China Natural Gas Announces Fourth Quarter and Year End 2010 Financial Results

NEW YORK, March 14, 2011 /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 fourth quarter and full fiscal year ended December 31, 2010.

Fourth Quarter 2010 Results

Revenue in the fourth quarter of 2010 increased 25% to $27.12 million from $21.67 million in the fourth quarter of 2009, driven by addition of fueling stations and increase in the number of residential and commercial pipeline customers. Sales of natural gas grew approximately 36% year-over-year to $21.83 million, from $16.10 million in the fourth quarter of 2009. Gasoline revenue in the fourth quarter of 2010 increased 9% to $2.12 million, from $1.94 million in the prior year's period. Installation and services revenue decreased 12% year-over-year to $3.18 million, from $3.63 million a year ago. In the fourth quarter of 2010, sales of natural gas, gasoline, and installation and other services contributed 80%, 8%, and 12% of total revenue, respectively.

Gross profit in the fourth quarter of 2010 expanded 7% to $11.31 million, from $10.53 million in the same period of 2009, driven by the increased sales volume of natural gas. Gross margin in the fourth quarter of 2010 was 42%, compared to 49% a year ago, was mainly due to the increase of procurement cost of coal bed methane in Henan province.

In total, operating expenses in the fourth quarter of 2010 increased by approximately $1,55 million to $5.31 million, from $3.76 million in the same period of 2009. Operating income in the fourth quarter of 2010 was $6.00 million, a decrease of 11% year-over-year, from $6.77 million in the same period of 2009.

During the quarter, the Company recognized $285,569 of non-cash gain from the change in the fair value of warrants, compared to $442,432 in the fourth quarter of 2009. Income tax expense was $1.07 million at an effective tax rate of 17%, as compared to an effective tax rate of 16% in the fourth quarter of 2009. Net income in the fourth quarter of 2010 decreased 17% to $5.08 million, or $0.24 per diluted share, from $6.12 million, or $0.27 per diluted share, in the fourth quarter of 2009.

Excluding the impact of the non-cash expenses (see "About Non-GAAP Financial Measures" below), adjusted net income was $4.79 million, versus $5.68 million in the fourth quarter of 2009. For the fourth quarter of 2010, adjusted earnings per diluted share was $0.23, versus $0.26 per diluted share in the fourth quarter of 2009.

Mr. Qinan Ji, Chairman and CEO of China Natural Gas, commented: "We are very pleased with our strong growth and profitability for the fourth quarter and full year 2010. During this quarter, we increased our number of pipeline customers to 115,479, and we expanded the number of our CNG gas stations to 39. 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 2010 demonstrated the long-term market potentials for our CNG gas stations as well as our piped natural gas and installation services for residential, commercial and industrial customers."

Financial Highlights for the Fiscal Year 2010:

• Revenue increased by 11% to $89.95 million, primarily due to the rise in sales price of natural gas and gasoline in 2010;
• Gross profit decreased by 2% to $39.41 million;
• Income from operations decreased by 24% to $19.03 million from $25.05 million in fiscal year 2009.
• Non-GAAP net income of $15.43 million, or $0.72 per diluted share

Revenue for fiscal year 2010 increased by 11% to $89.95 million from $81.07 million for fiscal year 2009, mainly due to the rise in sales prices of natural gas and gasoline in 2010. Revenue from sales of natural gas increased by 15% to $71.37 million in the year 2010 from $62.24 million in the prior year. Gasoline revenue increased 18% to $7.52 million from $6.38 million in the prior year. Installation and other revenue decreased by 11% to $11.06 million from $12.45 million in the fiscal year 2009.

Gross profit for fiscal year 2010 decreased by 2% to $39.41 million from $40.16 million in the year 2009. The decrease was mainly due to the increase in the procurement cost of coal bed methane in Henan province. In fiscal year 2010, gross margin decreased by 5% to 44% from 49% in 2009. Operating expenses in the fiscal year 2010 increased by 35% to $20.39 million from $15.11 million in the year 2009. This increase was mainly due to four additional CNG fueling stations were acquired in 2010 and the subsidiaries of our variable interest entity in Hubei and Jinbian were in the initiation stage with material management expenses.

Income from operations decreased by 24% to $19.03 million from $25.05 million in the year 2009. Operating margin decreased by 10% to 21% from 30.9% in the prior year.

Net income for fiscal year 2010 decreased by 9% to $17.22 million, or $0.80 per diluted share, from 18.83 million, or $$1.12 per diluted share, in the fiscal year 2009. Excluding the impact of the non-cash expenses explained above, net income would have been $15.43 million, or $0.72 per diluted share, representing a year-over-year decrease of 24%.

Balance Sheet

As of December 31, 2010, the Company had cash and cash equivalents of $10.05 million, compared with $36.34 million as of September 30, 2010, $42.61 million as of June 30, 2010, and $48.18 million as of December 31, 2009.

Mr. Ji 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. Upon the completion of our new LNG plant, we intend to aggressively grow our LNG business so as to capture a sizable share of China's emerging LNG market. We believe that once in full operations, our LNG business will enable us to further strengthen our market position, accelerate our growth and will bring greater value to our shareholders."

Conference Call

Management will hold a conference call on Wednesday, March 16, 2011 at 8:00 a.m. ET (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. 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 one week from 11:00 a.m. March 16, 2011, ET until 9:00 a.m. ET, March 24, 2011. The number for the replay is (877) 344-7529, or (412) 317-0088 for international calls; the pass code for the replay is 449305. In addition, a recording of the call will be available on the company's website at http://www.naturalgaschina.com for one year.

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 27 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.