CURRENT RATING: 6
CURRENT 12-18 MONTH PRICE TARGET: $13.50
The distribution of oil/gas products in China requires government licenses that for a variety of reasons are not easy to procure. In that regard, the distribution side of the business, while not involving anything particularly proprietary possesses some “administrative” barriers to entry that are topical to the story and its opportunities. In addition, the Company has also managed to tie up some military railroad routes throughout China, which I think could provide a basis for growth in the distribution side because it allows them to deliver product into portions of the country that are perhaps underserved and void of significant delivery infrastructure. My view is that those areas may be conducive to higher aggregate demand growth and perhaps better pricing/margin opportunities.
The biodiesel production side of the business is relatively new, as its first sales came in late 2007, and the facility is still in the process of ramping to capacity, which the Company believes it will achieve in calendar 2008. That should mean that the biodiesel side of the equation will provide the basis for considerable comparative growth in the coming quarters, and should also provide a platform for expansion into the future. As an example, For the March 31, 2008 quarter, the Company reflected biodiesel sales of just under $7 million on what they suggest was about 50% of capacity. That implies that 100% capacity would generate around $14 million per quarter or somewhere between $55 and $60 million annually to the revenue mix. In 2007, the Company generated $87 million in revenues from distribution alone. Clearly, the biodiesel piece will create some compelling comparable numbers. (That scenario is even more intriguing considering that for the March 2008 quarter, distribution revenues themselves increased by 160%, from $11.1 million in the first quarter of 2007 to $28.8 million). Moreover, in my view, because of China’s growing demand for both domestic and cleaner energy sources, the Company should be able to sell whatever capacity it is able to create in both the near and intermediate terms. Furthermore, there is good reason to believe that the Company’s distribution capabilities may significantly enhance their biodiesel business on a variety of levels.
In my view CBEH represents a considerable growth opportunity in what is obviously a burgeoning part of the world. Furthermore, I think its business addresses some key problems that China is dealing with and will continue to deal with for some time to come; a growing demand for energy (especially domestic sources) and the need to utilize more environmentally sound solutions. I think the coming quarters will demonstrate marked growth in both top and bottom line results, and those results should provide the basis for considerably better valuations going forward.
DISCLAIMER STATEMENT
The information contained in this report has been written by David Lavigne of EdgeWater Research Partners LLC ("Edgewater") and has been derived from sources considered reliable, but cannot be guaranteed by us. Edgewater and Lavigne are not aware of any material conflict of interest known at the time of the publication of this report. Financial projections and estimates herein represent our independent analysis based upon information in conjunction with the Company's publicly available financial statements. Edgewater and Lavigne may maintain positions in the securities referenced, which may change at any time without notice. Edgewater does not receive fees, warrants or any other compensation from issuers in connection with its research. It does however, encourage issuers and it representatives to subscribe to Edgewater's research, and from time to time, issuers and or their representatives may also purchase individual copies of Edgewater's research products. Edgewater and Lavigne may own options, rights or warrants to purchase any of the securities of the Company. This report is for informational purposes only and is not to be construed as specific investment advice or recommendations, nor as an offer to sell or a solicitation of an offer to buy any securities. The securities referenced are speculative in nature and may not be suitable for your specific investment objective. For specific investment advice or recommendations, please consult with your investment representative.
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