China Natural Gas Announces Fourth Quarter and Year End 2011 Financial Results

NEW YORK, April 2, 2012 /PRNewswire-Asia/ -- China Natural Gas, Inc. ("China Natural Gas" or the "Company") (PINK: 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 fourth quarter and full fiscal year ended December 31, 2011.

Fourth Quarter 2011 Results

Revenue in the fourth quarter of 2011 increased 32.4% to $35.9 million from $27.1 million in the fourth quarter of 2010, primarily attributable to the realization of revenue from LNG, which started in July 2011, and increase in average unit selling price of CNG sold through our fueling stations. Sales of natural gas grew approximately 43.5% year-over-year to $31.3 million, from $21.8 million in the fourth quarter of 2010, mainly due to our LNG business. Gasoline revenue in the fourth quarter of 2011 decreased 42.9% to $1.2 million, from $2.1 million in the prior year's period, because of the closure of six of our eight gasoline fueling stations during the fourth quarter of 2010 and the fourth quarter of 2011. Installation and services revenue increased 6.1% year-over-year to $3.4 million, from $3.2 million a year ago. In the fourth quarter of 2011, sales of natural gas, gasoline, and installation and other services contributed 87.2%, 3.4%, and 9.4% of total revenue, respectively.

Gross profit in the fourth quarter of 2011 expanded 15.7% to $13.1 million, from $11.3 million in the same period of 2010, driven by the increase in sales revenues. Gross margin in the fourth quarter of 2011 was 36.5%, compared to 41.7% a year ago, primarily due to the current 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 the purchase costs of natural gas.

In total, operating expenses in the fourth quarter of 2011 increased by approximately $2.5 million to $7.8 million, from $5.3 million in the same period of 2010. Operating income in the fourth quarter of 2011 was $5.3 million, a decrease of 11.9% year-over-year, from $6.0 million in the same period of 2010.

During the quarter, the Company recognized $281 of non-cash gain from the change in the fair value of warrants, compared to $285,569 in the fourth quarter of 2010. Income tax expense was $1.3 million at an effective tax rate of 24.8%, as compared to an effective tax rate of 17.4% in the fourth quarter of 2010. Net income in the fourth quarter of 2011 decreased 24.5% to $3.8 million, or $0.17 per diluted share, from $5.1 million, or $0.24 per diluted share, in the fourth quarter of 2010, primarily due to the increase in the average unit purchasing costs of natural gas at a higher rate than that of our sales prices, a lower gross margin generated from the LNG sales, and increased operating expenses.

Excluding the impact of the non-cash expenses (see "About Non-GAAP Financial Measures" below), adjusted net income was $3.8 million, versus $4.8 million in the fourth quarter of 2010. For the fourth quarter of 2011, adjusted earnings per diluted share was $0.17, versus $0.23 per diluted share in the fourth quarter of 2010.

Mr. Shuwen Kang, CEO of China Natural Gas, commented: "We are very pleased with our strong growth and profitability for the fourth quarter and full year 2011. During this quarter, we increased our number of pipeline customers to 116,790, and we have expanded into liquefied natural gas ("LNG") business. We continued to see higher sales volumes resulting from the increasing number of hybrid vehicle fleet and municipal vehicles in the city of Xi'an, which utilize compressed natural gas as a cleaner, cheaper and more efficient fuel alternative. We believe our strong performance in 2011 demonstrated the long-term market potentials for our CNG gas stations as well as our LNG business, piped natural gas and installation services for residential, commercial and industrial customers."

Financial Highlights for the Fiscal Year 2011:

• Revenue increased by 38.1% to $124.2 million, primarily attributable to the realization of revenue from LNG, which started in July 2011, and increase in average unit selling price of CNG sold through our fueling stations;
• Gross profit increased by 22.3% to $48.2 million;
• Income from operations increased by 9.6% to $20.9 million from $19.0 million in fiscal year 2010;
• Non-GAAP net income of $15.0 million, or $0.70 per diluted share.

Revenue for fiscal year 2011 increased by 38.1% to $124.2 million from $90.0 million for fiscal year 2010, primarily attributable to the realization of revenue from LNG, which started in July 2011, and increase in average unit selling price of CNG sold through our fueling stations. Revenue from sales of natural gas increased by 48.8% to $106.2 million in the year 2011 from $71.4 million in the prior year, mainly due to our LNG business. Gasoline revenue decreased by 20.3% to $6.0 million from $7.5 million in the prior year, because of the closure of six of our eight gasoline fueling stations during the fourth quarter of 2010 and the fourth quarter of 2011. Installation and other revenue increased by 8.9% to $12.0 million from $11.1 million in the fiscal year 2010.

Gross profit for fiscal year 2011 increased by 22.3% to $48.2 million from $39.4 million in the year 2010. The increase in gross profit was primarily attributable to the increase in sales revenues.. In fiscal year 2011, gross margin decreased by 5.0% to 38.8% from 43.8% in 2010, primarily due to the current 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 the purchase costs of natural gas.

Operating expenses in the fiscal year 2011 increased by 34.2% to $27.4 million from $20.4 million in the year 2010. This increase was primarily due to selling expenses associated with the operations of our LNG plant, which started in July 2011, and legal fees incurred in connection with a class action lawsuit brought against us and an investigation by the SEC on the Wang Loan, a related party transaction.

Income from operations increased by 9.6% to $20.9 million from $19.0 million in the year 2010. Operating margin decreased by 4.4% to 16.8% from 21.2% in the prior year.

Net income for fiscal year 2011 decreased by 11.4% to $15.3 million, or $0.71 per diluted share, from 17.2 million, or $0.80 per diluted share, in the fiscal year 2010. Excluding the impact of the non-cash expenses explained above, net income would have been $15.0 million, or $0.70 per diluted share, representing a year-over-year decrease of 2.7%.

Balance Sheet

As of December 31, 2011, the Company had cash and cash equivalents of $9.6 million, compared with $10.0 million as of December 31, 2010.

Mr. Kang concluded: "We remain optimistic about the market growth and potentials for natural gas usage in the developing Shaanxi and Henan provinces. We will continue to focus on growing our business strategically by steadily expanding our CNG customer base, especially focusing on sales to fleet vehicles and taxis. We are confident that our strong balance sheet, our current infrastructure, technical expertise and strategic CNG expansions will help sustain our steady growth and profitability.

"We also continue to remain optimistic about the long-term opportunities in the LNG market as China aims to increase natural gas usage. On July 16, 2011, we completed most of the construction of Phase I of the LNG plant and began commercial production and sale of LNG. The launch of the LNG plant is an important part of our integration strategies, which include strategic plans to develop our own network of LNG fueling stations in Shaanxi, Henan and Hubei Provinces."

Conference Call

Management will hold a conference call on Tuesday, April 3, 2012 at 8:00 a.m. EDT (5:00 a.m. Pacific) to discuss these fourth quarter and year end results.

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

A replay of the call will be available for one week from 11:00 a.m. April 3, 2012, ET until 9:00 a.m. ET on April 12, 2012. The number for the replay is (877) 344-7529, or (412) 317-0088 for international calls; the pass code for the replay is 10012301.  

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 25 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.

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 related to the Senior Notes issued in January and March 2008 as well as change in fair market value of the Company's outstanding warrants. 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.

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.

SOURCE China Natural Gas, Inc.