Published:
April 7, 2008
Gushan Environmental (NYSE: GU,
$15.48) 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.
Timothy W. Lutts
Editor
Cabot Wealth Advisory
About Timothy Lutts
Timothy Lutts heads one of America's most respected independent investment
advisory services, publishing seven newsletters to over 85,000 subscribers
around the world. His dedicated team of professionals serves individual
investors with high-quality investment advice based on time-tested Cabot
systems. Tim also edits Cabot Stock of the Month.
As a teenager, Tim worked part time for his father, Cabot founder Carlton G.
Lutts, when Cabot Market Letter was first published in 1970. After
college, Tim worked for a variety of technology companies in the Boston area
before returning to Cabot as a full time employee in 1986. He brought Cabot into
the computer age, and then the Internet age, and became President of Cabot
Heritage Corp. in 1996.
Under his leadership, Cabot newsletters have been honored numerous times by both
Timer Digest and the Hulbert Financial Digest as the top
investment newsletters in the industry.
Tim has appeared on numerous podiums as an investing expert including Bloomberg
TV and the World Money Show, and led Investor's Business Daily discussion
groups. He holds a B.A. in English from Northeastern University.
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