China Natural Gas Announces Second Quarter 2010 Financial Results

China Natural Gas, Inc. (“China Natural Gas” or the “Company”), 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, 2010.

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 geographic growth and forward integration objectives.

We invested significant resources during the second quarter toward the completion of our LNG facility in Shaanxi province, for which we held the opening ignition ceremony on June 30, 2010.

We completed four new fueling station acquisitions in the second quarter, increasing the size of our network to 40 stations.

Our successful acquisition of a fully operational CNG compression station in Hanchuan City will also drive top- and bottom-line growth in the coming quarters, especially as a step stone for our future expansion in Hubei Province.

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 2010 Financial and Operating Results

Revenues in the second quarter of 2010 increased 1.9% to $21.1 million from $20.7 million in the second quarter of 2009, driven by sales from 5 new fueling stations added since the third quarter of 2009, as well as an increase in the number of residential and commercial pipeline customers to 112,343 as of June 30, 2010 from 103,343 as of June 30, 2009.

Natural gas sales grew 3.2% year-over-year to $16.2 million, up from $15.7 million in the second quarter of 2009.

Gasoline revenues in the second quarter of 2010 increased to $2.03 million, up 24.5% from $1.63 million in the prior year’s period, which was mainly attributable to the increase of international oil prices.

Installation and services revenue decreased 15.0% year-over-year to $2.88 million from $3.39 million in the year-ago period.

In the second quarter of 2010, sales of natural gas, gasoline, and installation and other services contributed 76.7%, 9.6%, and 13.6% of total revenues, respectively.

Gross profit in the second quarter of 2010 decreased 6.4% to $9.6 million, from $10.3 million in the prior year’s same period.

Gross margin in the second quarter of 2010 was 45.5%, compared to 49.6% a year ago.

Gross profit and gross margin decreased primarily due to increased procurement costs in Henan Province, a main area of operations.

Operating income in the second quarter of 2010 was $4.7 million, a decrease of 31.3% year-over-year from $6.8 million in the second quarter of 2009.

The change was primarily due to a $1.5 million increase in operating expenses to $5.0 million during the second quarter in 2010, versus $3.5 million in the same period in 2009.

Income tax expense was $973,611 for an effective tax rate of 18.1%, as compared to an effective tax rate of 21.3% in the second quarter of 2009.

Net income in the second quarter of 2010 increased 18.1% to $4.6 million, from $3.9 million, in the second quarter of 2009.

Net margin increased to 21.6% during the three months ended June 30, 2010 from 18.6% during the three months ended June 30, 2009.

EPS decreased to $0.21 per diluted share, down 19.2% from $0.26 per diluted share in the second quarter of 2009.

As of June 30, 2010, the Company had $42.6 million in cash and cash equivalents , compared to $48.2 million in cash and cash equivalents at December 31, 2009.

The decrease in cash and cash equivalents was primarily attributable to the construction of the LNG plant, additions of fueling stations, and market development initiatives in Henan and Hubei Province.

Net cash provided by operating activities was $10.9 million for the six months ended June 30, 2010, compared to net cash provided by operations of $14.4 million for the six months ended June 30, 2009.

The primary reason for the change was due to lower operating income and an increase in working capital of $596,743.

Business Developments and Outlook

On July 1, 2010, the Company announced the commencement of test run of its Jingbian liquefied natural gas (LNG) plant, marked by an ignition ceremony.

The Company plans to begin commercial production within the second half of this year.

The plant’s completion will also serve as the precursor to the Company’s forward integration strategy, which involves the potential development of its own network of LNG fueling stations.

On July 8, 2010, the Company announced that it had successfully acquired a compressed natural gas (CNG) compressor station in Hanchuan City, China.

The station currently has sufficient capacity to process 80,000 to 100,000 cubic meters of natural gas daily and is centrally located near rail lines and arterial roadways, which should reduce transportation costs and improve shipping efficiency.

Management foresees the compressor station servicing the Company’s future expansion in Hubei province.

On August 6, China Natural Gas announced that a ship powered by LNG and modified by the Company successfully completed its test navigation in Wuhan on August 3rd, 2010.

The historic event is the first time an LNG-powered ship has navigated in China’s domestic waterways, demonstrating that LNG can be used both in cars and ships as a transportation fuel.

The Company succeeded in fueling a tugboat weighing over 300 tons with LNG for Wuhan Ferry Company.

The ship now runs on a fuel formula of 30% diesel and 70% natural gas, representing significant energy and cost savings.

CHNG is also planning to apply for related ship modification patents and intends to pursue additional applications for the technology.

Following a meeting in early July by the Chinese State Council regarding the economic development of western China, the Company announced that it will continue to benefit from a preferential 15% corporate income tax rate for the next 10 years.

The income tax policy, as well as a transition from a volume-based to a price-based resource tax on oil and natural gas, is part of the State Council’s strategy to spur economic growth in underdeveloped parts of western China.


Source: China Natural Gas, August 16, 2010;