China Natural Gas Q3 Revenues Rise

China Natural Gas, Inc., 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, 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 the Company’s 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 the Company’s 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 the Company’s 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. The Company’s 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 the Company 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 the Company’s 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.