Gushan Environmental Energy: The Case for Chinese Biofuel

| About: Gushan Environmental (GU)

Biodiesel is a relatively new (circa 1990ish commercially) clean burning alternative energy source that makes use of waste oil products, animal fats and vegetable oils. It has not really taken off much in the US, but most people critique that to be the fault of politics. Europe and China, on the other hand, have already begun to see a major demand for the product. The European Union, a signatory of the Kyoto agreements, has an incentive to use it because they have to reduce emissions and biodiesel burns a lot cleaner then petroleum based diesel. China's demand for biodiesel, however, is increasing alongside the domestic growth they are seeing, rising prices of oil and a step stool the government created for it.

The Chinese domestic growth over the last 15 or so years has been complemented and made possible in part by a significant increase in vehicles. Their government has realized that in this period of time categorized by massive development, they have the opportunity and ability to make clean burning energy sources a competitive alternative, and that is exactly what they have done. They have legislation in play that requires their petroleum selling companies to include bioliquid fuels in their selling scheme or otherwise be liable for the loss of the bioliquid fuel manufacturers. On top of that, they have permitted foreign investment in the category, which is why we have the opportunity to invest in companies like Gushan Environment Energy (NYSE:GU).

Gushan had its initial public offering in December, of which it didn't raise as much money as it wanted to, and it is pretty close to the price it entered the market. They raised the money to support R&D, corporate expenses and expand their production, and for the growth that they expect to achieve (and because it's China) they are trading at quite a value. Take note however, that there is not much financial information that goes against what management has said because they are so newly listed.

Gushan claims to be the largest producer in the market and some of their publicly listed competitors, who are much more diversified, include PetroChina (NYSE:PTR), SINOPECH (NYSE:SHI) and CNOOC (NYSE:CEO). There is potential competition in the future from domestic manufacturers who are still developing and foreign competitors; specifically Malaysia setting up shop and sending over their palm oil.

It has rarely been picked up by the financial media, but Jim Cramer has been optimistic about it twice on his show. There are so many positive factors going for this company that you just can't ignore it. I hope to pick GU up at a good price before Wednesday's 8:30 AM conference call.

Disclosure: none