Gushan (GU) is a $3 stock, with $2 in cash and zero debt. EPS for 2008 is likely to be 90 cents to $1, with 2009 EPS of around $1.50. So given the current valuations, Gushan is trading anywhere from two times to three times earnings.

Based in Fujian province in China, Gushan is the leading biodiesel producer in China. It sells its biodiesel to oil wholesalers and oil retailers. When it went public in December 2007, Gushan issued 18 million ADS shares and raised $180 million.

Gushan is a pure play on alternative energy in China. The number of motor vehicles in China, whose population is north of 1 billion peope, has grown from 20 million to 50 million since 2000. Chinese oil consumption nationwide is around 500 million tons, with 200 million tons being produced domestically; the rest is bought on the spot-market.

This is where Gushan comes into play. As part of a broad alternative energy policy, China's goal is to reach 5 million tons per year in biodiesel consumption by 2015, with renewable fuels reaching 20% of total supply. To support these monster initiatives, the Chinese government has supported all of the major biodiesel producers, particularly Gushan, by giving massive revenue tax breaks and in some cases helping with research and development costs. Thus, the regulator environment has been and will likely remain very favorable to biodiesel producers, especially Gushan.

Gushan will experience additional tailwinds going forward, as its main input cost, vegetable oil and used cooking oil, continues to increase in supply and (more importantly) tank in price. Most of these oils are trading for half their value of just a few months ago. It is very simple: Lower input costs generally equate to higher earnings per share, which should drive the stock higher.

2008 earnings are expected to be 95 cents this year, which means Gushan is trading with a 3.5 P/E. 2009 earnings are where things really get interesting; we have seen estimates as high as $1.50, which, if reached, means Gushan is trading with a forward P/E of 2. Since diesel sales in China are running more than 180 million tons this year, the government wants to see 1% of that in the form of biodiesel.

As of midyear, Gushan had production capacity of 3500,000 tons, having brought online an additional 75,000 tons in Shanghai.

We think the stock is worth an easy $5 in the short term. It is a huge beneficiary of the recent drop in commodity prices, the sole beneficiary of a new government wide policy and the only "real" investment on alterative biodiesel fuels in China

Know What You Own: Gushan operates in the specialty chemicals industry. Some of the other stocks in this industry include China Petroleum & Chemical (SNP), PetroChina (PTR) and CNOOC (CEO). These stocks recently closed, respectively, down 11.4% to $50.57; down 9.2% to $57.25; and down 10.1% to $56.04. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.


Posted on Oct. 27, 2008