soya oil.jpgLondon
welcomes China Biodiesel, which claims to be the only commercial
biodiesel producer in China, with a 16% first-day pop — not bad in
these volatile times.

The company, which has just raised £8m
through a placing on London's AIM market, has been making biodiesel
from used cooking oil and other waste oils since 2005 at a plant in
Longyan, in coastal Fujian province.

In 2005, it had revenues of 68m yuan and net profit of 27m yuan, so its clearly still a minnow but a profitable one.

China
Biodiesel has developed its own production process based on a
proprietary catalyst which the company goes to great measures to keep
secret. The ingredients are ordered from different suppliers and all
staff are required to sign a confidentiality agreement covering the
materials and processes used.

The company is reluctant to patent
the catalyst — which speaks volumes about its faith in China's IPR
laws — although it is talking with the authorities about filing a
patent application that would not require the usual detailed disclosure.

The
Longyan plant was designed in-house and is working at full capacity of
20,000 tonnes a year. The expansion plan calls for a second facility in
Longyan and, in 2007, a new plant in Xiamen with annual capacity of
50,000 tonnes.

By 2008, China Biodiesel plans to build two more
50,000-tonne plants, in Guangzhou and Shanghai, bringing total annual
production up to 200,000 tonnes.

The company, in its AIM
admission document, talks up the favourable investment climate created
by China's new renewable energy law, introduced in January 2006, which
seeks to generate 15% of total energy needs from renewables by 2020.

While Chinese universities have done research into biodiesel,
China Biodiesel says it knows of just two potential competitors. It
does not know whether they are yet in commercial production, hence its
claim to be the first.

Western companies are watching keenly the
development of China's fledgling biodiesel market, so I suspect that
China Biodiesel is not going to have the market to itself for much
longer.

However, it argues that it is well positioned to fend
off foreign rivals because, unlike most biodiesel products, which are
typically produced from plants, China Biodiesel is using waste oil.
Now, there is a passionate debate
among environmentalists about whether developing nations should divert
agricultural production away from food crops to grow biomass for
biofuel.

While China needs to find new energy sources, it also has to expand its food supply.

So
making biofuel from waste is, on the face of it, a more “sustainable”
alternative. More pragmatically, China Biodiesel points out that waste
oil is cheap while the costs of importing biodiesel into the PRC from
the US and Europe are high, placing the group's products “in a strong
competitive position. “

I suspect the real competitive weapon,
however, is China Biodiesel's chairman, Huodong Ye. As well as being an
adviser on biomass energy for China's five-year plan, he is an
important figure in Fujian's business and political scene — the sort
of guanxi that outsiders can only envy.

China
Biodiesel is the latest in a string of China plays that have joined
AIM, the junior market of the London Stock Exchange, in the past couple
of years. AIM was originally favoured by small tech stocks but in
recent years the new issues board has been dominated by junior miners,
oil companies and, now, China plays.

Some Aim companies, such as Central China Goldfields or South China Resources, manage to combine both investment themes — resources and China.

City
investment bankers say China's growth companies are flocking to AIM
because the regulatory burden is less than for Nasdaq while a London
listing brings greater international credibility than an Asian exchange.

Today, Aim has at least 30 China-related companies and there is a whole ecosystem of investment banks, lawyers and advisers experienced in bringing Chinese firms to Aim.

For
China Biodiesel's AIM placing, law firm DLA Piper advised Evolution
Securities, the nominated adviser and broker. DLA Piper also recently
acted for another AIM newcomer, Hutchinson China Meditech, which
specialises in traditional Chinese medicine. Both DLA Piper and Evolution have offices in China.

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