China Natural Gas Announces Third Quarter 2010 Financial Results

XI'AN, China, Nov. 15, 2010 /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 and operating results for the third fiscal quarter ended September 30, 2010.

Third Quarter Fiscal 2010 Financial Highlights

• Revenues for the third quarter of fiscal year 2010 increased 10.9% year-over-year to $22.3 million, up from $20.1 million in the third quarter of 2009

• Net income for the third quarter decreased 22.9% year-over-year to $3.6 million, compared with $4.6 million for the third quarter of 2009

• Gross margin for the third quarter was 42.1% based on gross profit of $9.4 million, compared with a 48.3% margin in the same period last year

• Operating income and operating margin for the third quarter were $4.0 million and 17.9%, respectively, compared to $5.9 million and 29.3%, respectively, in the third quarter of 2009

• Earnings per diluted share were $0.17 for the quarter, compared with diluted EPS of $0.29 achieved in the same period a year ago

Nine Months Financial Highlights

• Revenues for the nine months ended September 30, 2010 increased 5.8% year-over-year to $62.8 million, up from $59.4 million in the first nine months of 2009

• Net income for the nine months decreased 4.5% year-over-year to $12.1 million, compared with $12.7 million for the first nine months of 2009

• Gross margin for the nine months was 44.7% based on gross profit of $28.1 million, compared with a 49.9% margin in the same period last year

• Operating income and operating margin for the nine months were $13.0 million and 20.7%, respectively, compared to $18.3 million and 30.8%, respectively, in the first nine months of 2009

• Earnings per diluted share were $0.56 for the nine-month period, down 34.1% compared with diluted EPS of $0.85 achieved in the same period a year ago

Mr. Qinan Ji, Chairman and CEO of China Natural Gas, stated, "We have continued to grow our market presence in the third quarter with sales growth of 10.9% year-over-year and 5.8% sequentially. While procurement cost increases in a key geographic region restrained bottom-line growth this quarter, we maintained a healthy gross margin above 40% and net margin of approximately 16%, which demonstrates the attractiveness and flexibility of our business model. We look forward to the positive effect that our new LNG plant will have as we aim to complete the test run in the coming quarter."

Third Quarter 2010 Results of Operations

Revenues

Revenues for the three months ended September 30, 2010 were $22.3 million as compared to $20.1 million for the three months ended September 30, 2009. The increase of $2.2 million, or 10.9%, was primarily due to the contribution of revenue beginning in August 2010 by the Company's recent acquisition, Hanchuan Makou Yuntong Compress Natural Gas Co., Ltd., as well as the addition of four new fueling stations during the second quarter of 2010 and one new fueling station in the third quarter of 2009, offset by the closure of one fueling station during the third quarter of 2010, and an increase in the number of residential and commercial pipeline customers from 107,273 to 114,049 between September 30, 2009 and September 30, 2010.

For the three months ended September 30, 2010, sales of natural gas and gasoline made up 88.4% of total revenues, while the remaining 11.6% was generated from the Company's installation and auto conversion services.

Gross Profit

Gross profit for the three months ended September 30, 2010 was $9.4 million as compared to $9.7 million for the three months ended September 30, 2009.  The decrease of $0.3 million, or 3.4%, was primarily due to increased procurement costs of natural gas for fueling stations in Henan Province, a main area of operations, as China Natural Gas continued its gradual shift from coal bed methane as a source of supply for its fueling stations to regular natural gas due to uncertainty in the market supply of coal bed methane as well as the increased market demand for both coal bed methane and natural gas. Costs of sales for the three-month period were $12.9 million as compared to $10.4 million for the same period a year ago. The Company's gross margin was 42.1% and 48.3% for the three months ended September 30, 2010 and 2009, respectively.

Income from Operations

Operating income for the three months ended September 30, 2010 totaled $4.0 million as compared to $5.9 million for the three months ended September 30, 2009. The decrease of $1.9 million, or 32.2%, was largely impacted by the increase in procurement costs and by increases in operating expenses, including depreciation, rental expense, salaries, and electricity associated with the addition of four new fueling stations in the second quarter of 2010 and one new fueling station in the third quarter of 2009, offset by the disposal of one fueling station during the third quarter of 2010. Total operating expenses for the three-month period totaled $5.4 million, up 40.9% from $3.8 million for the same period a year ago.

Net Income

Net income for the three months ended September 30, 2010 was $3.6 million as compared to $4.6 million for the three months ended September 30, 2009, due to the reasons set forth above. Third quarter 2010 net margin was 16.1%, down from 23.1% in the previous year. Earnings per diluted share were $0.17 for the quarter, compared with diluted EPS of $0.29 for the same period a year ago.

Nine Months Results of Operations

Revenues

Revenues for the nine months ended September 30, 2010 were $62.8 million as compared to $59.4 million for the nine months ended September 30, 2009. The increase of $3.4 million, or 5.8%, was primarily due to the contribution of revenue beginning in August 2010 by the Company's recent acquisition, Hanchuan Makou Yuntong Compress Natural Gas Co., Ltd., as well as the addition of four new fueling stations during the second quarter of 2010 and one new fueling station in the third quarter of 2009, offset by the closure of one fueling station during the third quarter of 2010, and an increase in the number of residential and commercial pipeline customers from 107,273 to 114,049 between September 30, 2009 and September 30, 2010.

For the nine months ended September 30, 2010, sales of natural gas and gasoline made up 87.5% of total revenues, while the remaining 12.5% was generated from the Company's installation and auto conversion services.

Gross Profit

Gross profit for the nine months ended September 30, 2010 was $28.1 million as compared to $29.6 million for the nine months ended September 30, 2009. The decrease of $1.5 million, or 5.2%, was primarily due to increased procurement costs of natural gas for fueling stations in Henan Province. Costs of sales were $34.7 million for the nine-month period, up 16.7% from $29.8 million in the same period a year ago. The Company's gross margin was 44.7% and 49.9%, respectively, for the nine months ended September 30, 2010 and 2009.

Income from Operations

Operating income for the nine months ended September 30, 2010 amounted to $13.0 million as compared to $18.3 million for the nine months ended September 30, 2009. The decrease of $5.3 million, or 28.7%, was largely impacted by the increase in natural gas procurement costs and by increases in operating expenses, including depreciation, rental expense, salaries, and electricity associated with the addition of four new fueling stations in the second quarter of 2010 and one new fueling station in the third quarter of 2009, offset by the disposal of one fueling station during the third quarter of 2010. Operating expenses for the nine months ended September 30, 2010 totaled $15.1 million, up 32.8% from $11.3 million in the same period a year ago.

Net Income

Net income for the nine months ended September 30, 2010 was $12.1 million as compared to $12.7 million for the nine months ended September 30, 2009, representing a decrease of 4.5%, due to the reasons set forth above. Net margin for the first nine months of 2010 was 19.3% as compared to 21.4% in the first nine months of 2009. Earnings per diluted share were $0.56 for the period, compared with diluted EPS of $0.85 for the same period in 2010.

Liquidity and Capital Resources

As of September 30, 2010, the Company's current assets were $45.8 million and current liabilities were $12.0 million. Cash and cash equivalents totaled $36.3 million as of September 30, 2010, compared with $48.2 million as of December 31, 2009. The Company's shareholders' equity at September 30, 2010 was $162.1 million. The Company had cash provided by operating activities for the nine months ended September 30, 2010 and 2009 of $13.5 million and $18.3 million, respectively.

Business Highlights and Outlook

On September 2, 2010, the Company announced the completion of its first liquefied natural gas (LNG) fueling station. The station is Located in Hongqing District, Xi'an, and the Company believes it is the first LNG fueling station in Shaanxi Province. The LNG fueling station will initially serve as a working model to showcase the market potential of LNG to future users rather than to generate revenues.

On September 7, 2010, the Company announced that it has retained Ernst & Young, one of the Big Four accounting firms, to assist the Company in Sarbanes-Oxley compliance. According to the agreement, Ernst & Young will help the Company implement an internal control program. They will assist the Company's management in the recording, testing, and evaluating of internal controls involving entries and processes in financial reporting.

On October 21, 2010, the Company announced that the sales prices of both pipeline natural gas in Shaanxi Province and vehicular fuel in Xi'an have increased, effective October 20, 2010, according to a new notice from the Shaanxi Provincial Price Bureau and the Xi'an Municipal Pricing Bureau. The Shaanxi Provincial Price Bureau and Xi'an Municipal Pricing Bureau are responsible for developing and implementing pricing policies within the province and city, respectively.

On June 30, 2010, the Company commenced the test run of phase I of its LNG plant in Jingbian County, Shaanxi Province, which, when operational, will have a processing capacity of 500,000 cubic meters per day, or approximately 150 million cubic meters on an annual basis. The Company plans to begin commercial production of LNG following its completion of the test run of phase I of the Jingbian LNG plant. The remaining aspects of the test run, which management aims to complete in December 2010, include testing the operation of various components and equipment of phase I of the plant. The launch of operations will serve as a precursor to the China Natural Gas' forward integration strategy, which involves the development of its own network of LNG fueling stations in Shaanxi and Hubei Provinces.

Full Year 2010 Guidance

China Natural Gas expects to generate total revenue of $84 million and net income of $16 million for the full year 2010, decreased from the guidance issued in the first quarter 2010, primarily due to increased procurement costs of natural gas for fueling stations in Henan Province, which are set by government authorities, and delays in construction of the Company's LNG facility that have resulted in postponement of revenue contribution by the facility.

Conference Call and Webcast

Management will hold a conference call to discuss these results on Tuesday, November 16, 2010  at 8:00 a.m. EST (5:00 a.m. PST) . To participate in the call, please dial 1-877-941-8418, or 1-480-629-9812 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 or alternately via the following link:

http://viavid.net/dce.aspx?sid=00007E16

A replay of the call will be available for two weeks from 11:00 a.m. November 16, 2010, EST until 11:59 p.m. EST on November 30, 2010. The number for the replay is 1-877-870-5176 or 1-858-384-5517 for international calls; the pin number for the replay is 4385423. 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 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 27 CNG fueling stations in Shaanxi Province and 12 CNG fueling 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.

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 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 Annual Report on Form 10-K, as amended. The Company does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

This information is intended to be reviewed in conjunction with the Company's filings with the Securities and Exchange Commission, which includes the accompanying notes.

SOURCE China Natural Gas, Inc.

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