Interview With China Clean Energy (CCGY) CFO William Chen

Monday, June 7, 2010, 2:00 PM ET -

By Zack Buckley

Below is a recent interview Zack Buckley, a regular GeoTeam contributor, had with China Clean Energy (OTC BB:CCGY) CFO William Chen.

Zack: Can you provide some background details of the company?

Mr. Chen: China Clean Energy is located in Fuqing City in Fujian province of China, and is engaged in the developing, manufacturing and distribution of bio-diesel and specialty chemical products from renewable resources. They found a process through research and development to create bio-diesel from waste grease including vegetable oil and palm oil.

Zack: Where do you see the company in 5 years? 10 Years?

Mr. Chen: In the next few months, we will continue our focus on expanding shipments to our existing customers and adding new customers. During the first quarter of 2010 we added 3 new specialty chemical and 2 biodiesel customers and we are negotiating with 6 new customers for our specialty chemical products. As we go down the road, we will take conservative measures to upgrade to AMEX or NASDAQ in order to pursue opportunities in acquisition projects such as acquiring one of the upstream feedstock suppliers. This will help us better manage our feedstock supply and cost, and acquire 2 to 3 of the retail gas station to sell our own bio-diesel to increase profitability and sales volume. As the demand increases, we will expand additional capacity in our new Jiangyin facility.

Zack: What are CCGY’s competitive advantages? What makes these sustainable over long periods of time?

Mr. Chen: In the fourth quarter of 2009 we generated $4.1 mil revenue while in the first quarter of 2010 revenue hit $10.7 million. This was due to our ability to expand sales volume within our existing customers as well as with new customers. One of our major advantages is that we have a sustainable business in our specialty chemical business segment. In addition, our new facility is able to produce more efficiently and our large customer base is able to absorb the additional supply for our products. In addition, we are now located near the sea port and railroad, which gives an advantage to easily export our products as well as transporting our feedstock.

Zack: Can you explain your main competitors a bit more?

Mr. Chen: One of the main competitors would be Gushan, they are the largest biodiesel producers in China. They have 7 facilities in China and one is in our province. They are currently having trouble due to the consumption tax. This tax does not affect ccgy because our customers are not state-owned enterprises.

We are also collaborating with our competition to create superior technology. Bio-diesel is a new and still developing industry, we need to cooperate and collaborate with our competitors to make the market bigger and create more awareness on clean energy's importance.

We will focus on building value for our investors and customers. We will stay competitive and expand our growth.

Zack: Why do your customers choose you over the competition?

Mr. Chen: We have great long term relationships with our customers. Our specialty chemicals products have received positive feedback from our customers and they had exceeded the regular standard. We are also able to improve our product for specific customers. For example, if a specialty chemicals customer asks for a specific standard, we are able to develop it. If they need a different temperature, we have our own R&D team that can change the product for the customers.

Zack: How is the new factory doing? When do you expect full capacity?

Mr. Chen: We have had positive feedback from customers on the factory products, as they have noticed improved quality in the products coming from the Jiangyin plant. We are leveraging the plant and our technology and expect to reach full capacity by the end of this year.

Zack: Guidance

Mr. Chen: We have only given guidance for the second quarter; we expect revenue to reach $11.5 million.

Zack: Gross margins

Mr. Chen: We expect 23-25% for specialty chemicals and approximately 8% for bio-diesel. We expect both of those to improve from quarter to quarter.

Zack: Can you fully explain your segment lines?

Mr. Chen: Our products are environmental friendly and come from renewable resources. we produce bio-diesel, monoacid, dimer acid, polyamide resins, dimer acid-based polyamide hot melt adhesive, trimer acid, and high quality printing ink. These are the feedstock for our customers. Our customer’s end product would be something like antirust oil that is used for ships, bridges and other buildings, soap, detergent, and coating for electronic appliances, glue, lubricants, and printing ink.

Zack: What is the estimated average price per ton of bio-diesel? Specialty chemicals?

Mr. Chen: For bio-diesel, the average selling price is approximately 650 dollars per ton and 1350 dollars for specialty chemicals.

Zack: What is the growth like in the industry?

Mr. Chen: Demand for diesel is growing at 9% in China. The motor vehicle fleet is growing at 16-17%. The demand is so great that China imports over 50% of its diesel.

Zack: Will the percentage of your products exported decrease substantially when the Jiangyin plant is fully operational?

Mr. Chen: We actually increased revenue of our exports, but as a percentage of total sales the percentage of exports decreased. This year first quarter we produce 4.5 thousand tons of bio-diesel, compare to fiscal year of 2009 we produced approximately 5 thousand which weighted down our export in overall, our export for specialty chemicals product remain strong for Q1 and as well as Q2 2010.

Zack: Do you expect to raise additional capital through the equity markets?

Mr. Chen: As we go down the road, there is a possibility that we will raise capital through the equity markets to fund projects to reach the next milestone for CCGY as we want to build a profitable and growing business with an environmental friendly product.

Zack: Why are taxes killing Gushan Environment Energy Adr (NYSE:GU) right now? Why is CCGY not affected by those taxes? How could that change in the future?

Mr. Chen: While we cannot speak for Gushan, CCGY is not affected by the consumption tax. It only affects companies that sell to state-owned enterprises. CCGY’s bio-diesel clients are in industry, private gas stations, ship fleets, and power generating plants.

Zack: Who are your customers? Can I meet or speak with them?

Mr. Chen: Yes, When you come to visit our plant, we can introduce to you some of our local customers. And also we have some of the large customer international customers like air products and chemicals, cray valley, and HBG export. They are NYSE listed companies. They were our largest customer in 2008 and they continue to be our largest customers today.

None of our customers exceeded 10% of sales. We have a large, diversified customer base.

Zack: Can you send me industry specific publications? I would be interested in third party reports on the bio-diesel and clean energy industries in China.

Zack: What Chinese businessmen or women do you admire?

Mr. Chen: CEO and founder of Baidu Robin Li.. I admire the business model Mr li has accomplished. an innovative company to bring valuable service to Chinese internet users to better search for the information they desire and connecting the Chinese people to the world.

Zack: If you had to invest in a US listed publicly traded Chinese company other than your own, what would it be?

Mr. Chen: Baidu, Inc. (NASDAQ:BIDU) as well.

Zack: If Gushan is able to recover, how will that affect CCGY? Will Gushan be competing for the same customers?

Mr. Chen: Again, I don't know Gushan's issue in details. As the company said in their conference call, it will change the business strategy to adjust to the new market environment. We will focus on our own business and I don't think Gushan's changes will affect us because bio-diesel and special chemical's market needs are growing very fast. Now we are working on building up our capacities to fulfill all the requirements and needs in the booming market. China imports over 50% of its oil consumption and china is going to continue import more of its oil consumption in the future.

Zack: What type of net income margins do you expect at full capacity of the Jiangyin plant for CCGY as a whole?

Mr. Chen: As we produced more efficient and higher demand drives our sale volume. We expect our income margin to improve.

Disclosure: No Positions at time of this interview

Profile

GeoTeam Contributor Zack Buckley is CEO of Uncoveringalpha.com and a research analyst at Geoinvesting.com. He developed his investing methodology by synthesizing the ideas from the best investors of all time, based on their track record. This led him to closely follow Warren Buffett, Peter Lynch, Seth Klarman and Benjamin Graham. Using a value approach, he pursued the most undervalued companies he could find, which led primarily to companies in China. Buckley will be spending three months this year in China visiting companies that are exciting investment opportunities.

****Follow him on his blog, Uncoveringalpha.com, as he travels across China touring factories and interviewing management.**