Gushan Environmental Energy: The Case for Chinese Biofuel

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 (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 (PTR), SINOPECH (SHI) and CNOOC (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

Comments

[Cat's eye]

Many things are hidden by the darkness at night. People whose eyes are used to broad daylight can't see in the dark. Be wary about your steps when you can't see well.

[Ceviche Fund Partners LP/Dan Jacome]

Nice call Daniel, cat's eye got it all wrong. GU has doubled in the last 2 weeks, basically. Keep up good work. Looks like a technical breakout, rather than something fundamental, but we are hearing vague chatter about a takeout.

[Daniel Nathel]

Dan, In response to the breakout... it seemed to be timed exactly in response to a press release that 65 Gushan employees and officers were getting over 1.5 million ADR options to vest a third a year for the next three years at US$10.60. The gain had a fundamental basis, but its magnitude might have been technical.

The fundamental being that they have good management and they are enticing them to stay and conquer the market.

The technical... I know that Market Technicians are capable of producing gains aside from the underlying businesses they are investing in, but I am not one and the word has too many meanings for me. For the sake of simplicity I would replace it with popular or increased demand for ownership in this situation... unless you are referring to something else like one of the volume/financial stat functions that most quote sites offer. If that is the case, I am curious to know what measurement you think was the underlying influence on the gain.

Thanks for your comment though. Shortly after I wrote this article I went long GU, and I nervously watched the price drop more than 10%. "Cat's eye's" comment was quite alarming and made me reluctant to continue writing because it didn't seem like I had a reader. Instead I concentrated on my own analysis more.

I am still in GU now, indefinitely, but I am looking to be compensated more for the risk I assumed when I picked it up. The price has been pretty unstable at the current level and if it had more time to follow it I would probably approach the situation differently and try to take advantage of the huge movements.

[gadflea]

GU - is it as simple as this: oil is going through the roof, the Chinese government has mandated alternative fuel use, GU is roughly doubling manufacturing capacity by year's end, it has a PEG of .31, a forward PE of 10, no debt, a current ratio of 11+, ROE @ 15%, and PM of 23%. Why shouldn't this stock go very much higher?

[gadflea]

GU - is it as simple as this: oil is going through the roof, the Chinese government has mandated alternative fuel use, GU is roughly doubling manufacturing capacity by year's end, it has a PEG of .31, forward PE of 10, no debt, a current ratio of 11, ROE @15%, and a PM of 23%. Why should this stock not go very much higher?