August 8, 2011

China Natural Gas Announces Second Quarter 2011 Financial Results

XI'AN, China, Aug. 8, 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 second fiscal quarter ended June 30, 2011.

Qinan Ji, Chairman and CEO of China Natural Gas, Inc. commented: "We are pleased to share the results of our second quarter, as we believe that they demonstrate continued progress toward our sector and geographic growth and forward integration objectives. The company has successfully commenced commercial production of its Jingbian liquefied natural gas ("LNG") plant on July 16, 2011, 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 second half of the year is promising as we continue to grow our business, and we look forward to sharing any future developments as they materialize."

Second Quarter 2011 Financial and Operating Results

Revenues in the second quarter of 2011 increased by 29.2% to $27.31 million from $21.14 million in the second quarter of 2010, driven by the increase in the average unit selling price per cubic meter of CNG (74.2% of our revenues was generated from the sale of CNG) from $0.37 to $0.48, as well as an increase in the number of residential and commercial pipeline customers. Natural gas sales grew by 37.4% year-over-year to $22.29 million, up from $16.22 million in the second quarter of 2010. Gasoline revenues in the second quarter of 2011 decreased to $1.97 million, down by 2.9% from $2.03 million in the same period of the prior year, which was mainly attributable to our closure of four out of our eight gasoline fueling stations during the fourth quarter of 2010. Installation and services revenue increased by 6.0% year-over-year to $3.05 million from $2.88 million in the comparable period of 2010. In the second quarter of 2011, sales of natural gas, gasoline, and installation and other services contributed 81.6%, 7.2%, and 11.2% of the total revenues, respectively.

Gross profit in the second quarter of 2011 increased by 16.8% to $11.23 million, from $9.62 million in the same period of the prior year. Gross margin in the second quarter of 2011 was 41.1%, compared to 45.5% a year ago. The increase in gross profit was consistent with the increase in sales revenues, although our gross profit margin decreased as described below. Gross margin decreased primarily due to our growth rate of sales revenue being lower than that of costs of revenue, which was primarily attributable to the material increase in average purchasing costs of natural gas.

Operating income in the second quarter of 2011 was $5.34 million, an increase of 14.9% year-over-year from $4.65 million in the second quarter of 2010. The change was primarily attributable to the increase in revenue and gross profit.

Income tax expense was $1,064,018 for an effective tax rate of 19.5%, as compared to an effective tax rate of 17.6% in the second quarter of 2010.

Net income in the second quarter of 2011 decreased 3.7% to $4.39 million, from $4.56 million in the second quarter of 2010. Net margin decreased to 16.1% during the three months ended June 30, 2011 from 21.6% during the three months ended June 30, 2010. EPS was $0.21 per diluted share in both the second quarter of 2011 and 2010.

As of June 30, 2011, the Company had $12.22 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 increase in unearned revenue, the reduction in advances to suppliers and the decrease in investments in construction in progress for the JBLNG project.

Net cash provided by operating activities was $12.72 million for the six months ended June 30, 2011, compared to net cash provided by operations of $10.88 million for the six months ended June 30, 2010. The increase was primarily due to the increase in unearned revenue and the reduction in prepaid expense and other current assets.

Conference Call

Management will hold a conference call on Wednesday, August 10, 2011 at 8:30 a.m. EDT (5:30 a.m. Pacific) to discuss its second quarter results.

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. Interested parties can also listen via a live Internet webcast, which can be found at the Company's website at http://www.naturalgaschina.com.

A replay of the call will be available 1 hour after the end of the conference through 9:00 a.m. August 18, 2011, EDT. The number for the replay is 1-877-344-7529 or 1-412-317-0088 for international calls. In addition, a recording of the call will be available via the company's website at http://www.naturalgaschina.com for one year.

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; and (4) the conversion of gasoline-fueled vehicles to hybrid (natural gas/gasoline) powered vehicles through its auto conversion division.

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)
                                                 June      December
                                                  30,           31,
                                                      2011          2010



                                     ASSETS
                                     ------
    CURRENT ASSETS:
      Cash and cash equivalents                $12,221,545   $10,046,249
      Accounts receivable, net                   2,712,502     1,821,595
      Other receivables                            312,331       188,364
      Employee advances                            305,415       302,532
      Inventories                                1,766,505       815,884
      Advances to suppliers                      1,429,156     8,434,995
      Prepaid expense and other
       current assets                            4,879,524     4,249,353
                                                 ---------     ---------
        Total current assets                    23,626,978    25,858,972

    Investment in unconsolidated
     joint ventures                              1,547,000     1,517,000
    Property and equipment, net                 93,983,731    82,769,171
    Construction in progress                   126,708,395   116,569,871
    Deferred financing cost, net                   722,250       927,166
    Other assets                                23,133,004    19,806,375
                                                ----------    ----------
    TOTAL ASSETS                              $269,721,358  $247,448,555
                                              ============  ============

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

    CURRENT LIABILITIES:
      Notes payable -current
       maturities                               $2,708,489    $2,551,306
      Long-term debt - current
       portion                                   4,641,000             -
      Accounts payable and accrued
       liabilities                               6,527,948     5,428,669
      Other payable -related party                 773,500             -
      Short-term borrowing -
       related party                             2,319,945             -
      Unearned revenue                           5,826,531     2,376,563
      Accrued interest                           1,010,229       646,528
      Taxes payable                              2,417,076     2,377,765
                                                 ---------     ---------
        Total current liabilities               26,224,718    13,380,831

    LONG-TERM LIABILITIES:
      Notes payable, net of current
       portion                                  29,793,495    28,064,363
      Long-term debt                            13,923,000    18,204,000
      Derivative liabilities -
       warrants                                 17,512,256    17,752,066
                                                ----------    ----------
        Total long-term liabilities             61,228,751    64,020,429
                                                ----------    ----------
         Total liabilities                      87,453,469    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                   2,145         2,132
           21,321,904 issued and
            outstanding at June 30, 2011
            and December 31,2010,
           respectively
      Additional paid-in capital                82,510,535    81,611,763
      Accumulated other
       comprehensive income                     20,109,437    15,667,145
      Statutory reserves                         8,968,479     7,918,634
      Retained earnings                         70,677,293    64,847,621
                                                ----------    ----------
        Total stockholders' equity             182,267,889   170,047,296
                                               -----------   -----------
    TOTAL LIABILITIES AND
     STOCKHOLDERS' EQUITY                     $269,721,358  $247,448,555
                                              ============  ============

                         CHINA NATURAL GAS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
                                   COMPREHENSIVE INCOME
                                        (Unaudited)
                                          Three Months Ended
                                               June 30,
                                               --------
                                             2011                2010
                                             ----                ----
    Revenues
      Natural gas                     $22,285,730         $16,221,003
      Gasoline                          1,974,377           2,033,840
      Installation and others           3,053,062           2,880,756
                                        ---------           ---------
                                       27,313,169          21,135,599
                                       ----------          ----------

    Cost of revenues
      Natural gas                      12,870,450           8,357,990
      Gasoline                          1,902,709           1,910,294
      Installation and others           1,308,916           1,251,783
                                        ---------           ---------
                                       16,082,075          11,520,067
                                       ----------          ----------

    Gross profit                       11,231,094           9,615,532
                                       ----------           ---------

    Operating expenses
      Selling                           4,041,412           3,054,992
      General and administrative        1,851,785           1,913,866
                                        ---------           ---------
                                        5,893,197           4,968,858
                                        ---------           ---------

    Income from operations              5,337,897           4,646,674
                                        ---------           ---------

    Non-operating income
     (expense):
      Interest income                       9,273             260,021
      Interest expense                          -                   -
      Other (expense) income,
       net                                 (9,091)             (3,031)
      Change in fair value of
       warrants                           123,630             665,115
      Foreign currency exchange
       loss                                (4,006)            (34,665)
                                           ------             -------
                                          119,806             887,440
                                          -------             -------

    Income before income tax            5,457,703           5,534,114

    Provision for income tax            1,064,018             973,611
                                        ---------             -------

    Net income                          4,393,685           4,560,503

    Other comprehensive income
          Foreign currency
           translation gain             2,993,637             797,858
                                        ---------             -------
    Comprehensive income               $7,387,322          $5,358,361
                                       ----------          ----------

    Weighted average shares
     outstanding
    Basic                              21,428,265          21,246,771
                                       ----------          ----------
    Diluted                            21,428,265          21,582,662
                                       ----------          ----------

    Earnings per share
    Basic                                   $0.21               $0.21
                                            -----               -----
    Diluted                                 $0.21               $0.21
                                            -----               -----


                                   Six Months Ended
                                       June 30,
                                       --------
                                        2011               2010
                                        ----               ----
    Revenues
      Natural gas                $42,633,560        $31,704,632
      Gasoline                     3,281,550          3,502,656
      Installation and others      5,506,167          5,295,134
                                   ---------          ---------
                                  51,421,277         40,502,422
                                  ----------         ----------

    Cost of revenues
      Natural gas                 24,969,900         16,222,644
      Gasoline                     3,127,433          3,277,572
      Installation and others      2,372,548          2,291,706
                                   ---------          ---------
                                  30,469,881         21,791,922
                                  ----------         ----------

    Gross profit                  20,951,396         18,710,500
                                  ----------         ----------

    Operating expenses
      Selling                      7,621,333          5,946,782
      General and administrative   4,762,756          3,731,522
                                   ---------          ---------
                                  12,384,089          9,678,304
                                  ----------          ---------

    Income from operations         8,567,307          9,032,196
                                   ---------          ---------

    Non-operating income
     (expense):
      Interest income                 15,920            349,387
      Interest expense                (4,666)                 -
      Other (expense) income,
       net                            87,865             43,538
      Change in fair value of
       warrants                      239,810          1,058,183
      Foreign currency exchange
       loss                           (7,048)           (42,775)
                                      ------            -------
                                     331,881          1,408,333
                                     -------          ---------

    Income before income tax       8,899,188         10,440,529

    Provision for income tax       2,019,671          1,884,756
                                   ---------          ---------

    Net income                     6,879,517          8,555,773

    Other comprehensive income
          Foreign currency
           translation gain        4,442,292            759,004
                                   ---------            -------
    Comprehensive income         $11,321,809         $9,314,777
                                 -----------         ----------

    Weighted average shares
     outstanding
    Basic                         21,375,085         21,215,337
                                  ----------         ----------
    Diluted                       21,377,407         21,619,989
                                  ----------         ----------

    Earnings per share
    Basic                              $0.32              $0.40
                                       -----              -----
    Diluted                            $0.32              $0.40
                                       -----              -----

                    CHINA NATURAL GAS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                            For the Six Months Ended June 30,
                                        2011                            2010
                                        ----                            ----

    CASH FLOWS FROM
     OPERATING
     ACTIVITIES:
    Net income                    $6,879,517                      $8,555,773


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

        Depreciation and
         amortization              3,744,657                       3,070,705
        Provision for
         doubtful accounts            20,810                          42,390


        Stock-based
         compensation                228,711                         867,096
        Change in fair
         value of warrants          (239,810)                     (1,058,183)
        Change in assets
         and liabilities:
         Accounts
          receivable                (866,852)                         76,830
         Other receivables          (118,999)                        658,742
         Employee advances             2,796                          50,142
         Inventories                (712,617)                          3,008
         Advances to
          suppliers                 (381,947)                       (782,495)
         Prepaid expense
          and other current
          assets                    (548,647)                     (2,594,001)
         Accounts payable
          and accrued
          liabilities                992,566                       1,470,528

         Unearned revenue          3,367,774                         459,057
         Accrued interest            363,701                         (79,987)
         Taxes payable                (7,632)                        141,433
                                      ------                         -------
    Net cash provided
     by operating
     activities                   12,724,028                      10,881,038
                                  ----------                      ----------

    CASH FLOWS FROM
     INVESTING
     ACTIVITIES:

        Payment for
         acquisition of
         property and
         equipment                (5,723,603)                     (6,260,885)
        Loan receivable                    -                     (14,259,240)
        Proceeds from loan
         receivable                        -                      14,552,620
        Additions to
         construction in
         progress                 (5,232,444)                    (14,317,621)
        Prepayment on
         long-term assets         (3,499,321)                     (6,520,371)
        Payment for
         acquisition of
         business                          -                      (3,637,912)
        Return of
         acquisition
         deposit                           -                       1,613,590
        Payment for
         intangible assets          (141,129)                     (4,869,242)
        Payment for land
         use rights                        -                      (1,147,360)
                                         ---                      ----------

    Net cash used in
     investing
     activities                  (14,596,497)                    (34,846,421)
                                 -----------                     -----------

    CASH FLOWS FROM
     FINANCING
     ACTIVITIES:
        Proceeds from
         exercise of stock
         options                     670,075                         676,201
        Proceeds from
         short-term debt
         and other
         payable, related
         parties              3,085,445                           -
        Proceeds from
         long-term debt                    -                      17,602,800
                                         ---                      ----------


    Net cash provided
     by financing
     activities                    3,755,520                      18,279,001
                                   ---------                      ----------

    Effect of exchange
     rate changes on
     cash and cash
     equivalents                     292,245                         114,998
                                     -------                         -------

    NET INCREASE
     (DECREASE) IN
     CASH & CASH
     EQUIVALENTS                   2,175,296                      (5,571,384)
                                   ---------                      ----------

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

    CASH AND CASH
     EQUIVALENTS, END
     OF PERIOD                   $12,221,545                     $42,606,410
                                 ===========                     ===========

    SUPPLEMENTAL
     DISCLOSURE OF
     CASH FLOW
     INFORMATION:
    Interest paid,
     including
     capitalized
     interest                     $1,700,611                      $1,288,328
                                  ==========                      ==========
    Income taxes paid             $2,062,496                      $2,030,575
                                  ==========                      ==========

    Non-cash
     transactions for
     investing and
     financing
     activities:
    Construction
     material
     transferred to
     construction in
     progress                $5,346,835   $                         -
    Construction in
     progress
     transferred to
     property and
     equipment              $12,781,821                  $4,107,320
    Advances to
     suppliers
     transferred to
     construction in
     process                 $7,480,412                  $1,678,940




    Other assets
     transferred to
     construction in
     progress                       $640,767  $                            -
    Capitalized
     interest -
     amortization of
     discount of notes
     payable and
     issuance cost           $2,091,230                  $1,777,516


    For more information, please contact:

    China Natural Gas, Inc.
    Bode Xu, CFO
    Phone: +86-29-8832-7391
    Cell: +86-158-2969-1287
    Email: [email protected]

    Jackie Shi
    Investor Relations Director
    Phone: +86-29-8832-3325 x922
    Cell:  +86-139-9287-9998
    Email: [email protected]

SOURCE China Natural Gas, Inc.