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Sino Clean Energy: A Closer Look

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

BEIJING (TheStreet) -- Earlier this year, when I visited Sino Clean Energy (SCEI), the stock was trading below $7 on volume as low as 40,000 shares. It seemed that there was simply no awareness of the stock. Since then, shares have plunged by 70% due to short seller allegations of fraud -- on Friday, volume exceeded 3 million shares.

SCEI's product, coal water slurry fuel ("CWSF"), has the potential to be a wonder fuel due to its ease of transportation, low waste residue and environmental benefits. I think it is an incredible product with huge potential in China. However, my visit to SCEI ultimately did not lead to an investment.

First, the facility was surprisingly small. The main production line is simply a small mixer (picture a cement truck) which is fed coal by a small conveyor belt. This did not seem consistent with the company's stated capacity of 850,000 tons.

The author at the SCEI facility

Second, the process was surprisingly "low-tech." Coal is simply ground up and mixed with water and a catalyst. Given that the process is so simple and that there are more than 40 commercial suppliers in China, I could not quite understand how it is possible for the product to generate net margins of roughly 45%. I had previously been under the assumption that this had to be the result of a more complicated high-tech process, creating a strong barrier to entry.

Third, although I was present at what should have been the busiest time of the year for SCEI, activity was surprisingly low. Only one production line was running and during my several hours at the facility, I only saw one truck enter and leave. I did visit and interview two customers, who confirmed use of SCEI as a supplier, as well as their satisfaction with the product and with SCEI. I also interviewed the truck driver who stated he makes daily fill-ups for delivery in the vicinity. We did not have any discussion of night time fill-ups and deliveries, so I can't confirm or refute management's recent statements about night time activity.

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