EUR 850.00 For Business Accounts Only

Morningstar | SGRE Updated Star Rating from 04 Mar 2019

Driving down costs has been paramount to position wind technology as a competitive energy source. In the transition to a subsidy-free environment, smaller players tend to struggle since they don’t have the scale efficiency required to face the new market dynamics. Before the merger with Siemens Wind Power, Gamesa was mainly an emerging-market player, with half of its revenue concentrated in India, Brazil, and Mexico. Without broader regional diversification and larger scale, Gamesa would have had difficulty improving its margins to Tier 1 competitors’ levels. We believe the merger will enable Siemens Gamesa Renewable Energy to achieve higher margins, boosted by wider market coverage and customer proximity, greater R&D capabilities, and procurement efficiencies, to name a few. In our view, SGRE is well positioned to gradually close the EBIT margin gap. In 2018, SGRE’s EBIT margin was 7.6%, nearly 200 basis points below Vestas’ 9.5%.The lack of subsidies will drive market consolidation, reducing the number of wind turbine original-equipment manufacturers. We expect the transition away from a subsidized market will squeeze smaller players, which will exit the market or look for buyers. Internationally, the three major players--Vestas, Siemens Gamesa, and General Electric--hold an estimated 40% of the market and should be the global front-runners. However, we don't think the Chinese market, which has the largest wind production capacity, will be easily accessible for these Tier 1 players. The Chinese market is likely to stay in the hands of local players like Goldwind, Envision, and United Power. On the other hand, the Chinese players will be challenged to make easy inroads into the American and European markets. First, these companies must set up regional service capacity. More important, American and European governments might perceive Chinese energy generation assets as risky from a national energy security standpoint.