Despite the hype given to solar energy development, Shanghai Electric Group, China's largest power generating equipment maker, has remained steadfast in getting out of the sector, which it deems as unprofitable, at least in the short-term.

The sale of its 35 percent stake in solar energy equipment maker Shanghai Topsolar Green Energy for 138.6 million yuan fell through last week because the buyer was said to have defaulted on payment. Fu Rong, Shanghai Electric's board secretary, said in a written reply that her company hasn't made a firm decision on what to do next with the unsold stake in Shanghai Topsolar.

But she had said earlier that the disposal of the company's investment in solar energy was essential because the company couldn't find a way to incorporate it into its future development plans. She was echoing the lines of Shanghai Electric's chairman Xu Jianguo, who said that he couldn't see a profitable future for solar energy despite official efforts to promote the sector as an alternative energy source to supplement fossil fuel.

"Shanghai Electric's determination to spin off the solar energy business is not in doubt, given the sector's minor contribution to the company's earnings, "said Zhan Wenhui, analyst with Haitong Securities in Shanghai.

Zhan said around 70 percent of Shanghai Electric's sales is generated from manufacture of fire-power equipment. As sales began to decline in recent years, the company has embarked on an ambitious plan to develop its capability in the production of nuclear and wind-powered energy generating equipment.

After reaching its peak in 2004, the profitability of Shanghai Electric's mainstay business of fire-powered generating equipment has been falling steadily. The rate of return on sales of such equipment in the second half of 2008 fell to 17 percent from more than 20 percent a year back, although the company continued to hold a 30 percent market share.

To raise capital for new ventures, Shanghai Electric in April raised 5 billion yuan by issuing about 700 million new shares at 7.15 yuan apiece. The company said 1.1 billion yuan of the total fund raised would be invested into nuclear projects, while 800 million yuan would go to wind power.

The company's A-shares dropped 0.48 percent to close at 10.4 yuan yesterday.

"Our target is to produce 800 to 1,000 mega-watt wind turbines by 2010, and have sales of 10 billion yuan from the wind sector by 2011," Xu told reporters earlier this year.

Xu said wind equipment would be the second sector to clock over 10 billion yuan sales on the heels of fire-power equipment going forward, due to the recent strategies to develop new energy.

Huang Li, deputy director-general in charge of energy saving and technology equipment under National Energy Administration, said last November China would subsidize 800 million yuan to core nuclear and wind power equipment makers, a move expected to benefit nearly 10 percent of the companies in the sector, according to Xinhua News Agency reports.

Shanghai Electric started developing wind power since 2004 with the capacity to do volume production of 1.25 mW and 2 mW wind turbines so far.

The company said nuclear and wind power will take the place of fire-power to lead the electric power generating over time.

Shanghai Electric has so far taken on nuclear-related orders worth 18.3 billion yuan so far, with almost 50 percent market share in making the main equipment of nuclear island domestically.

Xu said the company's sales from the nuclear business are likely to grow by 75 percent year-on-year to touch 3.5 billion yuan in 2009. Around 12 new nuclear projects are in the pipeline currently, with installed capacity of around 23.7 million kW.

However, Goldman Sachs said in a recent research note that the power equipment industry still has downside risks due to concerns on growth slowdown in power generation capacity partly due to the limited number of new power plants approved by the government.

Shanghai Electric gained 2.5 billion yuan in net profit in 2008, down 9.88 percent year-on-year.

(China Daily June 17, 2009)