I think it's fair to say that Chinese oil consumption is only going to continue its upward trend in the coming few years. China has already surpassed the United States in car sales as more people relocate from rural farming communities into the cities. Many industries are expanding, bringing in more workers willing to commute longer distances. All of this points to increasing oil consumption in China.
The question is, what is the best way to play this ongoing trend? Many Chinese energy plays remain undervalued at this time despite recent gains, giving many options to play the trend. While not to everyone's taste, I personally like to focus on small cap stocks that I believe are undervalued.
One company that has caught my eye in recent months is China Integrated Energy, Inc. (CBEH), formerly known as China Bio-Energy Holding Group. The company is engaged in three business segments: the development, production, and distribution of bio-diesel; the wholesale distribution and processing of heavy oil and finished oil products; and the sale of gasoline and diesel at retail gas stations. Actually, the bio-diesel segment really doesn't excite me especially. The main reason I like this company as an investment is the growing network of retail gas stations.
The company recently announced the purchase of two additional gas stations in Shaanxi province, bringing the total to twelve at this time. CBEH also plans to acquire a further 5-7 gas stations in the coming 12 months. The company has the ability to provide stable supply to all of the gas stations in its network. Being a vertically integrated energy company allows the company to achieve higher profit margins, and the simplicity of the company business model is something I find attractive as an investment. As of September 2009, the company reported average gross margins of 13.3% for its retail gas stations, a figure which I would anticipate growing significantly in 2010 with increased sales.
So how do the fundamentals stack up? The company has a market cap of $276M, with very little debt and a current ratio of almost 9. CBEH boasts a return on equity of almost 25% and a price to sales ratio of just 1.08. The company has demonstrated a trend of increasing sales and revenues over several years and has established a strong cash position in order to undertake further acquisitions. The shares currently trade at $8.49 and I would anticipate a 12-month target of $11-13.
Disclosure: At the time of writing the author held shares in China Integrated Energy, Inc. (CBEH).