Environmental monitoring company Envirosuite (ASX:EVS) saw shares explode higher today, after the company released details of a strategic agreement to enter the lucrative Chinese market.

The company has agreed to sell Mr Zhigang Zhang — described as a prominent leader in the Chinese environmental protection sector, and General Manager of Beijing BHZQ Environmental Engineering Technologies Co. — 50 million shares at 8c each. It will also grant a further 25 million options to Mr Zhang with a strike price of 15c each, conditional upon Envirosuite reaching $10 million in cumulative revenues by the end of 2021. For context, for the financial year just ended, Envirosuite had almost $6 million in annual recurring revenues.

The full deal, which still needs shareholder approval, will initially raise $4 million in cash and a further $6 million if all associated options are exercised. It certainly gives Envirosuite, which is still cash flow negative, a bit of extra breathing room. In FY19 it reported a statutory loss of almost $6 million and had $7.5 million of cash on hand.

Prior to the proposed transaction, shares in Envirosuite were trading at 13c — so Mr Zhang appears to have received an extremely favourable deal. Nevertheless, the reality is that you need the right partner to successfully do business in China and the strategic value of the arrangement is potentially significant.

Shares in Envirosuite have surged over 60% higher at the time of writing, hitting as high as 23.5 cents. The question, of course, is whether this is sensible.

The company certainly has a lot of favourable associations for investors to get excited about. Following a recent restructure, the company is a pure technology business with a highly scalable and world leading software as a service (SaaS) platform. There’s a huge tailwind in terms of increasing environmental focus from governments and industry, not to mention the internet of things (IoT) factor.

Revenues have been growing extremely fast in the last couple years and even prior to this latest announcement Envirosuite was targeting yet another doubling in its annual recurring revenue for the current year.

Of course, the company still has to execute on this potential — and success is far from guaranteed.

Although China is an exciting market, a lot of capital has been flushed down the toilet by over zealous Aussie companies looking to exploit the opportunity. Even when revenues do increase, they are often offset by an even larger rise in costs.

It’s also possible that any value created is dis-proportionally captured by insiders, who gain an advantage on the average shareholder through excessive remuneration and generous option grants.

That’s not to say that this will be the case with Envirosuite. It’s just sensible for investors to stay grounded.

A community favourite on Strawman, Envirosuite is ranked #21. Click below to see the consensus valuation and insights from our network of investors.

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