Since October, they’ve had to succor themselves with bland fare like China Digital TV — up 13 percent — or even bitter fruit like Constant (“We’ll email it for you!”) Contact — down 23 percent. So you can forgive investors for hearing the unlikely strains of Joey Scarbury‘s “Believe It or Not” as they consider Gushan’s prospectus. But there are some reasons to be cautious about what appears on the surface to be a promising IPO.
Gushan Environmental Energy filed Monday for an offering on the New York Stock Exchange with the proposed ticker GU. Gushan’s business is to take used cooking oil and other vegetable oils, convert it into fuel, and sell it to ship operators, petroleum wholesalers and individual gas stations. The company was one of the first to enter
And it’s in a growing business. Gushan sold 159,000 tons of biodiesel last year and 137,000 tons in the first nine months of this year. Profitable since 2002, earnings per share have risen steadily from two cents a share back then to 33 cents a share in 2006. So far this year, the company has delivered a net profit of 24 cents a share.
Revenues at the company nearly tripled to $110 million last year, although growth has slowed dramatically since then. Through September of this year, revenue grew 14 percent, to $98.3 million. Part of the proceeds from the planned IPO will go to expanding its production capacity to 400,000 tons by the end of 2008, added capacity that the company needs if it’s to revive its revenue growth rate.
But there is another danger lurking for Gushan in the near future. Prices of the used cooking oil it relies on are rising. Strange as it may sound, waste is becoming a coveted commodity in the age of alternative energies. As Gushan noted in its filing:
Between 2004 and
September 30, 2007, we experienced an increase in the average cost per ton of used cooking oil of 28 percent…. This increase in raw material cost is due in part to our suppliers’ perception that the raw materials constitute an increasingly valuable commodity…. Our operating costs may increase significantly if other businesses, including but not limited to other biodiesel manufacturers and oleochemical producers, compete for the raw materials we use.
That effect could be seen in the slower profit margins that the company has seen this year. Through September, direct material costs were 52 percent of revenue, up from 48 percent a year earlier. As a result, the gross profit margin fell to 44 percent from 48 percent, and operating margin fell to 39 percent from 44 percent.
Unless diesel prices rise in China to keep pace with the inflation in Gushan’s raw materials, the company’s profits could easily get squeezed once it lists on the NYSE. That could lead to investor disappointment down the road for what is otherwise a strong-looking entrant into the IPO market.