HEXZA, Ethanol, Nipah Palm

Reader "kent" sent an interesting comment yesterday that:

"A few weeks ago star newspaper published an article that a Malaysian Company with the Perak State Government has patented a procedure to make ethanol from Nipah Palm. They apparently have commenced construction of the production plants and are aiming for a target production of 8 to 9 billion litres of ethanol in 2009.Surely this is bearish for Hexza?"

Actually, I'm not so sure if it should rationally be bearish, although interestingly, the share price did drop from $0.695 on Apr 10, to $0.655 on Apr 19, before recovering. I found an article from Star Online dated 10 April, which might shed more light. As usual, I will highlight a few key words/phrases with my comments below.

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Tuesday April 10, 2007
Malaysian company says bio-fuel from nipah can help halt global warming
KUALA LUMPUR: A Malaysian government-backed company claimed Tuesday it has found a new source of energy to replace fossil fuels - ethanol from nipah palm trees that it believes can help stop global warming.
Pioneer Bio Industries Corp. said it is building the world's first refinery to commercially produce ethanol from the short palm trees, found in equatorial countries, that could fuel everything from automobiles to power plants.
Pioneer says the nipah palm sap will be used in a patented process to make ethanol, which produces virtually none of the carbon emissions blamed for the climate-changing greenhouse effect and ozone depletion.
"This is a new energy source to save the world, to tackle global warming,'' Pioneer Chairman Badrul Shah Mohamad Noor told reporters.
The company envisions a fuel of the future that would be 85 percent nipah ethanol and 15 percent gasoline, he said, thereby greatly reducing dependence on fossil fuels.
With a production capacity of 100 million imperial gallons (450 million liters), the refinery in the northern state of Perak will go on stream by the end of 2008, Badrul Shah said. Pioneer plans to build 15 such refineries across Malaysia.
Badrul Shah said nipah ethanol is an better alternative to ethanol produced from palm trees, sugarcane, corn, cassava and other plants because ethanol from those sources eats into food production and raises their prices.
Nipah palm trees are not a food source and its sap can be drained every day without the need to harvest the plants.
"The plant will live for 50 years. We just have to collect its sap,'' he said.
He said Pioneer has received an order worth more than US$66 billion (euro50 billion) from one of the biggest trading companies in the world to buy its ethanol from 2009 to 2013.
Badrul Shah refused to identify the company, saying details would be announced at a later date.
The size of the order could not be independently confirmed.
The Malaysian government has given Pioneer the right to harvest nipah palm trees on 10,000 hectares (24,710 acres) of land in Perak.
That is enough to run 15 refineries for five years, and there are millions of hectares of nipah palm trees growing in the wild in the wetlands along the coast and on Borneo island that can produce enough fuel to "replace the entire fossil fuel needs of the world,'' Badrul Shah said.
Pioneer has taken an international patent on the process of producing ethanol from nipah palm tree, which was perfected over five years by 16 Malaysian scientists commissioned by Badrul Shah, a businessman with interests in construction and services.
Currently, ethanol accounts for only 2 percent of the total global fuel consumption.
Also, the demand for food-based ethanol has been blamed for deforestation as trees are being cut down for plantations. - AP


Quick Comments:
1. My impression from the above is that Pioneer's new product seems quite different than HEXZA's, even though both are "ethanol".
2. HEXZA's ethanol seems to be for non-biofuel uses (e.g. Kaoling wine, or food), whereas Pioneer's ethanol seem to be totally "biofuel based".
3. Apparently, Pioneer has already found a buyer for the years 2009-2013 in Europe. The demand for HEXZA's ethanol seems to be brought on more from China. So, the 2 target markets seems different to me.
4. From investor's perspective, it is more important to assess the impact on HEXZA's future earnings. To me, it is not clear if Pioneer will impact HEXZA's earnings over the next 6 years (2007 to 2013). I am inclined to dismiss it as "nil/negligible".
5. Also, HEXZA (at $0.715 closing last week) only trades at a P/E of 3.9. The margin of safety is still quite large (even in the present competitive market).
6. At this point in time, I think it is premature to be concerned about Pioneer. My advice would be to continue to monitor HEXZA's quarterly results.