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China Natural Gas Reports Third Quarter 2008 Financial Results

November 12, 2008

NEW YORK, Nov. 12 /PRNewswire-FirstCall/ — China Natural Gas, Inc. (OTC Bulletin Board: CHNG), one of the leading providers of pipeline natural gas for industrial, commercial and residential use and compressed natural gas (CNG) for vehicular fuel in Xi’an, China, today announced its third quarter financial results for the period ended September 30, 2008.

   Financial Highlights for the Third Quarter 2008:   -- Revenue increased 102.7% year over year to $18.4 million   -- Gross profit increased 119.7% year over year to $9.5 million   -- Income from operations increased 173.2% year over year to $6.4 million   -- Net income of $5.1 million, or $0.18 per diluted share   -- Non-GAAP net income of $5.2 million, or $0.18 per diluted share    

Mr. Qinan Ji, Chairman and CEO of China Natural Gas, stated, “We are pleased to share our third quarter results with our investors. Despite the non-cash interest expenses incurred in the third quarter, our net income increased 161.8% year over year and 46.2% from the second quarter of 2008. The strong performance speaks to the strength of our business as well as the favorable market environment. In the third quarter, we continued to expand our CNG filling station network. As of September 30, 2008, we had a total of 35 stations, with 23 located in Shaanxi Province and 12 in Henan Province. We have also added 1,107 residential, industrial and commercial pipeline customers since the end of the second quarter of 2008.”

Mr. Ji continued, “As planned, we invested approximately $6.9 million in equipment and consulting fees related to our LNG project in the third quarter. We also continued to upgrade our management team with the appointment of Mr. Richard Wu, our new CFO. We remain optimistic about the future and believe we have the right management team in place to continue our expansion.”

Revenue for the third quarter was $18.4 million, an increase of $9.3 million, or 102.7%, from $9.1 million in the third quarter of 2007. The significant increase in revenue was due primarily to an additional 15 CNG filling stations and a year over year increase in residential, industrial and commercial pipeline customers to 92,984 from 83,979.

Revenue from sales of natural gas increased 103.2% to $15.4 million from $7.6 million in the prior year’s period and contributed approximately 83.4% of revenue performance in the third quarter of 2008, consistent with 81.7% in the second quarter of 2008 and 83.2% in the third quarter of 2007. Revenue from installation and other businesses increased 100.1% to $3.0 million, or 16.6% of total revenue, from $1.5 million in the third quarter of 2007.

Gross profit increased 119.7% to $9.5 million in the third quarter of 2008 from $4.3 million in the third quarter of 2007. Gross margin was 51.6% in the third quarter of 2008, compared with 45.4% in the second quarter of 2008 and 47.6% in the prior year’s period. Gross margin performance reflects the higher margin revenue generated from the natural gas sales in the Henan province. In July 2008, the Company renewed its supply contract in Henan to purchase natural gas at a price of RMB 1.0 per cubic meter, compared with RMB 1.55 per cubic meter previously.

In the third quarter of 2008, operating income increased 173.2% to $6.4 million from $2.4 million in the third quarter of 2007. Operating expenses in the third quarter of 2008 increased 56.0% to $3.1 million from $2.0 million the year before. This increase reflected larger business operations involving 35 CNG filling stations during the third quarter of 2008, as well as ongoing selling-related expenses. Meanwhile, general and administrative expense decreased by 5.8% year over year to $968,000 as a result of benefits of economy of scale over centralized corporate functions and the Company’s cost control efforts. Operating margin was 34.9% in the third quarter of 2008, compared with 29.9% in the second quarter of 2008 and 25.9% in the prior year’s period, reflecting higher gross margin offset by higher operating expenses associated with a larger sales force.

During the first quarter of 2008, the Company began to recognize non-cash non-operating expenses for the amortization of debt discount and deferred offering costs related to the 5.0% Guaranteed Senior Notes (“Notes”) issued to Abax Lotus in January and March 2008. In the third quarter of 2008, these non-cash non-operating expenses were $119,938, or less than $0.01 per diluted share.

Net income for the third quarter of 2008 was $5.1 million, or $0.18 per diluted share. Excluding the impact of the non-cash expenses explained above, net income would have been $5.2 million or $0.18 per diluted share, compared with $2.0 million, or $0.07 per diluted share, in the third quarter of 2007. (Please refer to the non-GAAP reconciliation table included in this press release.)

Balance Sheet

As of September 30, 2008, the Company had $20.4 million in cash and cash equivalents on hand, compared with $29.2 million as of June 30, 2008 and $41.3 million as of March 31, 2008.

Guidance

Please note that financial guidance excludes the impact of interest charges, amortization and other costs associated with the Company’s 5.0% Guaranteed Senior Notes due 2014 in an aggregate principal amount of $40 million and warrants representing the right to purchase 2,900,000 shares of the Company’s common stock to Abax Lotus Ltd.

Today the Company raised its full year 2008 revenue and net income expectations. The Company now anticipates year over year revenue growth in 2008 to be 92%, bringing total revenue for the year to $68 million. This expectation is up from prior guidance of year over year revenue growth of 70%, or approximately $60.2 million for the year 2008.

The Company now anticipates year over year net income growth in 2008 to be 77%, bringing total net income for the year to approximately $16 million. This expectation is up from prior guidance of year over year net income growth of 70%, or approximately $15.4 million for the year 2008.

Conference Call

China Natural Gas management team will hold a conference call on Thursday, November 13, 2008, at 8:00 am ET to discuss its third quarter 2008 results. Listeners may access the call by dialing 1-888-206-4835 or 1-913-312-0710 for international callers. A webcast will also be available via the Company’s website at http://www.naturalgaschina.com/.

A replay of the call will be available through November 20, 2008. Listeners may access the replay by dialing 1-888-203-1112 or 1-719-457-0820 for international callers, access code: 4859321.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for earnings that exclude the effect of non-cash non-operating expense of $119,938 related to the Senior Notes issued in January and March 2008. China Natural Gas’ management uses those non-GAAP financial measures when it internally evaluates the performance of business and makes operating decisions, including internal budgeting and performance measurement. China Natural Gas believes that providing the non-GAAP measures is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand China Natural Gas’ financial performance in comparison to historical periods, and it allows investors to evaluate China Natural Gas’ performance using the same methodology and information as that used by China Natural Gas’ management. However, investors need to be aware that non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure.

The Company has provided a reconciliation table of the non-GAAP measure to the equivalent GAAP measure.

About China Natural Gas, Inc.

China Natural Gas, Inc., (“CHNG”), is the first China-based natural gas retailing company publicly traded in the U.S. It currently owns and operates a network of CNG retail filling stations as well as a 120 kilometer long compressed natural gas pipeline in Xi’an, China. Xi’an is a fast growing Chinese city supported by a population of approximately eight million and is the “gateway” to the broad Western regions of China. CHNG currently retails natural gas at company-owned filling stations, delivers natural gas services to residential, commercial and industrial customers, and converts gasoline- fueled vehicles to hybrid (natural gas/gasoline) powered vehicles. Currently it is estimated that there are 5,000 buses and 20,000 taxis using CNG in Xi’an.

This press release contains forward-looking statements regarding revenue and net income growth and our LNG processing and distribution plant. Words such as “anticipates,”"expects,”"intends,”"plans,”"targets,”"projects,”"believes,”"seeks,”"estimates” and similar expressions are intended to identify such forward-looking statements. These statements are based on the current expectations or beliefs of China Natural Gas, Inc. management; are not guarantees of future performance; are difficult to predict and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements, including the fluctuation of natural gas prices, demand for natural gas, the availability of natural gas supplies, changes in governmental regulations and/or economic policies, civil unrest, weather and general economic conditions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. Unless legally required, CHNG undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

                  CHINA NATURAL GAS, INC. AND SUBSIDIARIES      CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME      FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007                                (Unaudited)                            Three months ended        Nine months ended                              September 30              September 30                            2008         2007        2008         2007      Revenue       Natural gas        revenue          $15,354,461  $7,555,131  $40,494,646  $19,243,968       Installation and        other              3,046,739   1,522,958    8,822,714    4,851,006          Total revenue    18,401,200   9,078,089   49,317,360   24,094,974      Cost of revenue       Natural gas cost    6,973,035   4,020,039   20,369,778    9,975,932       Installation and        other              1,935,798     738,211    5,700,976    2,138,734          Total cost of          revenue          8,908,833   4,758,250   26,070,754   12,114,666      Gross profit          9,492,367   4,319,839   23,246,606   11,980,308      Operating expenses       Selling             2,098,343     939,496    5,008,631    2,216,048       General and        administrative       968,169   1,028,197    2,947,494    1,710,459          Total operating          expenses         3,066,512   1,967,693    7,956,125    3,926,507      Income from      operations           6,425,855   2,352,146   15,290,481    8,053,801      Non-operating      income (expense):       Interest income        13,536      23,831      120,297       41,570       Interest expense     (212,774)          -   (1,249,003)         -       Other income        (expense)            (55,391)     31,148     (118,948)      39,504          Total non-          operating          income          (expense)         (254,629)     54,979   (1,247,654)      81,074      Income before      income tax           6,171,226   2,407,125   14,042,827    8,134,875      Provision for      income tax           1,034,636     445,463    2,584,774    1,317,878      Net income            5,136,590   1,961,662   11,458,053    6,816,997      Other comprehensive      income       Foreign currency        translation gain     756,316     455,308    4,554,040    1,320,878     Comprehensive      Income              $5,892,906  $2,416,970  $16,012,093   $8,137,875      Weighted average      shares outstanding       Basic              29,200,304  27,122,196   29,200,304   25,191,521       Diluted            29,279,590  27,286,286   29,316,837   25,223,465      Earnings per share       Basic                   $0.18       $0.07        $0.39        $0.27       Diluted                 $0.18       $0.07        $0.39        $0.27                     CHINA NATURAL GAS, INC. AND SUBSIDIARIES                        CONSOLIDATED BALANCE SHEETS               AS OF SEPTEMBER 30, 2008 and DECEMBER 31, 2007                                        September 30, 2008 December 31, 2007                                           (Unaudited)                                    ASSETS   CURRENT ASSETS:     Cash & cash equivalents                  $20,384,702       $13,291,729     Short-term investments                           -             238,554     Accounts receivable                        1,622,508           306,179     Other receivable-employee advances           865,800           549,820     Inventories                                  445,420           231,339     Advances to suppliers                      1,226,341           663,041     Prepaid expense and other current      assets                                      891,255           109,722     Loan receivable                                  -             274,200      Total current assets                     25,436,026        15,664,584    PROPERTY AND EQUIPMENT, net                 55,153,057        32,291,995   CONSTRUCTION IN PROGRESS                    19,410,492         2,210,367   DEFERRED FINANCING COSTS                     1,849,288               -   OTHER ASSETS                                10,278,250         3,123,052      TOTAL ASSETS                            $112,127,113       $53,289,998    LIABILITIES AND STOCKHOLDERS' EQUITY    CURRENT LIABILITIES:     Accounts payable and accrued      liabilities                                $715,890          $487,710     Other payables                                98,090            55,979     Unearned revenue                             384,745           327,220     Accrued interest                             350,002               -     Taxes payable                              1,911,550         1,211,775      Total current liabilities                 3,460,277         2,082,684    LONG-TERM LIABILITIES:     Notes payable, net of $16,104,432      discount                                 23,895,568               -     Derivative liabilities - warrants         17,500,000               -      Total long-term liabilities              41,395,568               -    COMMITMENTS AND CONTINGENCIES                      -                 -    STOCKHOLDERS' EQUITY:     Preferred stock, $0.0001 per      share; authorized 5,000,000      shares; none issued                             -                 -     Common stock, $0.0001 per share;      45,000,000 authorized shares      29,200,304 shares issued and       outstanding at September 30,       2008      and December 31, 2007                         2,920             2,920     Additional paid-in capital                32,098,740        32,046,879     Accumulative other comprehensive      gain                                      8,031,065         3,477,025     Statutory reserves                         3,228,224         1,802,735     Retained earnings                         23,910,319        13,877,755      Total stockholders' equity               67,271,268        51,207,314      TOTAL LIABILITIES AND      STOCKHOLDERS' EQUITY                   $112,127,113       $53,289,998                      CHINA NATURAL GAS, INC. AND SUBSIDIARIES                RECONCILIATION OF GAAP TO NON-GAAP MEASURES           FOR THE THREE MONTHS ENDED September 30, 2008 AND 2007                                (Unaudited)                                                      Three months ended                                                        September 30                                                   2008              2007       GAAP Net income                            5,136,590         1,961,662      Add:           Amortization of discount on            senior notes (after tax            effect)                                 79,508               -           Amortization of deferred            offering costs (after tax            effect)                                 20,316               -      Adjusted Net Income (Excludes all       non-cash items)                           5,236,414         1,961,662      *Assume an effective tax rate of       16.77%        Weighted average shares outstanding           Basic                                29,200,304        27,122,196           Diluted                              29,279,590        27,286,286        GAAP Basic EPS                                 $0.18              0.07      Add:           Amortization of discount on            senior notes                            0.0027               -           Amortization of deferred            offering costs                          0.0007               -      Adjusted Basic EPS                             $0.18              0.07       GAAP Diluted EPS                               $0.18              0.07      Add:           Amortization of discount on            senior notes                            0.0027               -           Amortization of deferred            offering costs                          0.0007               -      Adjusted Diluted EPS                           $0.18              0.07  

China Natural Gas, Inc.

CONTACT: Ashley Ammon, ICR, Inc., (US) +1-203-682-8200,Ashley.ammon@icrinc.com, or Wei-Jung Yang, (China) +86-8523-3088,Weijung.yang@icrinc.com, both for China Natural Gas

Web site: http://www.naturalgaschina.com/




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