FactSet) and Momentum m 2012 Natixis vs. consensus 2013 Natixis vs. consensus 2014 Natixis vs. consensus Sales % % % EBIT % % % EPS ( ) % % % Est. change over 3 months for the consensus EPS Change in target prices over the Target price (DKK) last 3 months Consensus Natixis % % % Other listed investment vehicles - No CB. ESG issues G: 100% free float and board 75% independent. Principle of 1 share = 1 vote, no poison pill. G: After 3 profit warnings over 2011/12, new chairman and resignation of CFO, still not replaced. Shareholders have lost confidence. Full CSR reporting. S: successive restructuring measures since 2009 and further measures planned for 2012 (2,335 redundancies expected) to cut staff in USA and Europe, but late reaction to the market slump (cost base too big). Little information on the terms (in 2012, costs= 40,000 per person). Health/Safety: LTIR improving steadily to 3.2 in 2011 (vs in 2007), comparable to Gamesa. Target of 0.5 for Product quality stable and no cause for concern. Innovation: considerable R&D expenditure (5.6% of revenues vs. 1.6% for Gamesa at 327m). Lagging behind Siemens and Areva in terms of offshore turbine power. Very good in onshore. E: EMS complete and well reported. Very committed to reducing its environmental impact (recycling target of 85% for 2015, CO2 emission reductions and a larger share of renewables in the electricity it uses). LCA complete with 2015 target to improve LCA in terms of reducing CO2 by 15% vs (5 to 10 g CO2/kWh produced over a turbine's lifecycle/3 MW turbine energy-neutral after 8 months of operation). Questions to management - Precise guidance for medium term? - Maintain operations in China where competition is fierce? - Do you plan to change how you communicate your guidance, in order to avoid the risk of a profit warning? Key sensitivities - Prices of certain commodities (iron, aluminium, nickel, copper). - Amount of feed-in tariffs, green certificates, PTC, other subsidies... - Oil and gas prices. Shareholders Shares Votes Free float 100.0% 100.0% Vestas I 74

75 Historical valuation, 12m yoy Absolute and relative PE (x) Change in 12-month EPS Absolute and relative EV/EBITDA (x) Absolute and relative EV/EBIT (x) Absolute and relative P/CF (x) FCF yield (%) and net yield (%) Source: FactSet Vestas I 75

76 Financial ratios Sales ( m) and operating margin (%) ROCE (%) and Sales/Capital employed (x) EBITDA/Financial costs (x) and ND/EBITDA (x) Capex/Sales (%) and WCR/Sales (%) Dividend per share ( ) and pay out (%) Free cash flow and net debt ( m) Source: Natixis Vestas I 76

77 1. A leader losing momentum We are initiating coverage of Vestas with a Reduce rating and a target price of DKK45 We are initiating coverage of Vestas with a Reduce rating and a DCF-derived target price of DKK45, assuming a normative EBIT margin of 5% in the medium term, well below the group s guidance ( high single digit ). Our cautious stance is due to the group s lack of a clear strategy, at this stage, whereas it is facing two tough years in the wind power sector. What is more, the management has lost investor confidence following a string of profit warnings in 2010 and A warranted underperformance by the share since the crisis in 2008 The share price has plummeted by 90% since 2008 From 2004 to 2008, Vestas share price increased almost tenfold, thanks to its substantial growth in the period (sales grew 23% per year) and weak competition, which enabled the group to establish itself as the sector leader with an average worldwide market share of 25%. The share was also buoyed by the multiple declarations from political figures in the period in favour of renewable energies and the introduction, in a large number of countries, of wind-generated electricity feed-in tariffs. Conversely, since 2008, the share has lost almost 90% of its value as a result of the repercussions from the 2008 crisis for the financing conditions of numerous wind farm projects and the rise of Chinese competition. What is more, at the height of the crisis the group took strategic development decisions (moves into the USA and China) that proved to be poorly-timed. Last, the change of accounting standard (26/10/2010) introduced a strong element of volatility to earnings, making them unpredictable. As a result, Vestas issued a string of profit warnings. Chart 46: Vestas share performance since x10 Lehman Brothers Triple 15 plan Change in Fukushima accounting method PW PW PW PW Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Sources: Datastream, Vestas Vestas I 77

78 Chart 47: Vestas relative performance versus the DJ Euro Stoxx Industrials index Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Vestas Euro Stox x Industrials Source: Datastream 2012 should be a year of transition for the group and the market is likely to maintain a wait-and-see stance on the stock. Indeed, the 2012 guidance is vey broad and therefore not reassuring, even disappointing. Moreover, Vestas has to manage the implementation of its new management organisation, which so far has got off to a somewhat chaotic start. The group is targeting 12e sales of between 6.5bn and 8bn (vs. 5.8bn in 2011), which will benefit from 1.2bn in sales postponed from In addition, it forecasts a low EBIT margin of between 0% and 4%, despite a margin of 14% in services and EBIT of 344m delayed from The management attributes this low guidance to unforeseen additional costs in the start of mass production of the V MW and GridStreamer technology. Table 41: 2012 guidance vs. the consensus and Natixis estimates m 2012 guidance Pre-publi. cons. Cons. Natixis Natixis Post-publi. cons. Cons. Sales 6,500 8,000 7, % 7, % 7, % o/w services % EBIT % % % o/w services % Operating margin (%) bp bp bp o/w services (%) bp EPS ( ) % Sources: Vestas, Natixis estimates, IBES We see a significant risk of downward revisions to the consensus for 2012/2013 We believe that the consensus is overly optimistic in 2012/2013 insofar as Vestas is facing a structural increase in its cost structure resulting from the industrialisation of new products and that it has not announced any new measures to remedy this. Therefore, we are not convinced that Vestas will achieve the middle of its EBIT guidance range in In addition, 2013 will be a difficult year with a collapse of the US market looking increasingly likely. The consensus has fully factored in this impact on sales but it looks too optimistic at the level of the operating performance since it assumes a significant improvement in the operating margin in 2013, despite the fall in sales. There will be no improvement in the margin unless the group manages to resolve its execution problems. Vestas I 78

79 Table 42: Natixis estimates vs. consensus 2013 m Consensus 2013 Change (%) Natixis 2013 Change (%) Cons. (%) Sales 6, , EBIT Operating margin (%) ,pb ,pb -50,pb EPS ( ) Source: Natixis estimates, IBES Target price of DKK45 based on a DCF valuation Our target price of DKK45 is obtained using a DCF valuation as the group s earnings volatility and the current troubled period it is going through render the use of historical multiples meaningless. Since 2010, Vestas has traded at multiples below its historical average and this gap has steadily widened. We believe that this is warranted by the impact of the austerity measures adopted by a large number of countries on the assistance allocated to renewable energies and the intensifying competition in wind power, which is making Vestas leadership position increasingly difficult to maintain. Chart 48: Historical 12-month forward valuation ratios (x) 3.0 EV / Sales 20 EV / EBITDA Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb EV / EBIT PE Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Source: Datastream Note, however, that if, as we expect, in 2015/16, the wind power sector once again finds itself in a strong growth situation, the share could once again trade at multiples in line with historical averages. Therefore, applying Vestas historical multiples to our 2015/2016 estimates discounted to present value using the group s current WACC (9.9%), we arrive at a valuation per share of DKK77. Vestas I 79

80 Table 43: Valuation of Vestas applying historical multiples to our 2015/2016 estimates m PE EV/EBIT 2015e 2016e 2015e 2016e Historical average (x) EPS ( )/EBIT Enterprise value 3,465 4,956 - Net debt -1,167-1,117 Shareholders equity 2,298 3,839 Number of shares (m) Value per share ( ) Discounted value per share ( ) Discounted value per share (DKK) Sources: Datastream, Natixis estimates DCF valuation of DKK45 Our DCF valuation works out at DKK45 per share, pointing to downside of 11% relative to the current share price. In the absence of a new medium-term strategy plan for the group, following the shelving of the Triple 15 plan, we might make substantial changes to our estimates for growth and profitability. Our target price corresponds to a 2012 EV/EBIT multiple of 12.1x and a PE multiple of 24.5x. Our valuation of DKK45 is based on the following assumptions for cash flow discounted at a WACC of 9.9%: 2011/2015 sales CAGR of 1.6% (assuming normative sales in 2011 of 7bn), well below the rate of growth of new worldwide wind power installed capacities in the period (5.7%), reflecting a loss of market share in the face of more intense competition and the strong presence on the European and US markets, which are mature. We also expect strong growth (10.3%) in 2016 with the commercial launch of its new 7 MW offshore turbine. In our calculation of terminal value, we assume a normative EBIT margin of 5%, well below the group s guidance for a high-single-digit margin, due to the growing competitive intensity, which is likely to continue to put pressure on prices and therefore on margins. Capex of 550m in 2012, in line with the group s guidance and lifted to 650m in 2014 and 2015, due to the construction of the factory intended to produce the new 7 MW offshore turbine, mass production of which is scheduled to start in We assume normative capex of 431m per year (4.5% of sales), which by our estimates corresponds to maintenance investments. Normative WCR of 7% of sales. Growth to infinity of 2%, in line with the other companies that we cover in the capital goods sector. Vestas I 80

81 Table 44: Calculation of the WACC % Risk-free rate 1.73 Natixis market risk premium 8.72 Beta (x) 1.27 Tax rate 33.0 Cost of capital Rate of remuneration of debt (after tax) 2.50 Share of capital 71.6 Share of debt) 28.4 WACC 9.90 Source: Natixis estimates Table 45: DCF m 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Normative Sales 7,188 6,527 6,962 7,446 8,216 8,574 8,901 9,193 9,445 9,633 Growth (%) Growth of wind power market (%) Market share (%) EBITDA Margin (%) EBIT Margin (%) Tax Depreciation & amortisation As % of sales Capex As % of sales Change in the WCR Free cash flow Discounted free cash flow As % of EV Enterprise value 1,475 Net debt 2011e -545 Financial asset 295 Shareholders equity 1,225 Number of shares (millions) 202 Value per share ( ) 6.1 Exchange rate ( /DKK) 7.4 Target price (DKK) 45 Source: Natixis estimates Table 46: Sensitivity of our target price to the normative EBIT margin and to the WACC DKK LT EBIT (%) WACC (%) Source: Natixis estimates Vestas I 81

82 2. The world leader in wind power Vestas market share shrank from 34% in 2004 to 12.3% in 2011 Vestas is currently the world leader in wind power, in terms of both the installed base (estimated at over 50 GW in 2011) and MW delivered with a market share of 12.3% in However, its market share has fallen steadily since 2004 (34%) because of the rise of the Chinese market, which is largely closed to foreign industrials. This is a real problem for Vestas, which is unable to take full advantage of the world s largest market (39% of new installed capacities in 2011). In addition, a number of Korean players are also entering the market, notably the offshore segment, including Doosan, Daewoo and Samsung. In offshore wind, Vestas is also in a tricky situation since its current 3 MW turbine is not powerful enough to compete with those of Siemens (3.6 MW) and Areva (5 MW). It will therefore probably lose all of its market share in the offshore segment between now and 2015, when its new 7 MW turbine is scheduled to be launched. Each year, Vestas dominant situation on the global wind power market is therefore increasingly coming under threat. Note that outside Asia, the group s market share has also declined, to 21.1% in 2011 vs. 25.8% in More than 30 years experience in wind power Vestas has the largest installed base with 22.8% of the worldwide base Vestas is a Danish company, founded in 1898, which was initially specialised in forging and manufacturing cranes. The group delivered its first wind turbine in 1979 and from 1987 onwards focused exclusively on this business. At the end of 2011, the group had thus installed more than 50 GW in wind turbines over a period of 30 years, i.e. by far the largest installed base on the market, nearly twice as large as the number two, GE Wind. Table 47: Top 10 global installed bases Rank Country 2010 installed base (MW) 2010 installed base (%) Vestas 1 Denmark 45, GE Wind 2 USA 26, Enercon 3 Germany 22, Gamesa 4 Spain 21, Suzlon 5 India 17, Siemens 6 Germany 13, Sinovel 7 China 10, Goldwind 8 China 9, Nordex 9 Germany 6, Dongfang 10 China 6, Other 19, Total 199, Source: BTM Consult Today, the group employs more than 22,000 people worldwide, most of whom are in Europe (62%). It therefore boasts the biggest track record in the industry with some of the most competitive wind optimisation and management tools on the market. The installed base is a real asset for services The size of the installed base is a real asset for the group in terms of providing services. Indeed, each year Vestas develops new solutions to better optimise utilisation of its turbines and make them more efficient and thus more profitable for clients. Growth in services sales has therefore on average outstripped growth in turbine sales since 2006 (25% on average per year in services versus 13% in turbines). The share of services in the group s total sales rose from 5% in 2006 to 12% in 2011 and Vestas I 82

83 this trend is set to accelerate since more than 95% of new turbine orders now include a maintenance contract versus 81% in Vestas has the longest wind data series on the market, irrespective of which region of the world one takes. This bolsters the credibility of the solutions offered by the group and constitutes a genuine competitive advantage, in particular in the face of Chinese players, which currently have no experience in the field and still do not have any genuine services offerings. Chart 49: Share of services in the group s sales and growth of turbine sales versus growth of services sales 78% 58% 38% 18% -2% -22% 5% 8% 7% 10% 9% 12% Serv ices as share of total rev enue Grow th in Serv ices rev enues Grow th in Turbine rev enues Source: Vestas Despite the impressive rise of Chinese industrials, Vestas remains the world number one in wind power in terms of market share, with 14.8% of MW delivered in Table 48: Ranking of the 10 leading wind turbine manufacturers by the number of MW delivered per year Rank Country Mkt. share 2008 Mkt. share 2009 Mkt. share 2010 MW delivered in 2010 Vestas 1 Denmark ,842 Sinovel 2 China ,386 GE Wind 3 USA ,796 Goldwind 4 China ,740 Enercon 5 Germany ,846 Suzlon 6 India ,736 Dongfang 7 China ,624 Gamesa 8 Spain ,587 Siemens 9 Germany ,325 United Power 10 China ,643 Other ,880 Total ,405 Source: BTM Consult A presence in 67 countries Vestas is the most geographically diversified wind turbine manufacturer with a presence in 67 countries. By way of illustration, in 2011 it supplied more than 50 MW of turbines in over 22 different countries, while the second most internationally diversified player, Suzlon, only supplied turbines in 17 countries. Vestas I 83

84 Chart 50: Geographical breakdown of turbines delivered (left) and market share in 2011 (right) Asia 20% 23% 20% 21% 12% Europe 45% 0% 5% America 35% Europe America Africa & Middle East World ex - Asia Asia World Source: Vestas Furthermore, in 2010, Vestas was among the top 3 wind turbine manufacturers that supplied the most wind turbines in the 10 biggest global markets, with the exception of China and Canada. The group s absence from China, the world s largest wind turbine market, is due to the fact that the Chinese market is largely closed to foreign turbine manufacturers. Table 49: Top 3 wind turbine manufacturers on the world s 10 largest markets in 2010 Rank MW installed 2010 Share of MW installed in 2010 in % No. 1 No. 2 No. 3 China 1 18, Sinovel Goldwind Dongfang USA 2 5, GE Wind Vestas Siemens India 3 2, Suzlon Enercon-India Vestas Germany 4 1, Enercon Vestas Suzlon UK 5 1, Siemens Vestas Gamesa Spain 6 1, Gamesa Vestas GE Wind France 7 1, Enercon Suzlon Vestas Italy Gamesa Vestas Suzlon Canada Siemens GE Wind Enercon Sweden Vestas Enercon Siemens Total 34, Source: BTM Consult The broadest product range on the market Vestas has the most diversified product mix with a presence in both low power turbines (850 kw) and heavy duty turbines (3 MW), and with turbines suited to all types of wind with rotor diameters ranging from 52 metres to 112 metres. The group is active in both onshore and offshore. It can therefore supply clients, everywhere in the world, with turbines suited to all types of sites and wind conditions, enabling it to create privileged ties with its clients and secure their loyalty. Table 50: The most diversified product range on the market Platform Year of mass production Power in MW Rotor size Number of models Types of turbine kw Onshore 2 MW Onshore 3 MW Onshore/Offshore 7 MW 2015? Offshore Source: Vestas Vestas I 84

85 Market share losses expected, especially in offshore Vestas is losing momentum in offshore due to its underpowered turbines Between 2005 and 2011, Vestas showed average annual growth in sales of 8.5%, i.e. a slower pace than that of the world wind power market (24%). This underperformance resulted from the growing importance of the Chinese market (39% of global new installed capacities in 2011 versus 4% in 2005). Chart 51: Growth of Vestas sales versus growth of the wind power market 60% 40% 20% 0% -20% -40% e 2013e 2014e 2015e Rev enue grow th Global grow th in new installations Global grow th in new installations ex -Asia Sources: Vestas, BTM Consult, GWEC, Natixis estimates Vestas has better defended its market share in the rest of the world outside Asia (a zone that has grown at a rate of 14.5% per year) with a market share of 21% in 2011 versus 27% in In 2015, Vestas market share should only decline slightly, and mainly in offshore. Indeed, 2011 was a particularly difficult year as a result of operating problems and not because of real losses of market share. We therefore expect market share to recover in 2012 to 14%, then erode slightly until 2015 (12.1% worldwide market share in 2015 versus 12.3% in 2011) mainly due to market share losses in offshore (around 8% of sales by our estimates). Unlike the onshore market, turbine power has fundamental importance in the offshore segment given the high cost of installing a turbine offshore (60-70% of the amount of the project versus just 20-30% in onshore). Now, Vestas most powerful turbine is 3 MW, versus 3.6 MW for Siemens and 5 MW for Areva and REpower. In addition, a number of other players are poised to arrive on the market between now and 2015, when Vestas new 7 MW turbine is scheduled for launch. The group will therefore probably lose all of its market share in offshore between now and 2015, whereas in 2010, it shared the market with Siemens. Chart 52: Vestas global market share since % 35% 25% 15% 5% -5% e 2013e Europe Africa & Middle East Americas World ex -Asia Asia World Sources: Vestas, BTM Consult, GWEC, Natixis estimates Vestas I 85

86 3. Confidence in need of rebuilding In 2009, at the height of the crisis, Vestas effected a strategic shift, reducing its production capacities in Europe and increasing them in China and the USA. This proved to be a poor choice as the group has steadily lost market share in China and the US market collapsed in 2010 with the emergence of shale gas. The target of 15bn in sales in 2015 with an EBIT margin of 15% in the Triple 15 plan rapidly appeared to be out of reach but the group did not abandon this target until the end of 2011, and then failed to chart a precise new course. The repeated profit warnings since the end of 2009 have seriously undermined the management s credibility, and they have also made a series of missteps in their financial communication. To regain the confidence of investors, the management absolutely must present the market with a new business plan that is clear and precise. At the height of the crisis, Vestas announced an extremely ambitious plan that it was forced to abandon at end target stillborn The strategic shift undertaken by Vestas in 2009 aimed at reducing its production capacities in Europe and increasing them in China and the USA rapidly proved to be the wrong strategy. Indeed, the group has steadily lost market share in China, due to the strong pricing pressure exerted by local competitors, and the US market collapsed in 2010 with the advent of shale gas. In 2010, the group s capacity utilisation rate thus fell to 55% in the USA and less than 50% in China. At the end of 2009, Vestas unveiled a new medium-term plan, called Triple 15, targeting sales of 15bn and an EBIT margin of 15% in The market never found this target credible, as can be seen from the share price, which has fallen steadily since the plan was announced, but the management waited until the end of 2011 to shelve it, and then failed to announce precise new targets. The only guidance provided by the management was for a high single digit EBIT margin in the medium term, with no further details and no explanation as to how they planned to achieve this target. Chart 53: Share performance since the announcement of the Triple 15 plan on 27/10/ % Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Source: Datastream Vestas I 86

87 At the end of 2011, the group in the end announced that it would eliminate nearly 45% of its jobs in the USA if the Production Tax Credit (PTC) was not renewed in We therefore factored into our estimates the elimination of 800 jobs in the USA in 2013, i.e. 32m in restructuring charges ( 40k per job cut). Vestas is encountering increasing difficulties in China due to competition from local players Conversely, concerning China, the management merely said that it was in wait-and-see mode. With just 501 MW sold on the Chinese market in 2011 despite capacity that we estimate at over 2,000 MW, China has become the least profitable market for Vestas. The group has two options in our view: 1/ pull out of this market, as REpower did in This would result in substantial restructuring costs, but would then enable the group to focus on zones with better penetration potential such as Turkey, Brazil or Mexico; or 2/ create a joint venture with a local player with a minority stake so as to facilitate its entry into this highly protectionist market. This option, which is the one chosen by Siemens and Nordex despite the risk of technology transfer, seems to be the most promising for the time being. Chart 54: Number of employees in USA versus the number of MW sold in this zone e 2013e Production staff MW sold Sources: Vestas, Natixis estimates Chart 55: Growth in employee numbers and MW sold in China since e 2013e Production staff MW sold Sources: Vestas, Natixis estimates Vestas I 87

88 Guidance revised down 5 times in under 2 years Since 2009, Vestas has issued 5 profit warnings Since the publication of the 2009 annual results, Vestas management has steadily lost credibility with four profit warnings in two years and a completely unexpected accounting change. In addition, the group committed several communication errors, which made the market even warier: In 2009, even though the group only just missed its EBIT guidance ( 856m vs. guidance of 864m), sales came to 6,636m, i.e. 560m short of the guidance of 7,200m. In 2010, the group revised its annual guidance twice, lowering its sales guidance from 7-8bn initially to 6bn, and its EBIT margin guidance from 10-12% to 5-6%. In addition, at the end of 2010 and with no prior warning, the management announced that it was adopting the IFRIC 15 accounting standard with effect from 22/11/2010, which had a major impact on the group s reporting of sales and EBIT. In 2011, the group issued a profit warning one week before the Q3 11 earnings report, cutting its sales and EBIT margin guidance to 6.4bn and 4% versus respectively 7bn and 7% initially. The reason given was a delay in putting into operation a new production factory in Germany, while the management had previously never mentioned the existence of this factory. In 2012, Vestas issued another profit warning, one month ahead of the publication of its 2011 annual results, lowering its guidance for sales and the EBIT margin to respectively 6bn and 0%. Despite these two profit warnings in the space of less than three months, Vestas reported results that were below its guidance, with sales of 5.8bn and an EBIT margin of -0.7%. At each of these announcements, the share price fell by an average of 16.9%. Table 51: Breakdown of the revisions to the group s guidance in 2010 and 2011 Guidance Initial 1 st revision 2 nd revision Accounting change Initial 1 st revision 2 nd revision Date 27/10/ /02/ /08/ /10/ /02/ /10/ /01/2012 Sales ( m) 7,000 8,000 7,000 6,000 7,000 6,400 6,000 EBIT margin (%) Performance (%) Sources: Vestas, Datastream Note, however, that the group is very transparent on certain points, notably its orders, which it communicates to the market each time the order value exceeds DKK500m ( 67m, or around 70 MW). Production operations lacking flexibility Vestas makes little use of outsourcing, and as a result its production operations lack flexibility In 2009, despite the crisis, Vestas displayed great optimism with the year-end launch of its Triple 15 plan. Probably convinced that demand would pick up strongly in the medium term, the group made little effort to restructure its operations: 1,567 jobs were cut in Europe but 1,468 employees were hired in the USA and China. In 2010, it continued to shift jobs to China and the USA. Thus, employee numbers rose from 20,829 to 23,252 in The group therefore increased its production capacities, despite an overcapacity situation that pushed the capacity utilisation rate down from 67% in 2008 to just 41% in 2010, inevitably weighing on margins. Vestas I 88

89 In 2011, the management began to become aware of the problem, cutting 531 jobs and announcing a further 2,321 job cuts in 2012, which will bring the total number of employees to 20,400 at the end of However, this is insufficient since employee numbers and production capacities increased by 85% between 2006 and 2011, while sales grew just 40%. Chart 56: Growth in the number of employees at Vestas since e Europe & Africa Asia America Source: Vestas With production capacities in a dozen countries and low use of outsourcing, Vestas cruelly lacks flexibility in times of crisis. It therefore gives the impression that the crisis is temporary and that it is waiting for the market to revive. Chart 57: Growth in Vestas production capacities and its utilisation rate 77% 74% 71% 67% 70% 41% 51% Production capacity Production Utilisation rate Sources: Vestas, Natixis estimates Is there someone at the helm? Vestas has changed its organisational structure and dismissed the CFO, but retained its CEO In January 2012, Vestas presented its new, simpler, and more client-oriented management organisation, with 5 operating divisions (versus a matrix-based organisation comprising 5 business units and 7 geographic zones previously). While this new organisation looks attractive by virtue of its simplicity compared with the former structure, its implementation has got off to a chaotic start: of the group s five divisions, just two have a manager at the helm, while the others are still waiting to find one, and the CEO Ditlev Engel looks increasingly isolated. This could prove problematic as the group has to present a new strategy plan in Vestas I 89

90 In this new structure, there is now a CEO and a deputy CEO, who also doubles as COO, and there are now just five divisions, all of which report to the CEO. Vestas also announced a broadening of the executive committee to include a total of six people compared with two (the CEO and CFO) previously. Chart 58: Vestas organisational structure since 13/01/2012 CEO Office CEO (Ditlev Engel) Deputy CEO & COO (Henrik Norremark) Staff Functions (COO) Staff Functions (CEO) Manufacturing Turbines et R&D Global Solutions & Services Finance Sales (COO) Anders Vedel (CTO) Anders Vedel (acting) (CSSO) Henrik Norremark (acting) (CFO) Juan Araluce (CSO) Source: Vestas Chart 59: Vestas former organisational structure Executive management Government Relations Finance & Operations Communications Treasury Contract Review & Services Marketing & Customer Insight Quality Forecasting & Planning IT People & Culture Technology R&D Spare Parts & Repair Blades Control Systems Nacelles Towers Americas Asia Pacific Central Europe China Mediterranean Northern Europe Offshore Source: Vestas A number of top management positions have still to be filled Nevertheless, several issues still have to be resolved: On the day the new organisation was announced, the group had not yet found heads for the Global Solutions & Services and Finance divisions, which are being headed by the CTO and deputy CEO, respectively, pending the appointment of suitable qualified people. Barely one month after Henrik Norremark was promoted to deputy CEO, having been Vestas CFO, he was dismissed from his position as a result of the two profit warnings, for which he was held to be responsible. Therefore, the CEO today also has to head up the Manufacturing and Finance divisions. Appointed in mid-january as head of the offshore business, which is part of the Manufacturing division, Hans Jörn Rieks (formerly the head of Central Europe), was dismissed on 08/02/2012. The group therefore no longer has a head for its offshore business, which is main focus of investment in This could delay development of its 7 MW turbine, which is vital to maintaining the group s positions in offshore. Vestas I 90

91 Furthermore, CEO Ditlev Engel is increasingly isolated. In addition, Bent Erik Carlsen and Sten Erik Rasmussen, respectively chairman and deputy chairman of Vestas board of directors, did not stand for re-election at Vestas annual general meeting on 29/03/2012. It should be noted that it was Bent Erik Carlsen who appointed Ditlev Engel as Vestas CEO and that he is his biggest supporter. The departure of Bent Erik Carlsen is therefore likely to undermine the position of Ditlev Engel, who is increasingly isolated within the group and is losing credibility both inside and outside the company. He could be forced to resign if Vestas fails to reach its 2012 targets. Even though we believe that the departure of Ditlev Engel would be a positive trigger for the share, this uncertainty adds to the current instability of the group s new organisation, while 2012 will be a crucial year from the operating standpoint. Vestas I 91

92 : a decisive year! 2011 was a particularly difficult year for Vestas, which had to cope with major execution problems relating to the start of mass production of its V MW turbine and the updating of its 2.0 MW platform with the implementation of the GridStreamer system. The production cost structure was therefore much greater than the management had initially anticipated and this situation is likely to continue in 2012 with an improvement expected as the year progresses will be a decisive year. The group will have to find managers for each of its divisions rapidly and meet the challenge of producing and delivering 7,000 MW of turbines. Its 2012 guidance is broad but more importantly disappointing given the sales and EBIT carried over from 2011 to 2012 mentioned in the profit warnings. In addition, the group should benefit from a backlog of 7,000 MW and a positive price-mix effect. Conversely, margins will remain weak due to additional costs in the industrialisation of new products and higher R&D expenses. We therefore believe that the cost savings plan of 150m over the full year will not be enough and will have to be increased. This vague guidance increases the management s lack of credibility and reliability in terms of financial communication. It either presupposes that the sales and EBIT delayed recognition effects mentioned previously do not exist, or strong market share losses combined with operating problems. 2011: execution problems Vestas has run into numerous operating problems, which are unlikely to be fully resolved in 2012 The poor performance in 2011 was mainly the result of operating problems that Vestas encountered in putting new products into mass production, notably the V MW turbine and the GridStreamer system. This system was introduced on the 2 MW platform so as to ensure full compatibility with all grid types via the inclusion of a full-scale converter combined with a permanent magnet generator. Thus, 650m in sales were postponed to 2012, of which 600m stem from the delay in putting into operation a new generator production factory in Travemünde, Germany, and 50m from delays to turbine production. A further 514m in sales is also likely to be postponed to 2012, as a result of poor weather conditions at the end of the year ( 210m) and delivery postponements decided by clients ( 304m). Chart 60: Breakdown of lost sales in 2011 vs. initial guidance ( m) Initial 2011 guidance Delay in starting up a plant PW 1 Delay s due to w eather Delay s due to clients Delay s in production PW2 Delay s due to clients 2011 rev enues Source: Vestas Vestas I 92

93 It should nevertheless be underlined that the group s change of accounting standard as of October 2010, as a result which the group recognises turbine sales once projects are put into operation (cost of completion method) rather than according to the percentage of completion, makes it very difficult to forecast sales. Indeed, Q4 is always a quarter of strong activity and with difficult weather conditions, and there is therefore a substantial risk of activity being postponed until the following quarter. Chart 61: Quarterly sales pattern ( m) Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q2 08 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Source: Vestas Operating problems have cost Vestas 2% of EBIT margin Insofar as all of the sales not recorded in 2011 will be recognised in 2012, we may consider this as good news for Conversely, at the EBIT level, the substantial variance with the initial guidance (- 60m versus initial guidance of 490m), was not solely due to the volume effect but also, for 149m (around 2% of EBIT margin), to an unforeseen rise in the cost structure relating to the start of mass production of the V MW and the GridStreamer system. Thus, only 344m in EBIT will be carried over in 2012, i.e. an outright loss of EBIT of 149m. The additional costs resulting from the industrialisation of new products are likely to again take a toll in Execution risk is therefore a real factor in this industry and we cannot rule out possible further setbacks of this type when the group puts future products into mass production, and notably its V MW offshore turbine. Chart 62: Breakdown of losses of EBIT in 2011 vs. the initial guidance ( m) Initial 2011 guidance Volume effect Plant costs PW 1 Volume effect Project cost ov erruns and depreciation PW2 Depreciation 2011 EBIT Source: Vestas Vestas I 93

94 Worrying 2012 guidance The broad guidance reflects the group s severe lack of visibility Vestas issued 2012 guidance for 6.5-8bn sales and a 0-4% EBIT margin, i.e. mid-range targets of 7.25bn sales and a 2% EBIT margin. The broad range shows that the group has absolutely no visibility on its P&L, particularly because of the new accounting method it has adopted. However, it issued the market with very precise guidance as regards the delivery and production of 7,000 MW worth of turbines, as well as sales guidance of 850m for its Services division with an EBIT margin of 14%. It also expects positive FCF. Table 52: Vestas 2012 guidance vs. our forecasts and those of the consensus m 2012 guidance Natixis Consensus Sales 6,500 8,000 7,188 7,169 o/w Services sales Group EBIT margin (%) Services EBIT margin (%) Production (MW) 7,000 FCF >0-128 Sources: Vestas, Natixis estimates, IBES The group s implicit 2012 guidance assumes a fall in sales of 2.9% at the top of the range Based on normative sales of 7bn in 2011 (sales excluding postponements) and a delayed revenue recognition effect of 1.2bn in 2012 (figure provided by Vestas), the revenue guidance range of 6.5-8bn issued by the group assumes an implicit organic decline of between -23.3% and -2.9%. This seems very cautious given that we see the global wind power market growing by 4.7% in Chart 63: Organic growth implicit in the 2012 guidance ( m) ,9% ,3% Normativ e 2011 rev enues Implicit 2012 guidance Sources: Vestas, Natixis Management sees the EBIT margin reaching between 0 and 4%. After factoring in a 14% margin guidance for the Services division and delayed revenue recognition effects from 2011 ( 344m), the implicit margin for the Turbines business would work out at between -2.4% and -10.4%. Vestas I 94

95 Table 53: Breakdown of Vestas 2012 guidance m Revenues delayed to 2012 Services Remaining businesses, high end of guidance Remaining businesses, low end of guidance Total, middle of guidance range Revenue 1, ,950 4,450 7,250 EBIT EBIT margin (%) Sources: Vestas, Natixis estimates FCF under pressure in 2012 Vestas is encountering a structural problem in generating cash The group s operating performance came under pressure in 2011 and investment spending was high, yet Vestas managed to generate positive FCF of 79m thanks to a 747m reduction in WCR (WCR of -1% of revenues in 2010 vs. 10% in 2011). This was achieved on the back of improved inventory management (just-in-time approach adopted) and above all a very high level of order intake (7,397 MW in 2011), enabling Vestas to book a large amount of prepayments. Vestas expects FCF to come out positive in 2012, which we consider very ambitious this time given the weak operating profit expected (operating margin guidance of 0 to 4%) and the level of investment spending which is to remain high ( 550m). However, Vestas will benefit in 2012 from record levels of expected production and deliveries with 7,000 MW worth of turbines (40% more than in 2010). But Vestas receives the biggest prepayments when it actually delivers its turbines. Deliveries are therefore a major FCF driver. So even though order intake was relatively weak in 2012, the impact on Vestas WCR should be limited. Based on 70m EBIT after restructuring charges, stable WCR (-1% of revenue) and 550m investments, we see FCF reaching - 128m in 2012, below the group s guidance (>0). Note that it will be a real challenge for Vestas to produce 7,000 MW worth of turbines given the many operational problems the group encountered in 2011 and the fact that its capacity is not used to running at such high utilisation rates (70%). So our view is that the guidance targets for FCF and turbine production and delivery are clearly at risk. Table 54: FCF calculation for the period 2007/2012e m e Cash flows Change in WCR CFO Net capex FCF Sources: Vestas, Natixis estimates Vestas nevertheless has a historically high backlog Backlog will boost business activity in 2012 Vestas backlog amounted to 9,552 MW in 2011, i.e. its highest level ever. Although we do not exactly know how fast it is being executed (Vestas only provides information on contracts worth more than DKK500m, i.e. 60% of the total), the current backlog level will boost business activity in general. It takes between 3 and 4 months between placing an order with Vestas and taking delivery, but most clients place orders that they want delivered well beyond 4 months. We estimate the Vestas I 95

96 backlog on average at 1 year, but it can be much longer than that for offshore projects for instance. Vestas expects to produce and deliver 7,000 MW worth of turbines in Chart 64: Quarterly trends in Vestas backlog since Q1 07 (in MW) Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q Source: Vestas Note also that the backlog still includes a large share of major contracts received from EDF EN, ENEL and EDP Renovaveis, amounting to total firm orders of almost 3,000 MW for the period 2011/2014. But it is very difficult to gauge how these orders will be spread out over the period. Table 55: Breakdown of Vestas framework contracts Date contract was signed Length of contract Firm orders, in MW Optional orders, in MW Regions Types of turbine EDF EN 30/06/ /2014 >50% installations in Europe and >30% in USA, i.e. 1 between 1,000 and 2,000 MW 0 Europe and USA Onshore ENEL 09/09/ / Worldwide Onshore EDP R 26/04/ /2012 1, America and Europe Onshore Source: Vestas Delayed revenue recognition effects in 2012 should improve the product mix Geo-mix expected to be more favourable in 2012 We expect a positive price-mix effect of 4% in 2012 thanks to an improving product mix, as revenues from sales of the new V MW turbines increase and sales generated in Europe grow (Europe is where we expect most delayed revenue recognition effects from 2011). The plant whose start-up was pushed back to 2012 is mainly dedicated to manufacturing generators for the V The revenues delayed to 2012 will therefore mainly consist of sales of this particular turbine. The more powerful and high-performance a turbine, the higher its selling price per MW. This is why we expect the average selling price per MW to rise from 0.98m/MW in 2011 to 1.02m/MW in We then expect it to fall steadily over the years ahead. We have thus factored into our model a negative price-mix effect of 2% on average per year as of Note that prices should begin to rise again in 2016 when the new offshore 7 MW turbine reaches the market. Vestas I 96

97 Chart 65: Average selling price (ASP) trends in m per MW e 2013e 2014e 2015e Sources: Vestas, Natixis estimates Note that the expected decline in the group s average selling price over the coming years is not only due to pricing pressure but also to changes in the geo-mix. The selling price differs considerably from one region to another: 1.1m in Europe, 1.03m in America and 0.64m in Asia. Moreover, we can see that prices have been rising in Europe, except in 2011, owing to execution problems which have forced the group to mainly sell turbines with low value-added. Prices in the USA rose in 2011 ( 1.03m/MW vs. 1.00m/MW in 2010) on the back of very robust demand. However, we expect prices in this region to fall in 2012 ( 0.97m/MW), because demand is set to slow down considerably in H2 12 and revive the price war. Prices in Asia have been falling steadily since 2009 and we expect them to decline further in 2012 to 0.56m/MW vs. 0.61m/MW in Chart 66: Average selling price trends by region (in m/mw) since Europe America Asia Group e Sources: Vestas, Natixis estimates Vestas I 97

98 Chart 67: Vestas sales geo-mix since % 60% 51% 56% 27% 10% 24% 16% 37% 34% 12% 10% e Europe America Asia Sources: Vestas, Natixis estimates R&D spending is at an all-time high Margins penalised by high R&D and production costs Although revenues are expected to expand by 23.2%, the EBIT margin is set to remain low at 1.7% in 2012 (vs. -0.7% in 2011) owing to the additional costs of mass-producing new products and the high level of R&D spending in 2012 ( 350m will be booked as investments, a historical high). Assuming that 75% of R&D expenditure is capitalised (the share capitalised by the group in 2011), we get a total of 271m R&D expenses (including amortisation) booked in the P&L vs. 203m in This therefore corresponds to a 95bp impact on the EBIT margin if R&D expenses are kept flat vs Note that R&D will continue to take a heavy toll on margins even if the group cuts back its R&D spending owing to a surge in R&D amortisation charges (amortisation over 5 years). Chart 68: Breakdown of Vestas R&D expenses ( m) % 6.5% 6.1% 5.4% 4.9% % 3.3% % 2.4% 2.1% % 75% 75% 75% % 80% 42% 67% 57% 31% 33% 43% 69% 58% 42% 20% 22% 25% 25% 25% e 2013e o/w R&D ex penses Capitalized R&D costs R&D as % of rev enue Sources: Vestas, Natixis estimates Note, however, that Vestas R&D capitalisation policy has helped it to expand its margins by between 40bp and 300bp as it has capitalised 75% of its R&D expenses since 2009 and 50% on average the previous years. We nevertheless consider this policy justified given the time it takes to design a new turbine upstream and the lifespan of a new platform downstream. Vestas I 98

99 Chart 69: Reported EBIT margin vs. EBIT margin adjusted for R&D 12% 7% 2% -3% -8% e 2013e Margin gap (bp) EBIT margin Adjusted EBIT margin Sources: Vestas, Natixis estimates Vestas I 99

100 /2015: a foggy haze Despite the crisis, Vestas is investing massively in preparation for offshore wind and wind power in general taking off by The group will therefore still be in a negative FCF position over 2012/2015, by our estimates, as it was over 2008/2010. Moreover, it is difficult to say whether these investments will effectively be profitable since competition is set to become fiercer by 2015, with about 40 manufacturers having announced plans to move into the offshore wind market vs. just 4 truly credible companies currently. The uncertainty is all the greater as management has so far not presented any strategy or concrete medium-term targets. Investment will remain high to prepare the launch of the new offshore turbine Massive investments The amount Vestas is investing is high relative to its historical level, especially during a crisis when production capacity is not being expanded very much. Based on Vestas guidance targets, investments will represent about 10% of revenues over the period 2010/2013, whereas it has historically been in the region of 6%, except for the 2007/2009 period during which the group s production capacity almost doubled. This trend is unlikely to reverse anytime in the near future since the group is planning to launch mass production of its 7 MW turbine in We therefore see investment spending amounting to 650m in 2014 and 2015, in particular to build the UK plant. Chart 70: Breakdown of investment spending since 2004 ( m) Intangible assets e 2013e Tangible assets 2014e 2015e Maintenance Sources: Vestas, Natixis estimates Moreover, Vestas will no longer enjoy being in an oligopolistic situation on most of its markets in the future. Heightened competition will inevitably make it lose market share on most of its markets, especially those where local manufacturers are moving in such as Asia and France for example. Vestas will therefore have to invest more and more heavily with lower and lower returns. For instance, Vestas investments over the period 2000 to 2007 represented on average 6.4% of revenues while the revenue CAGR over this period was 25%; between 2008 and 2012, meanwhile, investment spending represented on average 12.0% of revenues while the revenue CAGR was just 5.1%. Vestas I 100

101 Chart 71: Revenue growth vs. investments as a share of revenues (3-year moving average) 40% 30% 20% 10% 0% -10% e 2013e 2014e 2015e Capex as % of rev enue Rev enue grow th Sources: Vestas, Natixis estimates The limited use of outsourcing forces Vestas to invest more strongly Vestas has generated negative FCF in 4 of the last 7 years Higher R&D and little use of outsourcing We think there are two reasons for this surge in investment spending, which we consider structural for the medium term: Soaring R&D expenses. They represented 6.9% of revenues in 2011 vs. 2.5% in This inflation is clearly going to continue since Vestas is planning to invest 350m in R&D in Assuming 75% of R&D expenses are capitalised, we estimate total spending in 2012 at 466m, i.e. 6.5% of revenues. Much of this expenditure ( 200m estimated) is structural since it goes toward paying the salaries of the 2,000 R&D staff. If we add 50m for other development costs, we estimate the structural level of R&D maintenance capex at around 250m per year. The additional 100m spent in 2012 corresponds mainly to the costs of the future 7 MW offshore turbine (costs stemming from external consultants and the development of new patents). This amount seems high to us, but management justifies this by pointing to the complexity of developing the new turbine, which needs to be manufactured from a completely new platform. Use of outsourcing too sporadic. It is very important for Vestas to make its production facilities more flexible. So far, the wind power industry has been in its infancy and it was thus necessary to be fully integrated along the entire value chain. But it is now an industry in its own right, with lots of suppliers worldwide that now have the expertise to produce certain key turbine parts and meet deadlines and quality criteria. Vestas has said it might resort increasingly to outsourcing, although it gave no figures or targets. Vestas did nevertheless say during its 2011 earnings presentation that it was not against the idea of establishing a partnership to manufacture its future 7 MW offshore turbine. Although the group has been generating positive margins since 2008, its high investment spending has pushed FCF generation into negative territory ever since, with the exception of We see FCF remaining negative until 2015 since the group will continue to invest massively over the next 3 years. Vestas I 101

102 Chart 72: Vestas FCF generation since e 2013e 2014e 2015e Cash flow Chg. in WCR Capex FCF Sources: Vestas, Natixis estimates As a result, Vestas net debt has risen considerably from a net cash position of 271m in 2006 to a net debt position of 1.391bn in This could create financing problems as of 2013, with debt soaring (x2 by our estimates). Even though Vestas says it has no financing problems and no need to call on the market, we believe this possibility should not be ruled between now and the end of Chart 73: Vestas net debt since 2006 ( m) -0.21x -0.29x -0.83x x x 1.79x 1.23x 1.56x 1.52x 1.47x e 2013e 2014e 2015e Net debt (net cash) Net debt / EBITDA Sources: Vestas, Natixis estimates An insufficient 150m cost-cutting programme Vestas announced in Q3 11 that it was launching a cost-cutting programme of at least 150m on a full-year basis, with the full effects in Q4 12. We have thus factored in 32m cost cuts in 2012 and 121m in m in restructuring costs will be associated with this programme in 2012, fully paid in cash. Vestas business activity is set to plummet in 2013 (revenues -9.3%), largely because of a sharp slowdown expected in the US market, so we consider this cost-cutting programme insufficient. Moreover, Vestas said further restructuring measures were to be expected in late 2012, mainly in the USA. The PTC is not being extended, so Vestas plans to cut its US headcount by 1,600, i.e. almost 50%. We believe the PTC will be extended belatedly (late 2012), so we expect Vestas to cut 800 jobs in the USA, for which we have factored in 32m restructuring costs ( 40,000 per person). Vestas I 102

103 Financial Data on 31/12 Vestas Profit & loss statement ( m) e 2013e 2014e CAGR 11/14 Revenues 6, , , , , % Change 36.2% -15.7% 23.2% -9.2% 6.7% Organic growth 36.2% -15.7% 23.2% -9.2% 6.7% EBITDA % Change 59.3% -59.2% 78.9% 14.3% 15.0% EBIT na Change 23.5% na na 57.0% 78.0% Adjusted EBIT na Change 86.5% na na 18.1% 37.7% Operating margin 6.8% -0.7% 1.7% 2.2% 2.8% Financial items Pre-tax profit on ordinary activities na Exceptional items Corporate tax Goodwill amortisation/ impairment Equity associates Minority interests Net profit on divested activities Reported net profit na Change 24.8% na na 106.3% 165.0% Adjusted net profit na Change 107.7% na na 10.9% 62.5% Cash flow statement ( m) e 2013e 2014e CAGR 11/14 Cash flow from operations % Net Investments % Decrease (Increase) in WCR Free cash flow na Acquisitions Dividend na Capital increase Divestments Miscellaneous Increase (Decrease) in cash Net debt ,092.6 Gearing 21.0% 21.2% 25.9% 37.0% 40.2% Vestas I 103

104 Balance sheet ( m) e 2013e 2014e CAGR 11/14 Net fixed assets 2, , , , , % o/w net goodwill o/w gross goodwill Financial fixed assets WCR Net assets on divested activities na Total equity 2, , , , , % o/w shareholders' equity 2, , , , ,716.7 Provisions Net debt ,092.6 Per share data ( ) e 2013e 2014e CAGR 11/14 Shares outstanding (millions) % Diluted shares (millions) % Reported EPS na Adjusted EPS na Goodwill na Cash flow % Net dividend na Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% Book value % Financial ratios e 2013e 2014e CAGR 11/14 Personnel expenses ( m) 882 1, % Personnel expenses (% of sales) 12.7% 17.8% 12.5% 14.0% 13.4% Operating margin 4.5% -1.0% 1.0% 1.7% 2.8% Adjusted operating margin 6.8% -0.7% 1.7% 2.2% 2.8% Effective rate of tax -34.5% 8.5% -33.0% -33.0% -33.0% Net margin 2.3% -2.8% 0.2% 0.5% 1.3% ROE 5.7% -6.4% 0.6% 1.3% 3.3% ROCE 9.1% -0.8% 2.5% 2.7% 3.5% Capital employed ( m) 3,450 3,069 3,213 3,546 3, % Interest cover (x) 6.5 na Debt/EBITDA (x) Gearing 21.0% 21.2% 25.9% 37.0% 40.2% WCR (% of sales) 10.3% -1.2% -0.7% 3.3% 4.3% Goodwill (% of book value) 11.6% 12.4% 12.3% 12.2% 11.8% Net investments (% of sales) -11.5% -12.9% -7.7% -8.4% -9.3% Investment ratios 2012e 2013e 2014e EV/Turnover (x) EV/EBITDA (x) EV/Adjusted EBIT (x) P/BV (x) P/CF (x) Adjusted P/E Reported P/E Net yield 0.0% 0.0% 0.0% Free cash flow yield (%) -9.2% -21.6% -8.7% Vestas I 104

105 Source: Natixis avr -09 nov-09 mai -10 déc-10 j ui n-11 j anv-12 Gamesa Rel. DJ STOXX Small 200 Price 04/11/ Target 2.80 Upside 21.7% Performance 1m 12m 1 Jan Absolute -8.1% -67.4% -28.3% Sector -3.5% -8.4% 9.7% DJS Small % -11.9% 8.4% 12-month high/low 7.10 / 2.20 IBEX DJS Small Market capitalisation 568.8m Free float 72.4% Iberdrola 19.6% Daily volume 5m Analyst(s) Antoine Azar (33 1) antoine.azar@natixis.com Ludovic Debailleux (33 1) ludovic.debailleux@natixis.com Arnaud Schmit (33 1) arnaud.schmit@natixis.com Capital goods Gamesa GAM.MC / GAM@SM Focus on emerging countries! 13 April 2012 Spain Buy We initiate coverage of Gamesa with a 2.8 target price and a Buy rating. Gamesa is our preferred stock in the wind turbine sector owing to its favourable geographic mix (some 70% of sales in sharp growth countries) and the flexibility of its production base (some 50% subcontracting). Moreover, its close ties with Iberdrola and its wind farm development division offer clear visibility on sales growth. At our 2.8 target price, the share would still be valued 35% under its historic multiples. Our cycle-recovery valuation stands at 5.4 per share. As in 2011, the group in 2012 is likely to outperform growth for the world market (+8,9%e of growth for MW vs. 4.7%e for the world market) thanks to its strong exposure to growth markets in wind. Hence, the sales chalked up by Gamesa in Europe (-6.6% in 2011), have fallen from 59% of sales in 2009 to 26% in 2011 while India (+26% in 2011) and Brazil (+79%) represent respectively 20% and 14% of the MW sold in 2011, vs. 0% in Highly flexible production base. Gamesa has managed to rapidly shift its production base towards these growth zones. 68% of its production capacity is now outside Europe versus 31% in This has been made possible thanks to increased usage of subcontracting, which will allow the group to cut its costs base and limit the impact on its margins of the strong pressure on prices in these markets. Iberdrola is a strength. The main shareholder in Gamesa (20% of the capital), Iberdrola is also its leading client. The two players have notably signed a ten year contract for the supply of at least 50% of Iberdrola s needs in wind onshore, i.e. about 380 MW per year (13% of sales 2011 of Gamesa). Iberdrola will have a major role for the entry of Gamesa in wind offshore as they will cooperate in the development of a turbine of 5 MW and of 7 MW which could lead to future orders. Model integrated towards downstream. Gamesa is one of the few players to also have a wind development division for third parties, which enables the penetration of new markets and the hunt for new clients. Equity Markets Bloomberg access equity.natixis.com NXSE Distribution of this report in the United States. See important disclosures at the end of this report. Close on 31/12 Revenues ( m) Reported net profit ( m) Adjusted EPS ( ) Chg. EPS (%) (x) (x) (x) (%) , e 3, e 3, e 3, P/E EV/EBIT P/CF Net yield Gamesa I 105

106 Contents 1. Our top pick in wind 111 Unjustified underperformance in Cautious low cycle valuation Focus on emerging countries 118 Growth stemming from emerging countries 118 Relocation of a large slice of production capacity 120 and greater use of subcontractors 121 The strategy comes at a price: margins under pressure Iberdrola: a major asset 123 Strategic but pragmatic 123 Gamesa s no. 1 client 123 Gamesa could not be taken over without Iberdrola s say Integrated downstream model 125 Wind Farm: a key strategic asset 125 Services potential still largely underexploited An ambitious pipeline of projects new turbines planned out to Investment relatively under control plan likely to be reviewed 130 Reactive management 130 But the 2013 guidance looks out of reach 130 Financial Data 133 Gamesa I 106

107 Natixis Nutshell Gamesa Buy Price 04/11/ Target price 2.80 Capitalisation 568.8m 2012 PE 13.1x 2012 Net debt 756.0m 2012 EV/EBIT 11.6x 2012 Revenues 3,252.8m 2011/2014 EPS CAGR 9.2% Profile - Business(es): Development, manufacture, sale, installation and maintenance of onshore and offshore wind turbines (2013). Development and construction of wind farms. - Main markets and state of consolidation: The wind turbine market is increasingly fragmented, in 2011 the leading 5 players shared 47.2% market share, versus 77.4% in Competitive positioning: World no.4 in 2011, i.e. 8.2% market share vs. 14.7% in Strategic thrust: Development in short term sharp growth countries (India, Latam and China) and medium term in offshore (2013) and very powerful onshore turbines (4.5 MW in 2012). Porter's 5 forces Supplier power Barriers to entry Buyer power In terms of raw materials, Gamesa mainly consumes iron, but also aluminium, nickel and copper, and covers part of its needs. - Subcontracting target of 50% by 2013 (just under 40% at present), offering greater flexibility in a time of crisis and allowing a transfer of pressure on prices and investments towards suppliers. - Experience and quality of the equipment. - Services businesses. - State incentive policies. Degree of rivalry - Strong presence of local players in zones offering the greatest potential: China (81% mkt. share for these), India (61%), USA (43% for GE Wind). - Important and growing at the world level, notably in offshore. - China is particularly competitive with very powerful local players. - Gamesa has over 46 clients, of which 57% are large Utilities. - The group signed an onshore contract of 3.8GW between 2013 and 2022 with Iberdrola (leading client), which corresponds to 380 MW per year (13% of 2011 sales). - Its other main clients are Nextera Energy, EDP R, Acciona, Long Yuan, Datang, E.ON, EDF and ENEL - Gamesa has a rather solid and loyal client base, but the world overcapacity situation puts strong pressure on prices. Threat of substitutes - Conventional energy sources (nuclear, gas, coal, oil...). - Renewable energy sources (photovoltaic, hydraulic, thermal, biomass...). Gamesa I 107

108 Investment case Theme - High exposure to countries with strong growth in wind (Latin America, India, China). - Considerable flexibility of production plant thanks to ever increasing use of subcontracting. - A ten-year contract with Iberdrola ensures recurrent revenues plus a partnership with that company in offshore. - This makes Gamesa the sole European player set to deliver growth in 2013 even if the US market collapses. Triggers - Renewal of the PTC (a subsidy of $22 per MWh) in the US before its expiry in December Commercialisation of its new onshore turbine of 4.5 MW in H2 12. Risks to our scenario - Stronger than expected pricing pressure in low-cost countries. - An execution problem when starting up production of series of new products. Guidance - March 2012: guidance for sales of 2,800 and 3,200 MW for 2012 with an EBIT margin of 2%-4% and capex of 275m. - October 2010: CAGR over 15% of MW sold between 2010 and 2013 with an EBIT margin of 6%-7% in Consensus (FactSet) and Momentum m 2012 Natixis vs. consensus 2013 Natixis vs. consensus 2014 Natixis vs. consensus Sales % % % EBIT % % % EPS ( ) % % % Est. change over 3 months for the consensus EPS Change in target prices over the Target price ( ) last 3 months Consensus Natixis % % % Other listed investment vehicles ESG issues G Ref. shareholder: Iberdrola has 20% of the capital and voting rights. Rather low independence of 40% and only 20% if notion of availability is included. Hostile takeover bid unlikely as IBR accounts for 15% of Gamesa's board. Excellent, detailed and quantified social and environmental reporting! No information on sub-contractors despite having many of them. S: Gradual focusing of the business on more promising markets: 32% of production capacity in Europe in 2011 vs. 69% in 2009 (staff: 68% in 2010 in Europe vs. 74% in 2009, following the trend, but gradually). Health & safety: Continuous and dramatic improvement in the LTIR, similar to Vestas, at 3,84 vs. 20,06 in Very low severity rate of 0.09 vs. 0.3 in S: promotes internal mobility and promotion. Major training efforts (32 h/employee in stable). Innovation: invests little compared with Vestas (1.6% of sales vs. 5.6%) but plans to hire more staff and open 5 new centres. Very good track record in onshore. Little experience in offshore but committed and has partnerships with the right players. E: systematic ESM and sharp reduction of its environmental footprint. Not as conclusive and focused (no quantified target) as Vestas. LCA underway but inconclusive. Eco-design approach. E: takes account of biodiversity (impacts, remediation and preventative actions...) as it plays the role of developer on certain projects (unlike Vestas which does not mention this). Questions to management - Do you expect Iberdrola to increase its interest any further? - Have you been approached by any potential buyers? - In this difficult environment, are you still as confident in your guidance for 2013? Key sensitivities - Prices of certain raw materials (iron, aluminium, nickel, copper). - Feed-in tariff amounts, those of green certificates, PTC, other subsidies, etc. - Oil and gas prices Shareholders Shares Votes Iberdrola 19.6% 19.6% Blackrock Inc. 5.0% 5.0% Dimensional Fund Advisors LP 3.0% 3.0% Free float 72.4% 72.4% Gamesa I 108

109 Historical valuation, 12m yoy Absolute and relative PE (x) Change in 12-month EPS Absolute and relative EV/EBITDA (x) Absolute and relative EV/EBIT (x) Absolute and relative P/CF (x) FCF yield (%) and net yield (%) Source: FactSet Gamesa I 109

110 Financial ratios Sales ( m) and operating margin (%) ROCE (%) and Sales/Capital employed (x) EBITDA/Financial costs (x) and ND/EBITDA (x) Capex/Sales (%) and WCR/Sales (%) Dividend per share ( ) and pay out (%) Free cash flow and net debt ( m) Source: Natixis Gamesa I 110