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Trade: Buy GU

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Founded in 2001 and based in Hong Kong, Gushan (NYSE:GU) is the largest producer of bio-diesel. It converts waste such as vegetable oil, animal fat, and recycled cooking oil for use in a range of diesel engines, including diesel engines found in trucks, mass transit vehicles, marine vessels, and generators. The by-products of its bio-diesel production have various commercial applications in the food, pharmaceutical, and manufacturing industries. It sells its products to direct users, wholesalers, and retail gas stations. The Chinese government has mandated that 15% of fuel must be renewable by 2020.

Gushan is growing rapidly. Its 4Q 2007 revenue grew 50% yoy (31% sales volume and 14% price increase) to $138M. Operating income increased 104% to $53M. With Jan 2008 opening of a new Beijing plant and its existing three production facilities, the company proposes to double production cpacity during 2008, as well as drive volume efficiencies from better utilization of existing plants. It has targeted increasing its annual production volume nearly 50% in 2008.

It has $189M of net cash. I estimate its diluted Earnings/ADS share to be approximately $0.7 so PE@13/sh is about 18. Its fast growth thus implies a forward PEG less than 0.5, making it compellingly cheap at the current price.

I think its a good way to bet on alternate energy as well as China, now that the Chinese market has had a large correction.

Wednesday April 09, 2008 : 11:53 AM

Comments (2)

Uncle John:

This could be a good longer term play. I am interested enough to look into it. My fear is that the cost of creating that bio-fuel will be high and that this is a very small market. (How many french fries do the Chinese eat?) I need to do some research but it seems possible.

Good luck,
Uncle John

Posted by Uncle John | April 9, 2008 3:17 PM

BullishBud:

Not much of a comment, but more of a question...but what other renewables is China "dabbling" in? Plus, with the influx of outside energy firms playing in China, what are they doing to increase saturation in this market nitch?

However, I like the numbers this company is putting out, and even if other firms come in to comptete, it seems GU will be ahead of the curve.

Posted by BullishBud | April 12, 2008 5:52 PM

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