Biodiesel Stocks

Excerpted from
Around Asia's Markets: Oil costs stimulate quest for substitute
By Stuart Kelly Bloomberg News
MONDAY, AUGUST 22, 2005

Shares of Asian biodiesel-fuel companies, like the ethanol maker Khon Kaen Sugar Industry, may outpace oil producers, the region's best performers in the past year, as governments try to cut oil-import bills and consumers balk at record gasoline prices.

"You'll find biodiesel fuel or alternative energy stocks become more attractive, not only as their own businesses pick up, but also relative to the traditional oil stocks," said Shane Oliver, an asset manager AMP Capital Investors in Sydney.

Nomura International recommended that investors switch to biodiesel stocks like Khon Kaen.

Rising fuel costs have encouraged Asian governments to promote alternative fuels, like natural gas from waste products and ethanol from plants.

Gasoline in Japan rose to its highest price in more than 12 years last week.

Oliver said he held shares of Energy Development, which makes gas from rotting garbage at landfills, and Babcock & Brown Environmental Investments, a maker of bio-diesel, for the company's Sustainable Future Fund.

A measure of Asian oil producers and refiners, representing 3.1 percent of the Morgan Stanley Capital International Asia-Pacific index, has climbed 46 percent in the past year, the best performance of 10 industry groups in the regional benchmark.

Ethanol, made from sugar cane, grain or other plants, can be used to dilute gasoline, making it cheaper and cleaner-burning.

Shares of biodiesel company Khon Kaen have risen 40 percent since they began trading in March. Sean Darby, Nomura's chief Asian equity strategist, this month added the company to his list of recommended shares as he joined Stewart Paterson at CSFB in cutting oil producers. Babcock & Brown Environmental has risen 68 percent over the past year.

"You're betting that ultimately these companies have greater potential in the long run than oil companies, which are already pricing in considerable gains in the oil price," said Luke Maffei, an analyst at Shaw Stockbroking in Sydney, who has a "buy" rating on the bio-diesel maker Australian Renewable Fuels.

As oil producers decline, bio-fuel makers are catching up. Shares of Australian Ethanol, which fell 6.1 percent in the first seven months of this year, are up 43 percent this month. The ethanol producer Korea Polyol rose 9.1 percent in the first six months and has since climbed 19 percent.

Shares related to other forms of renewable power are also attracting buyers. Oliver at AMP said he held Solco, which makes solar energy products. The stock has added 30 percent in the past year.

Darby at Nomura recommended that investors buy shares of Tokuyama, a Japanese company that supplies polysilicon crystals used to make solar panels. The stock has more than doubled in the past year.

Still, investors such as Wallace Absolute Returns' Michael Birch prefer to switch to bigger companies that have a broader range of energy products such as BHP Billiton, the world's biggest mining company, which produces coal and uranium as well as oil.

"BHP is one of the few alternatives that's big and liquid enough to absorb the cash that's flowing out of the oil stocks," MrBirch said. He's been selling Woodside Petroleum.

Uranium prices have more than doubled in two years as stockpiles dwindle and China, India and Russia plan new reactors.

Investors are also betting on suppliers of equipment to make bio-fuels or to improve efficiency in vehicles.

Shares of India's Praj Industries, a supplier of ethanol-making equipment, have almost tripled this year on orders from local sugar mills as the government revived a plan to sell ethanol-blended petrol. Japan, China and Thailand are also promoting ethanol.

Rising sales of so-called hybrid vehicles such as Toyota's Prius that use less petrol are encouraging investment in suppliers of the hybrid technology.

Yasuda Asset Management's Masaki Iso is looking to buy stock in Neomax, which produces magnets used in the generators of hybrids, and in Fuji Electric Holdings, maker of semiconductors for the vehicles.

"Higher oil prices have bolstered the potential for hybrid cars because of the need for better fuel efficiency," Mr Iso said.

"The market potential for hybrid cars is huge."

Neomax shares are up 49 per cent this year. Fuji Electric has gained 46per cent this year and is up 20 per cent in the second half.

"We have to hunt for alternatives as the traditional oil stocks run up," Deutsche Bank Sydney's Thomas Murphy said.