China Natural Gas Announces Second Quarter 2010 Financial Results

XI'AN, China, Aug. 14 /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, 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.

Conference Call

Management will hold a conference call on Monday, August 16, 2010 at 8:30 a.m. ET (5:30 a.m. Pacific) to discuss these second quarter results.

To participate in the call please dial (877) 941-2068, or 480-629-9712 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 for two weeks from 11:30 a.m. on August 16, 2010, EDT until 11:59 p.m. EDT on August 30, 2010. The number for the replay is (877) 870-5176, or (858) 384-5517 for international calls; the pin number for the replay is 4344157. 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 28 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 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.