Check on China: China Solar & Clean Energy Solutions, Inc.

Shannon Roxborough | Apr 17, 2008 6:20am EDT | 2 Comments

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Crude recently hit a new high, topping $114 a barrel, a rise of more than 80% since April 2007. Thanks to a combination of high energy prices — fueled in part by turmoil in the Middle East — and oil supply instability amid ballooning energy demand from within its shores and other emerging economies, China has placed alternative energy at the top of its national agenda.

One company that has positioned itself to take advantage of a shifting pro-alternative energy political climate in Beijing is China Solar & Clean Energy Solutions, Inc. (OTC:CSOL). Formerly Beijing Deli Solar Technology Development Co., Ltd., China solar is a Connecticut-based company that designs, manufactures and distributes solar hot water heaters, coal-fired space heating systems (boilers, furnaces and stoves), and biomass (waste heat recovery) products for residential, industrial and public works uses in China. It also sells related components and parts, and provides after-sale services for their product lines. The solar hot water business accounts for about 45% of revenues, biomass operations make up 30%, and the coal-fired space heater side of the business pulls in the remaining 25%.

According to the China Solar Energy Society, solar heaters are 75% cheaper to operate than their gas and electric counterparts, have a 20% to 30% longer life span and are three times as efficient as electronic heaters (and nearly twice as efficient as gas-fueled models). China Solar is rapidly expanding its line of solar water heaters to capitalize on what it sees as a $2.7 billion market opportunity in China. Nearly 60% of homes in China are located in rural areas, where only one in 10 households is equipped with a water heater.

With over 80 products in its portfolio, the company's coal-fired and biomass boilers and space heaters fill a need to conserve energy at a time when China's breakneck growth is straining supply chains. The company's highly-efficient biomass-fueled stoves cut fuel costs in half and reduce the negative environment impact as the nation struggles with major pollution problems.

China Solars's Deli Solar subsidiary in May 2007 acquired 51% equity interest in Tianjin Huaneng, a company that manufactures solar water heaters, heat pipes and tubes, heat exchangers, blast stoves, heating filters, water boilers, and radiators for sale in China and throughout Southeast Asia.

In January 2008, CSOL announced it entered into an agreement to purchase Shenzhen PengSangPu Solar Industrial Products Corp., a smaller manufacturer of solar hot water heaters and space heating devices, for $2.8 million in cash and stock. The deal will expand China Solar's operations and broaden its reach into southern China market, where local officials are pushing for solar water heating systems to be used in residential communities.

The company reported record fourth-quarter and full-year 2007 results on April 11. Fourth-quarter revenues jumped 119% to $12 million, from $5.5 million in the prior year's quarter, while quarterly net income skyrocketed 479% to $1.1 million. Full-year revenue surged nearly 73% to $37.1 million, up from $21.5 million in 2006, and 2007 net income shot up 104% to $2.53.

China's solar market is projected to grow 15% annually over the next several years, and Chinese government officials also have plans to develop the largest solar-powered city in the world at Weihai, in the northeastern part of the country. All of which is good news for China Solar, whose primary business is solar water heater installation and construction projects. The company also plans to step up R&D efforts into other uses for solar energy, processing biomass to produce methane and generate electricity, and the development of alternative biofuels.

While some investors are worried about possible instability in the board room (the CFO abruptly resigned in January to pursue other interests; the company appointed Yihai Yang as acting CFO on March 24), Wall Street doesn't appear to be overly concerned. Paul J. Resnik, an analyst with Dutton Associates, maintains a "strong speculative buy" rating on the stock with a one-year target price of $5.46. Noting China Solar's successful expansion of both its geographic footprint and market share in China, the analyst believes the company has good prospects for above-average growth, given its advantageous position to benefit from the increasing need for more alternative energy sources, China’s fast-growing middle class and a robust housing market in the mainland.

China Solar shares closed at $1.92 on Wednesday. The stock has traded between $1.50 and $4.50 over the past 52 weeks. Based on estimates for Standard & Poor’s 500 earnings in 2008, China Solar’s stock trades at a reasonable P/E of about 14.

The company brass plans to initiate investor conference calls when it reports first quarter 2008 financial results next month.