Check on China: Gushan Environmental Energy Limited
Like the United States, China is pushing the development of alternative energy sources to reduce the nation's dependence on imported crude. In the face of spiraling oil prices and a domestic diesel fuel shortage, the Chinese biodiesel industry is receiving a lot of attention.
While corn-based ethanol is the most popular biofuel in the United States, biodiesel holds the top spot in China. Biodiesel is a clean-burning ("carbon neutral") and biodegradable fuel produced from feedstocks like waste oil (old cooking oil from restaurants), vegetable oil offal and animal fat, typically blended with standard diesel fuel, then used in trucks, buses, ships and electrical generators. The byproducts of biodiesel production are used in the food, manufacturing and pharmaceutical industries.
Gushan Environmental Energy Limited (NYSE: GU), the People's Republic of China's largest biodiesel producer in terms of annual production capacity, is betting on the growing use of biodiesel and the push toward a more energy independent China. In addition to providing biodiesel to individual retail gas stations, petroleum wholesales and seagoing vessels, Gushan sells by-products from the production process (glycerine, stearic acid, erucic acid, erucic amide and plant asphalt). The company operates three production plants in the Sichuan, Fujian and Hebei provinces and plans to soon add four new facilities in Beijing, Shanghai, Hunan and Chongqing, to more than double its annual production capacity to 400,000 tons by the end of this year.
Last month Gushan staged an initial public offering on the New York Stock Exchange, raising $173 million (18 million shares at $9.60), though the stock was priced well below the expected range of $11.50 to $13.50. Since then, shares weathered cooling U.S. capital markets and rose to $12.72 on Jan. 3, before slowly falling back to the $9 range. Gushan’s 52-week low is $7. The company plans to use the IPO proceeds to fund expansion efforts and to strengthen research and development.
Though Beijing has yet to mandate the use of biodiesel in automobiles and still hasn’t standardized the process of blending it with fossil fuel, China has a national goal of having biofuels, which now make up only 2% of fuel consumption, account for 15% of all transportation fuels by the year 2020. Pundits expect the Chinese diesel market to grow by 45% by 2010, by which time demand is expected to reach a record high of six billion gallons — biodiesel fuel could optimistically account for almost a third of that demand.
Officials at China's National Development and Reform Commission have set a goal to boost the country's biodiesel output to 200,000 tons by 2010 and ultimately reach two million ton mark by 2020 (officials also hope to increase the proportion of renewable energy consumption to 10% by 2010 and to 20% by 2020).
One area of biofuels that Gushan's R&D staff could eventually tap into is the growing interest in developing alternative sources of biodiesel. To jump-start efforts, the Ministry of Finance's Department of Economic Development has put in place a new initiative that will help promote the production of biofuels from forest sources.
Under the plan, the government will subsidize research and demonstration projects that produce biodiesel from oil-bearing plants. Projects that meet industrial standards qualify for subsidies of up to 40% of the total investment cost. Financial assistance will be provided to biofuel producers who lose money on crops when oil prices are down. The government will likely continue to expand their offerings of subsidized loans to further drive the production of biofuels and reduce the need for foreign oil.
Industry experts see great potential for China to boost its biodiesel output, given the newly implemented incentives for biodiesel producers like Gushan, but express caution that the era of quick profits in the event that biofuels will come to an end. Rick Kment, a biofuels analyst with DTN Research, suggests that biofuel producers will need to explore unconventional alternative resources in order to see more consistent profits over the long haul — especially considering the prices for vegetable, palm and soy oil are rising along with fossil fuels.
Even with the promising prospects, Gushan faces some serious challenges. In the wake of a larger-than-expected rise in the price of edible oils, which skyrocketed to all-time highs in 2007, China's biodiesel plants began focusing on used cooking oil, the lowest-cost raw material. The problem with waste oil is limited supply. Even in China, the world's largest consumer of vegetable oils, biodiesel companies have had to contend with record vegetable oils prices and problems collecting enough waste oil to support their growth.
On Jan. 8, Soleil initiated coverage of Gushan with a "buy" rating and a target price set to $13.85. The analysts expect Gushan to grow net income at about 22% over the next couple of years. Shares closed at $8.13 on Wednesday, down $0.37, or 4.35%.
Gushan's (GU) stock is well worth keeping an eye on because both the company and the biodiesel industry in China offer exceptional prospects for steady growth over the longer term.
