No Gushing Over Gushan

Will the busted Chinese IPO parade end with Gushan Environmental Energy (NYSE:GU)? Since hitting the American market in December, shares of the Chinese biodiesel baron are bruised, particularly from today's pounding, but not too badly beaten.

Over the same period, you could have lost half your money in domestic ethanol producer VeraSun Energy (NYSE:VSE) or Pacific Ethanol (NASDAQ:PEIX). Relatively speaking, Gushan is doing a better job of helping its new stateside shareholders follow Warren Buffett's first rule of investing.

In my recent piece on innovation in biofuels, I noted that most domestic biodiesel producers are getting killed by high soybean oil prices. Things aren't much different in Asia, where palm oil is the juice du jour. While Nova Biosource Fuels (AMEX:NBF) is banking on a basket of waste greases and fats, Gushan is going with vegetable-oil waste byproducts and used cooking oil.

While margins have steadily narrowed over the past few years, Gushan's profitability is still impressive. Compare the firm's 44% annual gross margin to 5% for Aventine Renewable Energy (NYSE:AVR), or oil refiner Valero's (NYSE:VLO) 14%. Once you back out the one-time IPO costs, Gushan appears to be trading at a very modest multiple to its underlying earning power, particularly considering its significant growth trajectory.

That said, I'm somewhat cautious about Gushan's earnings stability, because of the Chinese government's recent price-freezing activities. Fuel-price fixes have squeezed the downstream operations of PetroChina (NYSE:PTR), but that firm has much more diverse operations that cushion the blow. Gushan's input costs will keep on rising, so the fuel vendor looks vulnerable.

Related Foolishness:

• Investors have recently thanked ethanol players for not growing.
• Consolidation is the name of the game here at home.
• This Brazilian biofuels player has fared well since its quiet debut.