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Diesel power: China Biodiesel plc

Wednesday, June 18, 2008

Houdong Ye is a well travelled man. For the serial entrepreneur and chairman of AIM-listed China Biodiesel plc, the 6,000 mile flight to London is a chance to keep in touch with his company’s European investors. Tonight he and his finance director, Gloria He, will make the journey back to Fujian province where the company’s latest production facility is coming on stream.

According to Ms He, the move to AIM back in mid-2006 made a great deal of sense for what was then an emerging renewable energy business.

“AIM is particularly suitable for a small-cap company with fast growth,” she says. “At the time of the listing we were a small company and it was fairly easy for us to get listed. It is a flexible and highly efficient system.

“The other point is that we have found that European and American investors have a comprehensive understanding of renewable energy and clean technology. So it’s easier to show our value here. And through AIM we managed to raise the money we targeted.”

Mr Ye started China Biodiesel in 2001 after spending years running businesses in China’s chemicals industry. The company’s premise is simply to take used oils from industry and reprocess them into saleable biodiesel and chemicals. He believes its proprietary, and patented, process combined with flexibility to produce varying quantities of its three core offerings sets it apart from competitors.

Those offerings are B1, B2 and B3. B3 is regular biodiesel and B1 and B2 are non-toxic substitution petro-chemical products. If the market demands more biodiesel then China Biodiesel routes its feedstock into producing it. When demand slackens, then B1 and B2 chemicals get the attention.

“Our technology not only allows us to use low cost waste all year, but also enables us to shift between B1, B2 and B3,” Mr Ye says. “Many of our competitors cannot do that.”

All this variation is particularly important when you’re dealing with renewable energy in China. Indeed, government intervention aimed at protecting the country’s growing economy has created a structure where regulators often seem to take with one hand only to give with another.

Importance of renewable energy

The Chinese government clearly recognises the importance of renewable energy – notably by including it in its mid to long term development blue print, the Eleventh Five-Year Plan. However, it also likes to subsidise major oil companies to keep the price of diesel down. And while this tactic might help protect the economy, it does little to encourage an emerging biodiesel concern like China Biodiesel.

In an effort to neutralise the contradiction and stimulate new technology, the government also provides technology grants to renewables firms. But that still leaves China Biodiesel trying to make a profit from selling a product in a government-controlled market.

To fix the problem, the company uses its technology to switch between B1, B2 and B3 chemicals as market forces require. Its first plant kicked off production in 2003 and the second swung into action last September, with production there just coming on stream now. At full production they have the capacity to produce 100,000 tonnes of biodiesel products each year.

“We sincerely hope that the government eventually releases the subsidy on diesel, but we don’t completely rely on that,” Ms He says. “We react to the challenging environment by self-adjustment.

“At the time of our listing, B1 and B2 only took up 20pc-30pc of our total output, but this year that percentage has been lifted to more than 80pc. That helps us very much.”

As a result, the company boosted sales last year by 23pc to £9.3 million, although tough market conditions saw profits fall 56pc to £1.2 million. Its current market cap is around £7.5 million and its shares are trading at 16.5p.

Producing more B2 and B3 chemicals should also help to mitigate the rising price of feedstock, which was largely responsible for the slip in dent profits.

“It is hard to predict which direction the price of feedstock may go, and it is quite high at the moment,” Mr Ye says. “But we think that as an operator in this industry it is very important to find ways to cope with it. We are about to produce more B1 and B2 because there is no control over the price of those products.”

China Biodiesel is also planning to open an overseas office in the Philippines as part of an effort to secure a supply of raw materials at more competitive prices. It is planning on importing waste oils direct from South East Asia, Malaysia, the Philippines and Indonesia, where there are sufficient supplies.

But while the feedstock maybe coming from overseas, the chances of exporting any of this new energy are remote. “Currently we are focused on the Chinese domestic market,” Ms He says. “China is now the second largest energy consumer in the world but 40pc of its oil is imported. So exporting energy is not encouraged by the government. Plus, of course, the domestic market is big enough.”

In the immediate future the company has set its sights on securing sufficient feedstock to lift the two plants to full production and to build long term relationships with suppliers. Elsewhere, Ms He doesn’t rule out plans for another plant some time in the future.

“In late 2006 we bought a piece of land close to the first plant and at the second plant we also have a spare piece of land suitable for further expansion,” Ms He says. “But it is not an easy time for the biodiesel industry or the bio-materials industry. So while we have plans for expansion we also need to be cautious about plans for a new plant. It seems much wiser not to promise too much.”

Ben Hobson, SmallCapNews.co.uk