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In London, the AIM market offers opportunities to invest in clean technology companies from around the globe. First published in March 2007 pre-launch issue of Cleantech magazine. Copyright Cleantech Investor 2007
Investors can take advantage of the opportunities being created by the growth of new industries and services in the clean technology space by investing in a rapidly lengthening list of quoted companies in the UK. Most of these companies can be found on AIM. New Energy Finance (NEF) tracks 50 AIM llisted companies in the ‘clean energy’ space, which it breaks down into eleven sub-sectors. The largest sub sector by far is Hydrogen & Fuel Cells, accounting for almost a quarter of the NEF list. This highlights a major difference in character between the ‘new energy’ sector on AIM and elsewhere: solar is the largest subsector in the US, while globally, wind is a very important sub sector.
Importance of fuel cells reflects AIM’s early stage financing role
The large grouping of hydrogen & fuel cell companies on AIM reflects the market’s success in attracting early stage companies. Most hydrogen technologies remain some years away from mainstream acceptance and the untested nature of the technology implies that companies operating in this area are likely to be higher risk, more speculative investments than, say, an established US quoted solar panel manufacturer or a European quoted wind turbine manufacturer. AIM investors tend to be more accustomed to investing in early stage companies, while Nasdaq investors have been put off by memories of the failure of many fuel cell companies to deliver during the technology boom in the late 1990s.
‘New energy’ on AIM valued at £4 billion
NEF calculate that the total market capitalisation of the 50 AIM ‘new energy’ companies was £4 billion at the end of 2006. EnviroDaq, which includes over 70 UK companies, listed on the AIM market, the LSE’s main market and Plus Markets (formerly OFEX), adopts a broader definition in its UK market index. We estimate that the total number of companies listed in the UK in the clean technology space, defined in a broad sense to include environmental companies, numbered over 100 by the end of 2006, the greatest number of which can of course be found on AIM. Main market companies are generally much larger in market capitalisation terms. For example, waste management company Biffa, is capitalised at £1.2 billion, while Johnson Matthey, which is seeing rapid growth from its automotive catalyst division and is establishing a strong position in catalysts for fuel cells, is capitalised at £3.4 billion. Neither company might be described as an entirely ‘pure’ clean technology play and clearly neither of them is an ‘early stage’ investment. However, the fact that these two main market listed companies have a combined market capitalisation of more than the 50 AIM ‘new energy’ stocks, places the AIM phenomenon into perspective.
UK Quoted Cleantech Investing Cleantech on AIM growing in importance
If the sector remains relatively small in terms of capitalisation on AIM, it is growing in importance and is certainly not small in terms of numbers of companies. 2006 saw a host of clean technology IPOs. Half of the companies on the NEF list were from outside the UK – and the non UK companies accounted for more than 60% of the total by value. AIM is attracting more international companies in all sectors. With international companies making up just over a quarter of total AIM IPOs in 2006, the international component of the clean energy sector is above average, even for this cosmopolitan market.
AIM offers opportunity to invest in international sectors
A positive aspect is the opening up of the opportunity for UK based investors to gain exposure, through a domestic stock market, to sectors which are less developed or non existent at a national level. For example, large volume ethanol production is virtually impossible within the UK, given the constraints of land availability. However, AIM is host to ethanol companies from the (very different) ethanol markets of both the US (Renova Energy and GTL Resources) and Brazil (Clean Energy Brazil and Infinity Bioenergy).
'London - in particular AIM - has become a key hub for investment in ethanol and biofuels' - Peter Greensmith
UK based Ethanol Investments was established with a strategy to invest in ethanol services and new technology for bio ethanol production around the world. Peter Greensmith of Ethanol Investments says: “London – in particular AIM- has become a key hub for investment in ethanol and biofuels. Large scale ethanol production facilities will inevitably be located close to the feed stock, such as sugar cane in Brazil or corn in the US, but companies are increasingly turning to the UK financial markets for help with funding for the construction of their manufacturing plants or for the development of more advanced production technologies. There are a host of reasons for London’s growing pre-eminence here, but I would highlight the importance of having a mature, sophisticated renewable energy ‘buy and sell side’ community in London, who fully understand how to value such investments and who are prepared to look at the long-term, rather then be driven by short-term sell or feeds stock price fluctuations or ‘fashions”. New developments in solar The solar sector is relatively more mature on a global level compared to some clean technology industries. The AIM market can offer the opportunity to invest in companies which are developing new and potentially lucrative solar technologies. The UK’s use of solar power is low on an international scale and domestic UK solar companies are correspondingly few. Solar energy has been adopted most widely in the US, Germany and Japan and as a stock market sector, solar is well represented on the Nasdaq and New York stock exchanges and on the Deutsche Bourse (Japan has few pure plays as large conglomerates tend to manufacture solar panels).
Three international solar power companies are listed on AIM, of which two are US companies – Powerfilm Inc. and SIT. Powerfilm produces thin, flexible solar panels; SIT provides building integrated photovoltaic systems. Both companies have innovative technologies which might have been considered too early stage to raise funding via a market listing in their domestic US market - but they both found a receptive audience on AIM. Chinese ReneSola was best performing AIM stock in 2006 Innovative early stage UK solar companies have also listed on AIM, notably Romag Holdings, which produces specialist photovoltaic glass and Hightex, with various businesses including solar cooling systems. However, it was the third international company, Chinese based ReneSola, which was the best performing stock in the sector in 2006. Like all the Chinese companies, ReneSola shares were amongst the hardest hit during themarket shake out at the end of February/early March. However, the reasons for ReneSola’s strong performance last year were perhaps more to do with the company’s unique technology than with the fact that it was Chinese: ReneSola uses recycled silicon in its production process, a factor whichhas been working in its favour as the solar industry has been affected by silicon shortages.
Although it excludes some of the smaller domestically oriented companies and focuses purely on ‘new energy’, the NEF research provides a useful indication of the nationality of the clean technology companies listed on AIM. A breakdown of the NEF list of 50 companies by nationality is contained in the following chart. Close to a quarter of the NEF 50 companies are from the US, reflecting AIM’s success on a broader level in attracting US companies. Compared to Nasdaq or the New York Stock Exchange, AIM’s requirements with respect to initial equity, market capitalisation and trading history are minimal, often making it easier for early stage US companies to list in the UK than at home. Companies from other countries are attracted to AIM for similar reasons – and because of the FSA’s lighter regulatory touch compared to New York; the introduction of the Sarbanes Oxley compliance law in the US has proven a deterrent to even the more mature international companies from listing in the US – to the benefit of both the London Stock Exchange main market and AIM.
Bodisen Biotech share price drop
Chinese AIM listed clean technology companies are the second most important international grouping after the US and, as highlighted previously, Chinese based, ReneSola, was the best performing stock in the sector in 2006. In contrast, however, Chinese organic fertiliser manufacturer, Bodisen Biotech saw its shares lose more than half of their value during November last year on news of a warning from the American Stock Exchange. They were subsecquently delisted from Amex - and lost 63% in one trading session in March on that news. Bodisen Biotech had been listed on the Amex and AIM and received a warning from Amex that it was not in compliance with the American exchange’s listing standards. The publicity fuelled an already heated debate about the risks to investors of shares in AIM listed international companies. However, since Bodisen was able to meet the requirements for listing on Amex in the first instance, the subsequent Amex delisting would appear to have no bearing on the initial decision by AIM to admit the company.
Chinese listings may tail off
The numbers of Chinese listings on AIM may tail off somewhat in the wake of the Bodisen debacle, the shake out in stockmarkets in the first quarter – and also because the Chinese government has altered the tax regime which was making it attractive for companies to have an overseas listing. Meanwhile, however, criticism of the due diligence procedures by Nomads introducing overseas listings are likely to be silenced by the recent introduction of a rule book for Nomads. It is inevitably more challenging for a UK based investor to gain background information on the market in which an international company is operating. However, the onus is on the Nomad to perform the necessary checks on the company’s accounts and in theory the risks of investing in an international company listed on AIM should be no greater than the risks of investing in a domestic company.
Cleantech investment opportunities on AIM
The growth of clean technology is a global phenomenon and AIM looks set to continue to attract international companies which are active in the sector – and thereby offer investors in the UK a wider spread of clean technology investment opportunities. The success of AIM is due in part to its relatively low barriers to entry, which inevitably implies that risk levels for investors are higher. Equally, however, the potential rewards can be higher. UK based investors should consider investing in international markets if they wish to gain exposure to some of the more mature companies in the sector and diversify risk. However, for those who wish to focus upon early stage clean technology companies, some of the most exciting investment opportunities, both from around the world and from the UK, are available on AIM. |
