Driving profits for this Chinese-Australian battler is an electronic system for cleaning up diesel truck engines. Here's another Sino-Australian collaboration that's turning around the fortunes of a small Aussie technology company with potential for sensational growth in the next few years.
Advanced Engine Components (ASX code: ACE) is a Perth-based company that has established collaborative ventures with three of China's five major commercial vehicle engine-makers. Its flagship product is its patented natural gas vehicle system (NGVS), a sort of black box that enables diesel engines to be adapted to run on natural gas using an electronic sequential gas injection system.
While many competitors, such as Bosch, make mechanical systems for natural gas engines, ACE says it is unaware of any similar electronic system on the market that delivers the efficiency and performance of its NGVS to meet Euro 4 emission standards. The standard was introduced in Europe this year, with Australia to follow next year and India and China in 2010.
ACE has had a patchy history as a maker of relatively low-volume accessories for the motor industry. After a loss in 2002 of $6.27m, the Koo manufacturing family of Taiwan bought control. They recruited Tony Middleton, a civil engineer, to become managing director and reorganise the business. Until 1997, Middleton was chairman and managing director of TransPerth, the public transport authority.
Middleton began selling non-core businesses such as super-charger manufacture and focused entirely on alternative fuels technology, particularly natural gas.
The transition has been painful for shareholders, with accumulated losses since 2002 totalling $14.56m, although the loss rate has been progressively reduced since 2002's $6.27m deficit to $1.044m in the year to June 30, 2006. In the latest December half, revenue was up 51% to $1.97m and although a loss of $1.06m was reported, the company was cashflow positive in the final quarter.
That should be sustained in the present second half as sales of its NGVS units rise from a projected 2200 in 2006-07 to more than 7000 in 2007-08.
Some 645 passenger buses are using the ACE device, including 600 Renault-engined buses in France, plus test models using Renault and Mercedes engines in Perth, MAN engines in Adelaide and Renault in Canberra.
Earlier this year, ACE commissioned a company review from Strachan Corporate. Released in early February, it stated that the Chinese government had arranged a consolidation of its vehicle manufacturing industry that mandated cleaner fuel systems. "This should result in construction of at least 24,000 new buses each year which are adapted for either LPG or natural gas [methane]," it concluded.
China's largest commercial vehicle engine-maker, First Auto Works (FAW), is commercialising three different natural gas engines using ACE kits. By early February, ACE was delivering 200 units a month to FAW, with volumes expected to rise to 500 a month in mid-2007. At the same time, a second company, Weichai Wiefang Peterson Gas Engine Co, was also converting three gas engine models, using ACE equipment being delivered at the rate of 120 a month and set to rise to 500 a month late this calendar year. A third, Dongfeng Nanchong Automobile, already China's largest maker of natural gas engines, will use ACE kits from mid-2007, rising to 500 a month by the end of the year.
ACE's largest shareholder is the Hong Kong-based venture capital company 698 Capital International, controlled by Taiwan's Koo Group, comprising more than 80 companies. It holds 45% of ACE. Issued capital is 121.8 million shares, which have traded from a low of 8¢ in the past year to a high of 31.5¢, and last week at 26¢.
ACE Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
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