Auhua Clean Energy (LON:ACE) goes against type in a sector that has tended to over-promise and under-deliver.
It is a profitable and cash generative green story on a trajectory that really does mark it out as a growth stock.
Its niche is the solar water heater market in China. Anywhere else in the world and it might be considered a very specialist marketplace.
But there are a number of factors that ensure it is anything but. The first is that carbon emissions and pollution targets mean the People’s Republic is looking for clean ways to produce household energy.
“China still has power outages in winter and high pollution,” says chairman Raphael Tham.
“It is looking where it can trim carbon emissions and has a few initiatives, one of which is solar water heaters.
“Of course there is a bigger framework that by 2020 it will have reduced carbon emissions by 45%.”
Auhua and its split unit is part of the solution. And it is making huge in-roads as the traditional uni-body solar unit becomes redundant as China’s building boom moves from low-rise to high-rise.
Where the all-in-one worked well on the top of the roof of a five-story apartment block, it is impractical when the warm water has to be pumped down to 40 floors from the roof of an apartment block.
Auhua’s solar panel hangs from the apartment balcony, with the heater itself inside the building. The payback of the technology is around three years.
However this in itself is not the driving force for mass adoption of these easy-to-install split units.
Subsidies for developers are prompting mass adoption, and the trend will likely be maintained when legislation is brought in.
Auhua’s technology is deemed as best in class as well as being officially recommended by China’s Building Materials Department.
This might not mean a great deal to the outside world. However for developers building the new wave of housing in the Middle Kingdom, it counts for a lot.
And it is cited by the company’s chairman Tham as helping opening new doors.
Auhua’s power base is Shandong, a province of over 90 million people. It has 60% market share here, and an estimated 25-30% of the Chinese market for the split units.
However, that drive towards a cleaner, greener economy means the market is growing exponentially – this and the building boom that continues outside the nation’s tier 1 and tier 2 cities.
While it is fair to say that the development has slowed to a snail’s pace in over-crowded conurbations such as Shanghai and Beijing, the smaller urban areas are still expanding thanks to migration from the rural economies.
“Property prices may have come down, but demand is still there,” says chairman Tham.
“So the property slump has not really affected us at all. There are plenty of projects for us in the third and fourth tier cities.
“However now we are seeing a pick-up in demand we might consider projects in the second tier cities.”
Annual production capacity has grown from 50,000 in 2010 to 90,000 currently and the Company looks to continue to expand.
Increased demand means Auhua will by the end of next year be looking for additional factory capacity as output hits full production. The near term target is to increase the production capacity to 150,000 and in the longer term, it is looking to produce 500,000 a year.
New partners such as China’s property developers will be key to achieving that latter goal. The step up to 500,000 units would of course utterly transform Auhua’s financial position. Though for a business in the formative stages of development it isn’t doing too badly.
September’s interim results reveal it made a net profit of £2.4mln on sales of £9.7mln and ended the period with £3.3mln on the balance sheet.
“We are a rarity – a profitable green business,” says Tham.
“It is not what you would call super-scale technology.”
“But most of those prima donna technologies are loss-making, or have not proven themselves to be commercial.
“Ours is more evolutionary technology than revolutionary.”