I have written several articles (here and here) now about the issues facing Gushan Environmental Energy (NYSE:GU), its valuation, risks and opportunities. Please see those articles for links to SEC filings to support my investment thesis expressed several times throughout this article as well. Since I wrote those articles, I believe that there may have been a change in Chinese tax policy regarding the consumption tax issue that has rendered Gushan largely unoperational.
One of the largest issues facing Gushan, in my opinion, is the consumption tax that was levied on them by the government. The consumption tax lead Gushan to shut down several plants. A reversal of the Chinese tax policy would have an enormous impact on Gushan's operations, and in my opinion, its share price, which as of 11/23/2010 trades at an 19% discount to cash, and 342% discount to tangible book value (calculations below). As a reminder from my previous articles, Gushan has no debt. Gushan management has indicated that they would begin operations again at all plants once this tax issue was resolved (see Q&A below).
Recently I believe there have been developments in Chinese tax law that would directly affect Gushan's operations. I have several emails into GU management and awaiting confirmation, though I wanted to publish something here in anticipation of a press release from Gushan itself.
There is limited documentation that I can read on the subject but one translated article that seems to report this news is located here. My reading of this article is that fuel producers will be exempt from the consumption tax going forward, and any tax paid prior to this policy change will be refunded.
Lines from the article dated 11-11-2010 follow:
National Tax Administration: oil production from the oil companies exempt from GST one, from 1 January 2009, the oil producers of oil in the production process, as fuel, power and raw materials consumed in production for oil exempt from consumption tax. Other purposes or used for external sales of oil products directly act according levy of consumption tax.
II, from January 1, 2009 to the notification issued before the oil production from oil production has already paid consumption tax, in line with the above exemption, it shall be refunded.
Management has indicated in a recent Q&A session that Gushan would be profitable under current market conditions if not for the this specific consumption tax.
Q) "...If it is ruled in your favor...how close to profitability would you be given today's diesel prices and raw materials prices?"
A) "We remain confident that the consumption tax ruling will be in our favor.....we expect to focus back to biodiesel production and we should be profitable under current market conditions..."
If indeed the tax issue is resolved and GU can turn a profit, as per management's insight during Q&A, then I would reiterate my belief that the company should be valued at least at its tangible shareholder's equity on the balance sheet, of which 27% is in the form of cash balance.
Currently the shares trade at $3.70, which is a discount of 19% to GU's cash per share of $4.40 (pre-split $.88 from article referenced). GU has no debt.
Current tangible shareholder's equity is $16.35 per share(pre-split 3.27 referenced in article). The shares would need to rise 342% to reach its tangible shareholder's equity given today's share price of $3.70.
Should a profitable company that leads China's industry in an important political arena be valued at least at its book value? I believe so, but I'll leave it up to the readers of this article to answer this question for themselves.
Disclosure: Author holds a long position in GU