Reprinted from TopStockAnalysts.com:
Gushan’s (GU) Sales to Grow +66% this Year on Chinese Energy Demand
By Timothy Lutts, Editor of Cabot Stock of the Month Report
Published: April 7, 2008
Gushan Environmental (NYSE: GU) is China’s largest producer of biodiesel fuel and related products and thus, a key element of the country’s plan to reduce air pollution while reducing reliance on fossil fuels.
Biodiesel is derived from natural oils by a chemical process that splits oil (usually soybean) into biodiesel and glycerin. Compared to traditional diesel, biodiesel results in almost complete elimination of acid rain-causing emissions. Since trucking fleets are nearly completely diesel-based, it can provide a tremendous benefit to the environment, as well as some freedom from oil imports.
Nowhere is the combination of pollution and reliance on petroleum imports a more pressing need than in China. The booming economy there has brought with it a surge in diesel use, up +200% in the past decade to 116 million tons a year. Pollution from automobiles has gotten so bad in parts of China that some running events have been threatened to be moved from Beijing for this summer’s Olympics. That has led the Chinese government to get behind biodiesel in a significant way this past year. The country is now aiming to use 20 million tons by 2020, up from an estimated 200,000 tons in 2007.
Of that 200,000 tons, 190,000 (95%) came from Gushan. By the end of this year, Gushan will have annual capacity of 400,000 tons thanks to new plants slated to open in Beijing, Shanghai, Hunan and Chongqing provinces.
The company has focused on making its product not from soybean oil but from waste sources including vegetable oil, used cooking oil and methanol. Sales exploded from $5.3 million in 2002 to $115 million in 2006 (2007 sales are estimated to come in at $130 million), with net profit margins over 40% each year.
The price Gushan fetches for biodiesel varies in tandem with traditional diesel. Traditional diesel prices in China hit $1,000 a ton in late 2007, and have recently dipped because of seasonal factors to $800 a ton. Based on past years, that implies Gushan is now making somewhere around $720 a ton for its biodiesel.
There are only so many restaurants from which to collect discarded cooking oil in China, so the government has announced an effort to plant 7,000 hectares of forest this year in the Hebei province (where Gushan has a factory) to produce material for biodiesel. Plantings like the Chinese pistachio tree and others are seen as beneficial because they can be grown on mountainsides that can’t be used for other agriculture and provide jobs for people in remote villages. And the nuts have high natural oil content that provides a strong yield for producers. Hebei and other provinces also have stated they will plant another 1.27 million hectares of biodiesel forest by 2010, with government plans calling for 13 million hectares by 2020. It’s all part of an effort by the government to grow national renewable fuel use to 10% of total fuel use in two years (from about 8% now) and to 15% by 2020.
For Gushan, all of that should power sales growth of +66% in 2008 to $214 million, presuming China’s diesel doesn’t fall too far below $800 a ton, which isn’t expected. If prices climb closer to the $1,000 a ton mark for the year, Gushan could blow past that $214 million estimate quite easily. Since 110,000 tons of Gushan’s annual production isn’t scheduled to come online until the fourth quarter of 2008, sales should rise significantly again in 2009.
Gushan holds a Chinese patent through 2020 on technology it developed to efficiently process waste products into biodiesel, something it says allows it to operate more profitably in the sector. Competitors, which relied mostly on food crops for their biodiesel efforts, have to play catch-up in light of new regulations. In the meantime, Gushan has filed for six more patents on various biofuels processes. It’s also worth noting that Jianqiu Yu, Gushan’s founder, chairman and owner of 42% of the stock, is a member of the political committees of two provinces, giving the firm a stronger voice in policy.
In short, Gushan has a great growth story, and because it’s still little-known by U.S. investors, there’s tremendous upside potential for a big “Romance Phase” uptrend.
Short-term, however, you need to be careful. Aggressive investors should try to buy low and keep close stops.
Link to article on TopStockAnalysts.com
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