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China Natural Gas Announces Third Quarter 2011 Financial Results

November 14, 2011

XI’AN, China, Nov, 14, 2011 /PRNewswire-Asia/ — China Natural Gas, Inc. (“China Natural Gas” or the “Company”) (Nasdaq: CHNG), a leading provider of compressed natural gas (CNG) for vehicular fuel and pipeline natural gas for industrial, commercial and residential use in Xi’an, China, today announced its financial results for the third fiscal quarter ended September 30, 2011.

Qinan Ji, Chairman of China Natural Gas, Inc. commented: “We are pleased to share the results of our third quarter, as we believe that they demonstrate continued progress in our sector and geographic growth and forward strategic objectives. The company has successfully commenced commercial production of its Jingbian liquefied natural gas (“LNG”) plant and material revenue has been realized from the sale of LNG in the third quarter, which represents a key milestone in its corporate history.

Our network of compressed natural gas, or CNG, fueling stations currently contains 38 stations, a significant presence in the markets we operate in. Our outlook for the fourth quarter of the year is promising as we continue to grow our business, and we look forward to sharing any future developments as they materialize.”

Third Quarter 2011 Financial and Operating Results

Revenues in the third quarter of 2011 increased by 65.3% to $36.9 million from $22.33 million in the third quarter of 2010, mainly driven by the realization of revenue from the sale of liquefied natural gas, or LNG, which started in July 2011. Natural gas revenue from our fueling stations in the third quarter of 2011 increased by 25.7% to $19.73 million from $15.7 million in the third quarter of 2010, mainly because the average unit selling price per cubic meter increased to $0.48 (RMB 3.13) from $0.38 (RMB 2.54), net of VAT, due to the increase in the sales prices of our natural gas in Shaanxi and Henan Provinces based on regulatory changes implemented by the PRC government during the fourth quarter of 2010. Natural gas revenue from our pipelines in the third quarter of 2011 decreased by 22.6% to $1.66 million from $2.14 million in the third quarter of 2010, primarily due to the fact that the compressor station in Makou, which started to contribute revenue in August 2010, did not operate at full capacity due to an electricity quota limit set by the local government for the three months ended September 30, 2011. Our LNG production facility in Jingbian County, Shaanxi Province started operation in July 2011. Revenue from LNG was $10.84 million in the third quarter of 2011. Gasoline revenue in the third quarter of 2011 decreased to $1.51 million, down by 20.8% from $1.9 million in the same period of the prior year, which was mainly attributable to the closing of four out of eight gasoline fueling stations of ours during the fourth quarter of 2010 and the second quarter of 2011. Installation and other services revenue increased by 22.3% year-over-year to $3.16 million in the third quarter of 2011 from $2.59 million in the comparable period of 2010. In the third quarter of 2011, sales of natural gas, gasoline, and installation and other services contributed 87.3%, 4.1%, and 8.6% of the total revenues, respectively.

Gross profit in the third quarter of 2011 increased by 51.0% to $14.18 million, from $9.39 million in the same period of the prior year. Gross margin in the third quarter of 2011 was 38.4%, compared to 42.1% a year ago. The increase in gross profit was consistent with the increase in sales revenues. Gross margin decreased primarily due to lower gross margin level of our LNG business, as compared to the gross margins of those business lines making greatest contribution to revenues, and the growth rate of sales price of natural gas products being lower than that of purchase costs of natural gas.

Operating income in the third quarter of 2011 was approximately $7 million, an increase of 75.2% year-over-year from approximately $4 million in the third quarter of 2010. The change was primarily attributable to the realization of the revenue of LNG, which started in July 2011.

Income tax expense was $1,529,451 for an effective tax rate of 25.2%, as compared to an effective tax rate of 18.9% in the third quarter of 2010.

Net income in the third quarter of 2011 increased by 26.8% to $4.55 million, from $3.58 million in the third quarter of 2010. Net margin decreased to 12.3% during the three months ended September 30, 2011 from 16.1% during the three months ended September 30, 2010. Earnings per share was $0.21 per diluted share in the third quarter of 2011 compared to 0.17 in the same period of 2010.

As of September 30, 2011, the Company had $11.21 million in cash and cash equivalents, compared to $10.05 million in cash and cash equivalents at December 31, 2010. The increase was primarily attributable to the decrease in investments in construction in progress of the LNG project.

Net cash provided by operating activities was $15.75 million for the nine months ended September 30, 2011, compared to net cash provided by operations of $13.53 million for the nine months ended September30, 2010. The increase was primarily due to the increase in unearned revenue, the increase in accounts payable and accrued liabilities, and adjustments for non-cash expense items.

Conference Call

Management will hold a conference call on Tuesday, November 15, 2011 at 8:30 a.m. EST (5:30 a.m. PST) to discuss financial results from its third quarter ended September 30, 2011.

To participate in the call please dial 1-800-860-2442, or 1 412-858-4600 for international calls, approximately 10 minutes prior to the scheduled start time.

A replay of the call will be available 1 hour after the end of the conference through 9:30 a.m. November 15, 2011, EST. The number for the replay is 1-877-344-7529 or 1-412-317-0088 for international calls; the pass code for the replay is 10006741.

About China Natural Gas, Inc.

China Natural Gas ( http://www.naturalgaschina.com ) transports and sells natural gas to vehicular fueling terminals, as well as commercial, industrial and residential customers through its distribution networks in China’s Shaanxi and Henan Provinces. The Company owns approximately 120 km of high-pressure pipelines and operates 26 CNG fueling stations in Shaanxi Province and 12 CNG fuelling stations in Henan Province. China Natural Gas’ four primary business lines include: (1) the distribution and sale of CNG through Company-owned CNG fueling stations for hybrid (natural gas/gasoline) powered vehicles; (2) the installation, distribution and sale of piped natural gas to residential, commercial and industrial customers through Company-owned pipelines; (3) the distribution and sale of gasoline through Company-owned CNG fueling stations for hybrid (natural gas/gasoline) powered vehicles; (4) the conversion of gasoline-fueled vehicles to hybrid (natural gas/gasoline) powered vehicles through its auto conversion division; and (5) Production and sale of LNG through the Company’s LNG production facility.

SAFE HARBOR: FORWARD-LOOKING STATEMENTS

This press release includes statements that may constitute forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar statements. For example, statements about the future plans and goals of the JV with CNPC and its prospects are forward looking and subject to risks. China Natural Gas, Inc. may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission on forms 10-K, 10-Q and 8-K, in its annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to fourth parties. Statements that are not historical facts, including statements about the Company’s beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Potential risks and uncertainties include, but are not limited to, risks outlined in the Company’s filings with the U.S. Securities and Exchange Commission, including its registration statements on Forms S-1 and S-3, in each case as amended. The Company does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

This release is not an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration. Any public offering of securities to be made in the United States will be made by means of a prospectus that may be obtained from the issuer or selling security holder and that will contain detailed information about the company and management, as well as financial statements.


             CHINA NATURAL GAS, INC. AND SUBSIDIARIES
              CONDENSED CONSOLIDATED BALANCE SHEETS
                           (Unaudited)
                                       September
                                            30,            December 31,
                                                2011                  2010

                                  ASSETS
                                  ------
    CURRENT ASSETS:
    Cash and cash equivalents            $11,213,236           $10,046,249
    Accounts receivable, net               2,023,046             1,821,595
    Other receivables                        539,521               188,364
    Employee advances                        287,279               302,532
    Inventories                            2,085,768               815,884
    Advances to suppliers                  6,928,676             8,434,995
    Prepaid expense and other
     current assets                        4,540,379             4,249,353
                                           ---------             ---------
    Total current assets                  27,617,905            25,858,972

    Investment in unconsolidated
     joint ventures                        1,565,000             1,517,000
    Property and equipment, net          175,431,253            82,769,171
    Construction in progress              39,965,531           116,569,871
    Deferred financing cost, net             619,792               927,166
    Other assets                          30,750,525            19,806,375
                                          ----------            ----------
    TOTAL ASSETS                        $275,950,006          $247,448,555
                                        ============          ============

                   LIABILITIES AND STOCKHOLDERS' EQUITY
                   ------------------------------------

    CURRENT LIABILITIES:
    Notes payable -current
     maturities                           $7,529,330            $2,551,306
    Long-term debt - current
     portion                               4,695,000                     -
    Accounts payable and accrued
     liabilities                           7,563,468             5,428,669
    Other payable - related party            782,500                     -
    Short-term borrowing -
     related party                         2,319,945                     -
    Unearned revenue                       5,671,402             2,376,563
    Accrued interest                         532,495               646,528
    Taxes payable                          2,921,975             2,377,765
                                           ---------             ---------
    Total current liabilities             32,016,115            13,380,831

    LONG-TERM LIABILITIES:
    Notes payable, net of current
     portion                              22,587,989            28,064,363
    Long-term debt                        14,085,000            18,204,000
    Derivative liabilities -
     warrants                             17,500,285            17,752,066
                                          ----------            ----------
    Total long-term liabilities           54,173,274            64,020,429
                                          ----------            ----------
    Total liabilities                     86,189,389            77,401,260
                                          ----------            ----------

    COMMITMENTS AND CONTINGENCIES

    STOCKHOLDERS' EQUITY:
     Preferred stock, par value
      $0.0001 per share,
      50,000,000 authorized, none
      issued and outstanding                       -                     -
    Common stock, par value
     $0.0001 per share,
     45,000,000 authorized,
     21,458,654 and 21,321,904
     issued and outstanding at
     September 30, 2011 and
     December 31,2010,
     respectively                           2,145            2,132
    Additional paid-in capital            82,761,447            81,611,763
    Accumulated other
     comprehensive income                 22,806,158            15,667,145
    Statutory reserves                     9,579,928             7,918,634
    Retained earnings                     74,610,939            64,847,621
                                          ----------            ----------
    Total stockholders' equity           189,760,617           170,047,296
                                         -----------           -----------
    TOTAL LIABILITIES AND
     STOCKHOLDERS' EQUITY               $275,950,006          $247,448,555
                                        ============          ============


              CHINA NATURAL GAS, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
                        COMPREHENSIVE INCOME
                             (Unaudited)
                       Three Months Ended      Nine Months Ended
                          September 30,          September 30,
                          -------------          -------------
                           2011               2010         2011         2010
                           ----               ----         ----         ----
    Revenues
      Natural gas   $32,225,481        $17,836,178  $74,859,041  $49,540,810
      Gasoline        1,508,657          1,904,357    4,790,207    5,407,013
    Installation
     and others       3,163,237          2,585,939    8,669,404    7,881,073
                      ---------          ---------    ---------    ---------
                     36,897,375         22,326,474   88,318,652   62,828,896
                     ----------         ----------   ----------   ----------

    Cost of
     revenues
      Natural gas    19,893,643          9,904,265   44,863,543   26,126,909
      Gasoline        1,461,302          1,798,825    4,588,735    5,076,397
    Installation
     and others       1,363,506          1,234,189    3,736,054    3,525,895
                      ---------          ---------    ---------    ---------
                     22,718,451         12,937,279   53,188,332   34,729,201
                     ----------         ----------   ----------   ----------

    Gross profit     14,178,924          9,389,195   35,130,320   28,099,695
                     ----------          ---------   ----------   ----------

    Operating
     expenses
      Selling         4,667,132          3,663,654   12,288,465    9,610,436
    General and
     administrative   2,513,296          1,732,058    7,276,052    5,463,580
                      ---------          ---------    ---------    ---------
                      7,180,428          5,395,712   19,564,517   15,074,016
                      ---------          ---------   ----------   ----------

    Income from
     operations       6,998,496          3,993,483   15,565,803   13,025,679
                      ---------          ---------   ----------   ----------

    Non-
     operating
     income
     (expense):
      Interest
       income            12,403             49,403       28,323      398,790
      Interest
       expense         (465,236)                 -     (469,902)           -
    Other
     (expense)
     income, net        (62,059)           (18,914)      25,806       24,624
    Change in
     fair value
     of warrants         11,971            449,820      251,781    1,508,003
    Foreign
     currency
     exchange
     loss              (421,031)           (54,167)    (428,079)     (96,942)
                       --------            -------     --------      -------
                       (923,952)           426,142     (592,071)   1,834,475
                       --------            -------     --------    ---------

    Income
     before
     income tax       6,074,544          4,419,625   14,973,732   14,860,154

    Provision
     for income
     tax              1,529,451            834,783    3,549,122    2,719,539
                      ---------            -------    ---------    ---------

    Net income        4,545,093          3,584,842   11,424,610   12,140,615

    Other
     comprehensive
     income
    Foreign
     currency
     translation
     gain             2,696,721          3,302,747    7,139,013    4,061,751
                      ---------          ---------    ---------    ---------
     Comprehensive
     income          $7,241,814         $6,887,589  $18,563,623  $16,202,366
                     ----------         ----------  -----------  -----------

    Weighted
     average
     shares
     outstanding
    Basic            21,458,654         21,321,904   21,403,052   21,251,882
                     ----------         ----------   ----------   ----------
    Diluted          21,458,654         21,422,527   21,403,052   21,532,612
                     ----------         ----------   ----------   ----------

    Earnings per
     share
    Basic                 $0.21              $0.17        $0.53        $0.57
                          -----              -----        -----        -----
    Diluted               $0.21              $0.17        $0.53        $0.56
                          -----              -----        -----        -----


                CHINA NATURAL GAS, INC. AND SUBSIDIARIES
             CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Unaudited)

                                           For the Nine Months Ended
                                                 September 30,
                                               2011                  2010
                                               ----                  ----

    Net income                          $11,424,610           $12,140,615

      Adjustments to reconcile net
       income to net cash
      provided by operating
       activities:

       Depreciation and amortization      6,271,846             4,798,446
       Provision for doubtful accounts        6,759               129,167

       Gain on disposal of equipment         (3,366)                    -
       Stock-based compensation             479,622             1,075,315
       Change in fair value of
        warrants                           (251,781)           (1,508,003)
       Change in assets and
        liabilities:
        Accounts receivable                (148,404)             (200,764)
        Other receivables                  (339,992)              561,238
        Employee advances                    24,019                40,640
        Inventories                      (1,011,663)              (82,178)
        Advances to suppliers            (5,863,429)           (1,993,592)
        Prepaid expense and other
         current assets                    (313,404)           (2,778,533)
        Accounts payable and accrued
         liabilities                      1,953,199             1,708,603

        Unearned revenue                  3,171,096               363,203
        Accrued interest                   (114,033)             (650,637)
        Taxes payable                       461,903               (69,060)
                                            -------               -------
    Net cash provided by operating
     activities                          15,746,982            13,534,460
                                         ----------            ----------

    CASH FLOWS FROM INVESTING
     ACTIVITIES:

       Payment for acquisition of
        property and equipment           (6,568,845)           (6,557,183)
       Proceeds from sales of property
        and equipment                        16,896                     -
       Loan to related party                      -            (9,858,240)
       Loans to third party                       -            (4,401,000)
       Repayment of loan receivable-
        related party                             -             9,858,240
       Repayment of loans receivable-
        third party                               -             4,695,200
       Additions to construction in
        progress                         (7,884,773)          (22,433,455)
       Prepayment on long-term assets      (805,522)           (8,323,603)
       Payment for acquisition of
        business                                  -            (3,648,080)
       Return of acquisition deposit              -             1,618,100
       Payment for intangible assets       (189,327)           (4,882,939)
       Payment for land use rights                -            (1,765,200)
                                                ---            ----------

    Net cash used in investing
     activities                        (15,431,571)           (45,698,160)
                                        -----------           -----------

    CASH FLOWS FROM FINANCING
     ACTIVITIES:
       Proceeds from exercise of stock
        options                             670,075               676,200
       Proceeds from short-term debt
        and other payable, related
        parties                           3,090,647             1,323,900
       Proceeds from long-term debt               -            17,652,000
       Repayment of senior notes         (3,333,334)                    -
                                         ----------                   ---

    Net cash provided by financing
     activities                             427,388            19,652,100
                                            -------            ----------

    Effect of exchange rate changes
     on cash and cash equivalents           424,188               674,799
                                            -------               -------

    NET INCREASE (DECREASE) IN CASH
     & CASH EQUIVALENTS                   1,166,987           (11,836,801)
                                          ---------           -----------

    CASH AND CASH EQUIVALENTS,
     BEGINNING OF PERIOD                 10,046,249            48,177,794

    CASH AND CASH EQUIVALENTS, END
     OF PERIOD                          $11,213,236           $36,340,993
                                        ===========           ===========

    SUPPLEMENTAL DISCLOSURE OF CASH
     FLOW INFORMATION:
    Interest paid, including
     capitalized interest                $3,004,095            $2,629,926
                                         ==========            ==========
    Income taxes paid                    $3,142,069            $3,012,334
                                         ==========            ==========

    Non-cash transactions for
     investing and financing
     activities:
    Construction material
     transferred to construction in
     progress                            $6,210,629     $               -
    Construction in progress
     transferred to property and
     equipment                          $93,297,528            $4,143,807
    Construction in progress
     transferred to intangible
     assets                              11,611,672                     -
    Advances to suppliers
     transferred to construction in
     process                             $7,609,906     $               -

    Other assets transferred to
     construction in progress            $2,342,356           $15,924,502
    Capitalized interest -
     amortization of discount of
     notes payable and issuance
     cost                                $3,142,357            $2,731,695


    For more information,
     please contact:

    China Natural Gas, Inc.
    Bode Xu, CFO
    Phone: +86-29-8832-7391
    Cell: +86-158-2969-1287
    Email:
     bode.xu@naturalgaschina.com

    Jackie Shi
    Investor Relations
     Director
    Phone: +86-29-8832-3325
     x922
    Cell:  +86-139-9287-9998
    Email:
     yjshi@naturalgaschina.com

SOURCE China Natural Gas, Inc.


Source: PR Newswire