China Natural Gas Announces Third Quarter 2009 Financial Results

3Q09 Revenue Increases 9.4% YoY to $20.1 Million -- 3Q09 Gross Profit Increases 2.4% YoY to $9.7 Million -- 3Q09 Cash Balance Increases Sequentially by $46.2 Million to $55.9 Million -- Reaffirm FY09 Revenue and EPS Forecast -

NEW YORK, Nov. 10, 2009 (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 third fiscal quarter, ended September 30, 2009.

Third Quarter 2009 Results

Revenue in the third quarter of 2009 increased 9.4% to $20.1 million from $18.4 million in the third quarter of 2008, driven by additional fueling stations and higher residential and commercial pipeline customers. Sales of natural gas grew 0.7% YoY to $15.5 million, from $15.4 million in the third quarter of 2008. Gasoline revenue in the third quarter of 2009 increased 37.5% to $1.6 million, from $1.2 million in the prior year's period. Installation and services revenue grew 63.4% YoY to $3.0 million, from $1.9 million a year ago. In the third quarter of 2009, sales of natural gas, gasoline, and installation and other services contributed 76.8%, 8.1%, and 15.1% of total revenue, respectively.

Gross profit in the third quarter of 2009 expanded 2.4% to $9.7 million, from $9.5 million in the prior year's same period, driven by the increased sales volume of natural gas and increased revenue from installation business. Gross margin in the third quarter of 2009 was 48.3%, compared to 51.6% a year ago, mainly due to higher procurement costs of natural gas in Henan.

Operating income in the third quarter of 2009 was $5.9 million, a decrease of 8.4% YoY, from $6.4 million in the prior year's period. Meanwhile, operating expenses in the third quarter of 2009 increased by approximately $0.7 million to $3.8 million, versus $3.1 million in the prior year's period, mainly due to additional expenses related to the acquisition of Lingbao Natural Gas, Co. and the addition of 3 new fueling stations added since the third quarter of 2009. Consequently, third quarter 2009 operating margin was 29.3%, compared to 34.9% for the same period of last year.

During the quarter, the Company recognized $0.4 million non-cash expense from an estimated change in the fair value of warrants, versus zero in the third quarter of 2008.

Income tax expense was $1.0 million for an effective tax rate of 17.7%, as compared to an effective tax rate of 16.8% in the third quarter of 2008. Net income in the third quarter of 2009 decreased 9.5% to $4.6 million, or $0.29 per diluted share, from$5.1 million, or $0.35 per diluted share, in the third quarter of 2008.

Excluding the impact of the non-cash expenses (see "About Non-GAAP Financial Measures" toward the end of this release), adjusted net income was 5.1 million, versus $5.3 million in the third quarter of 2008. For the third quarter of 2009, adjusted earnings per diluted share was $0.32, versus $0.36 per diluted share in the third quarter of 2008.

Mr. Qinan Ji, Chairman and CEO of China Natural Gas, commented, "We are satisfied with our third quarter's steady growth and profitability. During this quarter, we increased our number of pipeline customers to 118,973, and we expanded the number of our CNG gas stations to 36. We also successfully completed a secondary offering and were encouraged by the strong interest and solid participation by new and existing shareholders. We believe this transaction will ensure the future growth of our LNG business and expansion of our existing CNG business, as well as further strengthen our balance sheet and enhance our working capital."

Liquidity and Capital Resources

As of September 30, 2009, the Company increased cash and cash equivalents to $55.9 million, compared to $9.7 million as of June 30, 2009. During the quarter, cash flow provided by operating activities was $3.9 million, versus $4.6 million a year ago. The Company invested an additional $7.9 million to construction-in-progress related to its LNG project. Accounts receivable was a modest $1.1 million, and Days Sales Outstanding remained solidly below 10 days.

Financial Outlook for 2009

The Company reaffirms its projection for the full year 2009 of revenue growing 15% to 20% to a range of $78 million to $83 million, from $68 million in 2008. The Company also reaffirms its net income guidance of a range of $17.5 million to $18.5 million, a 15% to 22% growth from $15.2 million in 2008.

Mr. Ji concluded, "We are excited about the potential demand growth and price increase in China's natural gas market. We will continue to grow our business strategically by steadily expanding our CNG customer base, and we are confident that our integrated strengths of considerable operational scale, technical expertise, and balance sheet will help sustain our steady growth and profits.

"We remain optimistic about our long-term opportunities in the LNG market. As recent as mid October of 2009, our LNG plant was on schedule to be completed and to begin operations by the end of this year. However, recent unexpected events have pushed that date back to 2Q10. During mid-October, we learned that several imported critical components took longer to ship and subsequently were held up at entry ports due to a change in tariff policy, which required additional documentation. In late October, we were also notified that the LNG plant requires additional reinforcements in order to meet our strict safety requirements. Eventually, 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 nascent LNG market. We believe that once in full operations, our LNG business will enable us to further strengthen our market position, enhance our brand, accelerate our growth and ultimately reward our new and existing shareholders with greater value."

Conference Call

The management team will hold a conference call on Tuesday, November 10th, 2009, at 8:00 am ET to discuss its third quarter 2009 results. Listeners may access the call by dialing 1-888-230-5944 or 1-913-312-1482 for international callers. A webcast will also be available via the Company's website at http://www.naturalgaschina.com . A replay of the call will be available through November 17, 2009. Listeners may access the replay by dialing 1-888-203-1112 or 1-719-457-0820 for international callers, access code: 6706463.

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 23 CNG fuelling 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 fuelling 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 fuelling 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.

                    CHINA NATURAL GAS, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

Three months ended       Nine months ended
SEPTEMBER 30             SEPTEMBER 30
2009         2008        2009        2008

GAAP Net Income           4,647,519    5,136,590  12,711,898  11,458,053
Add:
Amortization of
discount on senior
notes                    63,054       95,528     280,250     555,001
Amortization of
deferred offering
costs                    11,505       24,410      63,940     147,002
Change in fair value
of warrants             357,979           --   1,473,762          --

Non-GAAP Net Income       5,080,057    5,256,528  14,529,850  12,160,056
(Excludes all non-cash
items)
Weighted average shares
outstanding
Basic                 15,754,696   14,600,154  14,985,001  14,600,154
Diluted               16,139,820   14,639,795  15,035,172  14,658,419

GAAP Basic EPS                 0.29         0.35        0.85        0.78
Add:
Amortization of
discount on senior
notes                    0.0040       0.0065      0.0187      0.0380
Amortization of
deferred offering
costs                    0.0007       0.0017      0.0043      0.0101
Change in fair value
of warrants              0.0227           --      0.0983          --

Non-GAAP Basic EPS             0.32         0.36        0.97        0.83

GAAP Diluted EPS               0.29         0.35        0.85        0.78
Add:
Amortization of
discount on senior
notes                    0.0039       0.0065      0.0186      0.0379
Amortization of
deferred offering
costs                    0.0007       0.0017      0.0043      0.0100
Change in fair value
of warrants              0.0222           --      0.0980          --

Non-GAAP Diluted EPS           0.32         0.36        0.97        0.83

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 third 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.

    For more information, please contact:

China Natural Gas Inc.
Jacky Shi
IR Director
Tel:   +86-29-8832-3325 x922
Cell:  +86-139-9287-9998
Email: yjshi@naturalgaschina.com

ICR, Inc.
Michael Tieu
Tel:   +86-10-6599-7960
Email: Michael.Tieu@icrinc.com

CHINA NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

September 30,      December 31,
2009               2008
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash & cash equivalents             $       55,931,579 $       5,854,383
Accounts receivable                          1,141,615           906,042
Other receivable - employee advances           238,962           332,263
Inventories                                  1,464,958           519,739
Advances to suppliers                        1,809,560           837,592
Prepaid expense and other current
assets                                        455,586           838,294
Loan receivable                                293,400           293,400
Total current assets                        61,335,660         9,581,713

PROPERTY AND EQUIPMENT, NET                 71,840,861        76,028,272
CONSTRUCTION IN PROGRESS                    42,124,222        22,061,414
DEFERRED FINANCING COSTS                     1,439,456         1,746,830
OTHER ASSETS                                13,350,012         8,844,062

TOTAL ASSETS                        $      190,090,211 $     118,262,291

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities                        $        1,412,215 $         800,013
Other payables                                 245,397           124,151
Unearned revenue                             1,741,827           944,402
Accrued interest                               274,941           861,114
Taxes payable                                1,942,670         1,862,585
Total current liabilities                    5,617,050         4,592,265

LONG TERM LIABILITIES:
Notes payable, net of discount of
$13,457,880 and $15,478,395 as of
September 30, 2009 and December 31,
2008, respectively                         26,542,120        24,521,605
Redeemable liabilities - warrants           17,500,000        17,500,000
Derivative liabilities - warrants            2,488,070                --
Total long term liabilities                 46,530,190        42,021,605

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 per share;
5,000,000 shares authorized; none
issued                                             --                --
Common stock, $0.0001 per share;
45,000,000 shares authorized,
21,183,904 and 14,600,154 shares
issued and outstanding at
September 30, 2009 and December
31, 2008, respectively                          2,118             1,460
Additional paid-in capital                  79,812,871        32,115,043
Cumulative translation adjustment            8,700,988         8,661,060
Statutory reserves                           5,417,413         3,730,083
Retained earnings                           44,009,581        27,140,775
Total stockholders' equity                 137,942,971        71,648,421

TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY                             $      190,090,211 $     118,262,291

CHINA NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)

Three months ended             Nine months ended
September 30                   September 30
2009            2008          2009             2008
Revenue
Natural gas
revenue    $   15,454,386 $   15,354,461 $   46,140,884  $   40,494,646
Gasoline
revenue         1,633,478      1,187,754      4,440,892       3,466,601
Installation
and other       3,037,320      1,858,985      8,813,594       5,356,113
Total revenue    20,125,184     18,401,200     59,395,370      49,317,360

Cost of revenue
Natural gas
cost            7,536,188      6,973,035     21,773,635      20,369,778
Gasoline cost    1,534,806      1,085,311      4,194,615       3,208,326
Installation
and other       1,336,498        850,487      3,797,586       2,492,650
Total cost of
revenue         10,407,492      8,908,833     29,765,836      26,070,754

Gross profit      9,717,692      9,492,367     29,629,534      23,246,606

Operating expenses
Selling
expenses        2,406,462      2,098,343      7,062,429       5,008,631
General and
administrative
expenses        1,422,300        968,169      4,286,620       2,947,494
Total operating
expenses         3,828,762      3,066,512     11,349,049       7,956,125

Income from
operations       5,888,930      6,425,855     18,280,485      15,290,481

Non-operating
income expense)
Interest income      7,248         13,536         23,940         120,297
Interest expense   (68,407)      (212,774)      (745,064)     (1,249,003)
Other income
(expense), net     178,728         (6,786)      (137,954)        (17,512)
Change in fair
value of
warrants         (357,979)            --     (1,473,762)             --
Foreign
currency
exchange
income (loss)         280        (48,605)       (50,527)       (101,436)
Total non-
operating
expense           (240,130)      (254,629)    (2,383,367)     (1,247,654)

Income before
income tax       5,648,800      6,171,226     15,897,118      14,042,827

Provision for
income tax       1,001,281      1,034,636      3,185,220       2,584,774

Net income        4,647,519      5,136,590     12,711,898      11,458,053

Other
comprehensive
income
Foreign
currency
translation
gain              195,040        756,316         39,928       4,554,040
Comprehensive
income      $    4,842,559 $    5,892,906 $   12,751,826  $   16,012,093

Weighted
average
shares
outstanding
Basic          15,754,696     14,600,154     14,985,001      14,600,154
Diluted        16,139,820     14,639,795     15,035,172      14,658,419

Earnings per
share
Basic      $         0.29 $         0.35 $         0.85  $         0.78
Diluted    $         0.29 $         0.35 $         0.85  $         0.78

CHINA NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)

Nine Months Ended September 30,
2009                    2008

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                           $   12,711,898        $   11,458,053
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization             4,175,175             2,295,534
Loss on disposal of equipment                21,372                12,265
Amortization of discount on senior
notes                                      280,250               555,001
Amortization of financing costs              63,940               147,002
Stock based compensation                    186,672                51,861
Change in fair value of warrants          1,473,762                    --

Change in assets and liabilities:
Accounts receivable                        (235,396)           (1,269,832)
Other receivable                            (31,011)                   --
Other receivable - employee advances         93,231              (273,759)
Inventories                                (754,309)             (194,580)
Advances to suppliers                      (971,240)             (508,417)
Prepaid expense and other current assets    223,206              (783,706)
Accounts payable and accrued liabilities    611,924               193,212
Other payables                              121,234                37,587
Unearned revenue                            796,827                34,855
Accrued interest                           (586,173)              350,002
Taxes payable                                80,025               606,233
Net cash provided by operating
activities                              18,261,387            12,711,311

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment          (47,797)          (21,693,376)
Proceeds from sales of equipment             41,308                    --
Proceeds from short term investments             --               249,464
Additions to construction in progress   (18,064,065)          (16,679,747)
Prepayment on long term assets           (4,434,118)           (6,774,616)

Proceeds from loan receivable                    --               286,740
Return of acquisition deposit               449,970                    --
Payment for intangible assets               (68,347)                   --

Payment for land use rights                (455,830)                   --
Net cash used in investing activities   (22,578,879)          (44,611,535)

CASH FLOWS FROM FINANCING ACTIVITIES:
Stock issued for cash                    57,607,813                    --
Proceeds from senior notes                       --            40,000,000
Payment for offering costs               (3,237,452)           (2,122,509)
Net cash provided by financing
activities                              54,370,361            37,877,491

Effect of exchange rate changes on
cash and cash equivalents                   24,327             1,115,706

NET INCREASE IN CASH AND CASH
EQUIVALENTS                             50,077,196             7,092,973

CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD                      5,854,383            13,291,729

CASH AND CASH EQUIVALENTS,
END OF PERIOD                       $   55,931,579        $   20,384,702

SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest paid, net of
capitalized interest                $    1,014,956        $           --
Income taxes paid                    $    3,176,730        $    1,203,048

SOURCE China Natural Gas, Inc.