A High-Powered Chinese Energy Play

04/01/2010 1:00 pm EST


Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says a privately owned energy company has great distribution of oil, gas, and biodiesel throughout China.
China Integrated Energy (Nasdaq: CBEH) is one of the best managed private energy companies in China and a pure play on China's fast growing gasoline demand. Its earnings are growing at 35% a year and the stock is dirt-cheap, trading at only eight times this year's earnings.
CBEH is one of the leading oil distributors in China. The company purchases gasoline and other products from refineries operated by rural provincial government-owned oil companies and then sells to retail distributors throughout major Chinese cities. Essentially, CBEH profits from the spread between the wholesale and retail prices.
Oil product distribution accounts for roughly 68% of the company's sales and 49% of the profits. The company is also the only non-state-owned integrated biodiesel producer with a distribution license. CBEH's vertical integration allows the company to achieve a higher and more stable profit margin over its competitors.
As a result, although biodiesel accounted for only 19% of the company's revenue in 2009, the business contributed 39% of its earnings. Gas stations account for 13% to 15% of the company's sales and revenue.
With its three-tiered business operation, CBEH is the only vertically integrated energy company in China's private sector, giving it huge competitive advantages over other energy companies. CBEH has better control of its supply chain with biodiesel production, large storage capability, wholesale and retail distribution networks. As a result, CBEH achieves and maintains higher profit margins than other energy companies.
Another key strategic advantage for the company is its strong sales and distribution network. The company continues to expand its supplier and customer base, as well as its wholesale and retail network, through organic growth and acquisition.
On the financial side, CBEH has consistently delivered strong results. Its revenue [showed] average annual growth of 47.7% since 2005. Net income has also [grown] from $5.3 million in 2006 to $37.9 million in 2009—an average growth rate of 55%. Even in the 2008 slump, the company managed to grow its revenue by 148% and profits by 116%! In the next two years, I expect that earnings growth will continue to be strong at over 30% per annum.
In addition, the company maintains a strong and healthy balance sheet. As of year-end 2009, CBEH had $62.4 million cash, with a total liability of only $10.2 million. For the fiscal year 2009, revenue grew 33.8% and net income grew 32.8% with earnings per share of $1.04 and a trailing-12-month P/E ratio of less than 10x—or about eight times this year's projected earnings per share.
So, as you can see, CBEH is perfectly positioned in the fastest growing energy market in the world, and I expect this company to continue its rapid growth. I recommend you buy CBEH under $11. (It closed at around $10.50 Wednesday—Editor.) My price target is $15 within four to six months.
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