China Natural Gas (PINK:CHNG)

First Quarter 2012 Results

• Revenue in the first quarter of 2012 increased by 33.9% to $32.28 million from $24.11 million in the first quarter of 2011
• Gross profit in the first quarter of 2012 increased 16.9% to $11.36 million from $9.72 million in the same period of the prior year.
• Gross margin in the first quarter of 2012 was 35.2%, compared to 40.3% a year ago. Gross margin decreased 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 revenue.
• Operating income in the first quarter of 2012 was $3.70 million, an increase of 14.6% year-over-year from $3.23 million
• Income tax expense was $0.79 million at an effective tax rate of 28.9%, as compared to $0.96 million at an effective tax rate of 27.8% in the first quarter of 2011.
• Net income in the first quarter of 2012 decreased by 21.6% to $1.95 million, or $0.10 per diluted share, from $2.49 million, or $ 0.12 per diluted share, in the first quarter of 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
• 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."

Item 3.01  Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing.

 

On March 6, 2012, China Natural Gas, Inc. (the “Company”) received a letter from The Nasdaq Stock Market (“Nasdaq”) indicating that the Nasdaq Hearings Panel has determined to deny the Company’s appeal for continued listing on Nasdaq, and that trading of the Company’s shares will be suspended effective at the open of business on Thursday, March 8, 2012. The Nasdaq Hearings Panel agreed with the Nasdaq Staff’s determination that continued listing should be denied based on Nasdaq’s broad discretionary authority contained in Nasdaq Listing Rule 5101.

This Amendment No. 1 on Form 10-Q/A (the “Amended Filing”) amends the Quarterly Report of China Natural Gas, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2011, originally filed on November 14, 2011 (the “Original Filing”).

 

As disclosed in the Company's Quarterly Report on Form 10-Q/A (Amendment No. 3) for the quarter ended March 31, 2010, as of March 31, 2010, the Company had outstanding balances of $9,858,240 and $4,401,000 of loan receivables, extended to Ms. Taoxiang Wang (the “Wang Loan”) and Shanxi JunTai Housing Purchase Ltd. Respectively (the “Juntai Loan”) (together with the Wang Loan, the “Loans”).

 

The Company’s Board of Directors has concluded that the Wang Loan was made to parties related to the Company’s former Chief Executive Officer and current Chairman of the Company’s Board of Directors, Mr. Qinan Ji, for the benefit of those related parties, and that the nature of the Wang Loan had not been properly disclosed to the Company's Board of Directors and Audit Committee, its Independent Registered Public Accounting Firm, Frazer Frost, LLP at the time the Wang Loan was made, or its current Independent Registered Public Accounting Firm, Friedman LLP at the time they were engaged as the Company’s new Independent Registered Public Accounting Firm in December 2010. Furthermore, neither of the Loans were reported to or approved by the Company’s Board of Directors.

 

As a result, the Company filed a Current Report on Form 8-K on September 21, 2011 to disclose that its quarterly financial statements for the three months ended March 31, 2010, June 30, 2010 and September 30, 2010, respectively, and its annual financial statements for the year ended December 31, 2010, should no longer be relied upon due to a failure to correctly disclose the Wang Loan as a related party transaction.

 

Based on our past performance and current expectations, we believe our cash and cash equivalents, as well as cash generated from operations, will satisfy most of our working capital needs. We will try to obtain new short-term bank loans to finance our working capital and to satisfy other liquidity requirements associated with our operations. As for capital expenditures, we will seek long-term bank loans or other long-term financing options.

Our planned capital expenditures as of September 30, 2011 were approximately $215.8 million through December 2015, the majority of which were to be incurred in connection with Phases II and III of the LNG plant in Jingbian County, Shaanxi Province, the construction or acquisition of additional fueling stations and compressor stations and the construction of the expansion of our operations in Hubei Province. We expect to fund the planned capital expenditures mainly through cash flows from operations as well as through potential borrowings.

Third Quarter 2011 Results

• Revenues in the third quarter of 2011 increased by 65.3% to $36.9 million from $22.33 million in the third quarter of 2010
• Net income in the third quarter of 2011 increased by 26.8% to $4.55 million, from $3.58 million in the third quarter of 2010.
• Earnings per share was $0.21 per diluted share in the third quarter of 2011 compared to 0.17 in the same period of 2010.

Qinan Ji, Chairman of China Natural Gas, Inc. commented: "We are pleased to share the results of our third quarter, as we believe that they demonstrate continued progress in our sector and geographic growth and forward strategic objectives. The company has successfully commenced commercial production of its Jingbian liquefied natural gas ("LNG") plant and material revenue has been realized from the sale of LNG in the third quarter, which represents a key milestone in its corporate history.

Our network of compressed natural gas, or CNG, fueling stations currently contains 38 stations, a significant presence in the markets we operate in. Our outlook for the fourth quarter of the year is promising as we continue to grow our business, and we look forward to sharing any future developments as they materialize."

The Company’s  Board of Directors has concluded that the Company’s unaudited interim financial statements for the three months ended March 31, 2010 (included in the Company’s Quarterly Report on Form 10-Q/A filed with the Securities and Exchange Commission (the “SEC”) on October 1, 2010), unaudited interim financial statements for the six months ended June 30, 2010 (included in the Company’s Quarterly Report on Form 10-Q/A filed with the SEC on October 1, 2010), unaudited interim financial statements for the nine months ended September 30, 2010 (included in the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 15, 2010), and audited financial statements for the fiscal year ended December 31, 2010 (included in the Company’s Annual Report on Form 10-K/A filed with the SEC on June 14, 2011) (collectively, the “Subject Financial Statements”), should no longer be relied upon due to a failure to correctly disclose as a related party transaction the Wang Loan (defined below) previously disclosed in the Subject Financial Statements.  The Company’s Board of Directors has concluded that the Wang Loan was made to parties related to the Company’s Chief Executive Officer and Chairman of the Company’s Board of Directors, Mr. Qinan Ji, or to benefit those related parties, and that the nature of the Wang Loan had not been properly disclosed to the Company's Board of Directors and Audit Committee, its Independent Registered Public Accounting Firm, Frazer Frost, LLP at the time the Wang Loan was made, and its current  Independent Registered Public Accounting Firm, Friedman LLP at the time they were engaged as the Company’s new Independent Registered Public Accounting Firm in December 2010.  Furthermore, neither of the Loans (defined below) were reported to or approved by the Company’s Board of Directors.
 
Xi’an Demaoxing Real Estate Co., Ltd. (“Demaoxing”) was formed in November 2007 by relatives of Mr. Qinan Ji, the Company’s Chief Executive Officer and Chairman of the Company’s Board of Directors (the “Demaoxing Promoters”).  In January 2010, Shaanxi Xilan Natural Gas Equipment Co., Ltd. (“Shaanxi Xilan”), one of the Company’s major subsidiaries, extended a loan of US$9,858,240 to Ms. Taoxiang Wang (the “Wang Loan”), who obtained a 40% ownership interest in Demaoxing on January 21, 2010.  Ms. Taoxiang Wang used her 40% ownership interest in Demaoxing and its assets as collateral for the Wang Loan. On January 26, 2010, the Wang Loan funds were remitted by the Shaanxi Xilan to an account of Demaoxing.  Also in January 2010, Xi’an Xilan Natural Gas Co., Ltd. (“Xi’an Xilan”), the variable interest entity of Shaanxi Xilan, extended another loan of US$4,401,000 to Shaanxi Juntai Housing Purchase Ltd. (“Juntai”) (the “Juntai Loan”) (together with the Wang Loan, the “Loans”), which obtained a 30% ownership interest in Demaoxing on January 21, 2010.  Juntai used an individual guarantee and its 30% ownership interest in Demaoxing and its assets as collateral for the Juntai Loan.  Xi’an Xilan remitted the Juntai Loan funds to an account designated by Juntai on January 8, 2010 and January 11, 2010.  Management of the Company believed that the Loans were adequately secured by collateral.  On January 21, 2010, the Demaoxing Promoters also transferred 30% of their ownership interests in DeMaoxing to Shaanxi Rongxin Real Estate Co., Ltd. (“Rongxin”).  The Board of Directors has determined that the Demaoxing Promoters retained indirect beneficial interests in Demaoxing after transferring their ownership interests and thus the Wang Loan was a related party transaction.
 
The Company’s Board of Directors was not notified of the extension of the Loans by the Company, and did not approve the Loans. Upon learning of the existence of the Loans in April 2010, the Board of Directors required that the Loans be immediately repaid.  In April 2010, Demaoxing repaid the principal of the Wang Loan and made an interest payment of US$140,722, settling the Wang Loan in full.  In May 2010, the principal of the Juntai Loan was repaid together with an interest payment of US$87,923, settling the Juntai Loan in full.
 
The Company’s Board of Directors and Audit Committee have discussed this matter with the Company’s current and former Independent Registered Public Accounting Firms, Friedman LLP and Frazer Frost, LLP, respectively.  The Company will file restated quarterly reports on Form 10-Q/A for the three months ended March 31, 2010, the six months ended June 30, 2010, and the nine months ended September 30, 2010, and a restated annual report on Form 10-K/A for the year ended December 31, 2010, to disclose the Wang Loan as a related party transaction, to disclose the additional material weaknesses in controls relating to the approval of the Loans, and to disclose the remediation efforts undertaken to address these material weaknesses.

XI'AN, China, Sept. 2, 2011 /PRNewswire-Asia/ -- Mr. Qinan Ji, Chairman and Chief Executive Officer of China Natural Gas, Inc. ("China Natural Gas" or the "Company") (Nasdaq: CHNG), announced today that the exclusive agreement that he entered into with Themes Investment Partners ("Themes") terminated on August 31, 2011.  Themes continues to be interested in a potential investment.  Mr. Ji continues to seek out alternative sources of funding for the going-private transaction.

Red Flag

Notice that CHNG filed an 8K yesterday morning regarding its going private news that includes a tid bit of information that was worded somewhat differently when compared to the related press release:

Filing

On June 30, 2011, Mr. Qinan Ji ("Mr. Ji"), the Chairman and Chief Executive Officer of China Natural Gas, Inc. (the “Company,” “we,” “our” or “us”), announced that he had entered into an exclusivity agreement with a consortium backed by Themes Investment Partners, a China-focused private equity firm (the “Themes Consortium”). Mr. Ji informed the Special Committee of our Board of Directors (the "Special Committee"), that he intended to work together with the consortium to formulate a proposal to acquire all of the outstanding shares of common stock of the Company that he and his affiliates do not currently own through a going private transaction. Mr. Ji, directly and indirectly, currently beneficially owns approximately 13.99% of the Company's common stock.

We have not received any written or oral proposal or other writing from Mr. Ji or the Themes Consortium. (tid bit of information that was worded somewhat differently when compared to the related press release)

 

Rodman and Renshaw on CHNG                       5/20/2011

1Q11 Earnings Update: Another Miss; Maintain Market Perform

1Q11 results missed our expectation For the fifth consecutive quarter, China Gengsheng Minerals (“Gengsheng”, Ticker: CHGS, Market Perform) delivered its quarterly earnings results that missed our expectations. Revenue in 1Q11 came in at $16.2 million, while up 36.4% YoY, did miss our estimate of $17.6 million. Gross profit increased 7.9% YoY to $4.3 million, but missed our estimate of $4.7 million. Gross margin in the quarter was 26.5%, more or less in-line with our estimate of 27.0%. Operating expenses of $3.6 million were a touch lighter than our estimate of $3.9 million. On the bottom line, Gengsheng incurred a net loss of $79,934 for the quarter, translating to an approximate $0.00 EPS, below our respective estimates of a net income of $0.5 million or $0.02 EPS.

As of March 31, the company had $11.5 million in cash and cash equivalents, $59.4 million in stockholders’ equity, and $25.5 million of working capital.

Adjusting estimates We have adjusted our model to reflect the recent company performance and our updated outlook. For full year 2011, we now expect the company will realize $73.0 million of total revenue. Among them, we expect monolithic refractory segment will contribute $45.3 million of sales and fracture proppants will contribute $21.6 million. We are significantly lowering our expectation for the company’s fine abrasives line and now anticipate $4.9 million of sales will come from this segment for the year. We estimate non-GAAP net income will be $2.2 million, or $0.08 per diluted share. For 2Q11, we now estimate total revenue will reach $18.0 million, gross profit will be $4.8 million, and non-GAAP net income will come in at $0.7 million, or $0.02 per diluted share.

Maintaining Market Perform rating The share price of Gengsheng has retreated by almost 28% since our downgrade on March 24, and we believe the valuation has become more reasonable. That being said, in light of our near to medium term outlook on the company’s financial performance and share price volatility, we believe there could be even more attractive entry points down the road. In this regard, we are maintaining our Market Perform rating on the shares of Gengsheng. We continue to like the company as we believe it represents a long term growth story, especially with regard to its fracture proppant business. Thus we await more attractive valuation levels and/or new corporate development catalysts before we take on a more positive stance.

Risks Major risks to our rating and price target include the company’s heavy dependence on the steel industry, refractory market demand risk, intense industry competition, capital raising uncertainty, business execution risk, fluctuation of raw material prices, environmental liability risk, as well as political and regulatory risks related to operating in China.

Notice Regarding Privacy and Confidentiality:


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

CHNG: Terminating Coverage

Terminating Coverage: Effective immediately, we are terminating coverage on China Natural Gas Inc. (Nasdaq: CHNG) to better allocate resources within our coverage universe. Our last rating for CHNG was Market Outperform / Speculative Risk with a price target of $12.00. Investors should not rely on our previously published financial projections.

4Q10 Results

CHNG reported 4Q10 revenue and Non-GAAP net income of $27.1 MM and $4.8 MM, with diluted EPS of $0.23. Top-line grew by 25.2% Y-o-Y and 21.5% sequentially. Gross profit stood at $11.3 MM or 41.7% in margin, compared to $10.5 MM or 48.6% in margin in 4Q09 and $9.4 MM or 42.1% in margin in 3Q10. CHNG generated $6.0 MM in EBIT, implying an EBIT margin of 22.1%, compared to 31.3% and 17.9% in 4Q09 and 3Q10. Net income was $5.1 MM on a GAAP basis, down 17.0% from $6.1 MM in 4Q09. Diluted EPS was $0.24, compared to $0.38 in 4Q09 and $0.17 in 3Q10. CHNG ended the quarter with $10.0 MM in cash while accounts receivable stood at $1.8 MM. The company generated approximately $3.2 MM in operating cash flow, compared to the CFO of $7.2 MM in 4Q09 and $2.7 MM in 3Q10.

LNG Processing Facility Progress

According to the 10-K filing, Phase I of the LNG plant has been completed in Jingbian County of Shaanxi province with total processing capacity of 500,000 m³/day, or 150 MM m³/year. $65.3 MM has been spent on Phase I project so far, while an additional $1.8 MM needed in the near-term.

Company Description

China Natural Gas Inc. (CHNG) is engaged in the distribution of compressed natural gas (CNG). As of Dec-10, the company had 39 CNG fueling stations, with 27 stations located in Shaanxi province and 12 stations in Henan province. In addition, CHNG distributes and sells piped natural gas to nearly 145,479 residential and industrial customers in the city of Xi’an in Shaanxi Province and Lingbao in Henan Province through a 120 km high-pressure pipeline network. The company purchases all of the natural gas that it sells, and does not explore or produce any own natural gas. In addition to CNG and piped natural gas, the company sells gasoline at eight fueling stations it owns, and provides vehicle conversion services at four workshops to convert gasoline-fueled vehicles to hybrid vehicles (powered by natural gas/gasoline). The construction of a liquefied natural gas (LNG) facility is more or less complete. Estimated to cost $67.1 million (with $65.3 MM already spent and additional $1.8 MM in the future), the phase I of the plant will have an annual capacity of 150 MM m³/year.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.

Rodman and Renshaw on CHNG                      4/12/2011

CHNG: Terminating Coverage

Terminating Coverage: Effective immediately, we are terminating coverage on China Natural Gas Inc. (Nasdaq: CHNG) to better allocate resources within our coverage universe. Our last rating for CHNG was Market Outperform / Speculative Risk with a price target of $12.00. Investors should not rely on our previously published financial projections.

4Q10 Results

CHNG reported 4Q10 revenue and Non-GAAP net income of $27.1 MM and $4.8 MM, with diluted EPS of $0.23. Top-line grew by 25.2% Y-o-Y and 21.5% sequentially. Gross profit stood at $11.3 MM or 41.7% in margin, compared to $10.5 MM or 48.6% in margin in 4Q09 and $9.4 MM or 42.1% in margin in 3Q10. CHNG generated $6.0 MM in EBIT, implying an EBIT margin of 22.1%, compared to 31.3% and 17.9% in 4Q09 and 3Q10. Net income was $5.1 MM on a GAAP basis, down 17.0% from $6.1 MM in 4Q09. Diluted EPS was $0.24, compared to $0.38 in 4Q09 and $0.17 in 3Q10. CHNG ended the quarter with $10.0 MM in cash while accounts receivable stood at $1.8 MM. The company generated approximately $3.2 MM in operating cash flow, compared to the CFO of $7.2 MM in 4Q09 and $2.7 MM in 3Q10.

LNG Processing Facility Progress

According to the 10-K filing, Phase I of the LNG plant has been completed in Jingbian County of Shaanxi province with total processing capacity of 500,000 m³/day, or 150 MM m³/year. $65.3 MM has been spent on Phase I project so far, while an additional $1.8 MM needed in the near-term.

Company Description

China Natural Gas Inc. (CHNG) is engaged in the distribution of compressed natural gas (CNG). As of Dec-10, the company had 39 CNG fueling stations, with 27 stations located in Shaanxi province and 12 stations in Henan province. In addition, CHNG distributes and sells piped natural gas to nearly 145,479 residential and industrial customers in the city of Xi’an in Shaanxi Province and Lingbao in Henan Province through a 120 km high-pressure pipeline network. The company purchases all of the natural gas that it sells, and does not explore or produce any own natural gas. In addition to CNG and piped natural gas, the company sells gasoline at eight fueling stations it owns, and provides vehicle conversion services at four workshops to convert gasoline-fueled vehicles to hybrid vehicles (powered by natural gas/gasoline). The construction of a liquefied natural gas (LNG) facility is more or less complete. Estimated to cost $67.1 million (with $65.3 MM already spent and additional $1.8 MM in the future), the phase I of the plant will have an annual capacity of 150 MM m³/year.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.

Fourth Quarter Highlights:

• Revenue in the fourth quarter of 2010 increased 25% to $27.12 million from $21.67 million in the fourth quarter of 2009,
• Gross profit in the fourth quarter of 2010 expanded 7% to $11.31 million, from $10.53 million in the same period of 2009
• Excluding the impact of the non-cash expenses, 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."

Based on past performance and current expectations, we believe our cash and cash equivalents, cash generated from operations, as well as future possible cash flows from financing activities, will be sufficient to satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations.

On December 20, 2010, the Board of Directors of China Natural Gas, Inc.  appointed Shaocheng "Bode" Xu, aged 36, as the Company’s Chief Financial Officer. From March 2007 to December 2010, Mr. Xu served as the chief financial officer for Yanglin Soybean, Inc., a China-based company listed on the Over-the-Counter Bulletin Board (“OTCBB”), which is engaged in the manufacturing, distribution and sales of non-genetically modified soybean products. From 2006 to 2007, Mr. Xu was a senior financial consultant with Dow Jones Business Consultants in Shanghai, where he assisted clients with analyzing financial management processes and evaluating their financial reporting and internal control systems. From 2005 to 2006, Mr. Xu was an internal control operations supervisor with Citigroup Corporate Banking Asia Pacific Operations Center in Shanghai, where he primarily focused on operations management and reviewed procedures to improve the maintenance of client information and documents. Mr. Xu also served as a Corporate Management Coordinator at United Automotive Electronics System Co., Ltd., in Shanghai, where he organized and coordinated production processes and formulated and implemented the annual budget for the office electronics. He is an affiliate of the Association of Chartered Certified Accountants (ACCA) and holds a Master of Professional Accounting degree (MPAcc) from Shanghai University of Finance and Economics and a BA degree from Foreign Affairs College in Beijing.

On December 8, 2010, David She resigned from his position as the acting Chief Financial Officer of China Natural Gas, Inc. for personal reasons. Mr. She advised the Company that he has no disagreements with the Company on any matter relating to the Company’s operations, policies or practices. Wilson Qu, Director of Corporate Control of the Company, will act as principal financial and accounting officer and oversee the Company's financial operations until the Company names a new Chief Financial Officer. The Company initiated the search for a new Chief Financial Officer prior to David She's resignation.

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

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.

Rodman & Renshaw on CHNG

Retracing Recent Developments 

The Pledge issue unfolded with a $17.7 MM bank loan from SPD Bank Xi’an branch on February 2010. CHNG did not disclose the loan on its balance sheet in the original 10-Q for March 31 2010. The company, through its VIE, pledged its equipment and vehicles as collateral for the loan. However, on August 8, 2010, the company’s former outside legal counsel determined that the pledge was prohibited by an indenture in connection with a $28.9 MM senior note with 5% interest rate and $18.5 MM warrants issued to Abax Lotus in January 2008. As a result, CHNG had to announce that Abax Lotus had the right to declare a default, upon which it could require CHNG to repay the entire notes and redeem the warrants. 

 On August 19, 2010, CHNG filed an 8-K form to disclose the situation, and on August 20, 2010, it restated its balance sheet numbers on its previously reported 10-K and 10-Qs for periods ended on December 31, 2009, March 31, 2010, and June 30, 2010. The restatement included (1) Disclosing the $17.7 MM bank loan on its balance sheet for March 31, 2010. (2) Reclassifying the senior notes and warrants from long-term liabilities into current liabilities in case of a potential declaration of default, in line with directives from its Audit committee. 

On August 20, 2010, We Put Our Rating Under Review. 

We believed that internal control weakness within the company had created an overhang in relation to CHNG’s capital structure with the possibility of default. We put our rating under review from Market Outperform given the uncertainty from this development. 

DLA Piper Engaged, Issue Cleared Up

In late August 2010, CHNG engaged DLA Piper and another law firm to conduct a second review. Both firms confirmed that the pledge on the bank loan was not prohibited by the indenture under the Abax notes, therefore removing the default scenario. CHNG also hired DLA Piper as its new outside legal counsel. 

Reversing The Previous Reclassification 

On October 1, 2010, the company filed another amended 10-Q and 10-K form to reverse its previous adjustment regarding the reclassification of the senior notes and warrant liabilities. Now the $28.9 MM of senior notes, $18.5 MM of warrant liabilities, and $17.7 MM bank loan from SPD Bank are reclassified as long-term liabilities. 

Reinstating Market Outperform Rating 

We are now reinstating our Market Outperform Rating and PT of $12.00 on CHNG given that the issue is now cleared and overhang in its capital structure is officially removed. 

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

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Significant factors affecting our results of operations are:

Successful expansion of our CNG fueling station business in our target markets. Our revenue increased by 1.9% during the three months ended June 30, 2010 from the three months ended June 30, 2009 and by 3.1% during the six months ended June 30, 2010 from the six months ended June 30, 2009 largely because of the addition of 5 new fueling stations added in third quarter of 2009 and first half of 2010, as well as the increase of pipeline natural gas customers. As of June 30, 2010, we operated 40 CNG fueling stations in total and, in Shaanxi alone, we operated 28 CNG fueling stations. We believe we are the largest provider of CNG fueling stations in Xi’an, one of our core target markets for CNG. As of June 30, 2010, we operated 12 CNG fueling stations in Henan province, another of our core target markets. The successful expansion of our CNG fueling station business in Xi’an and Henan province has been a significant factor driving our revenue growth and results of operations for the period reviewed. While we intend to expand into different provinces, we anticipate the growth of our CNG fueling business in Xi’an and Henan province will continue to significantly affect our results of operations as we intend to continue to increase the number of CNG fueling stations we operate in these areas.

Regulation of natural gas prices in the PRC. The prices at which we purchase our natural gas supplies and sell CNG and pipeline natural gas products are strictly regulated by the PRC central government, including the National Development and Reform Commission (“NDRC”), and the local state price bureaus have the discretion to set natural gas prices within the boundaries set by the PRC central government. In addition, natural gas procurement and sale prices are not uniform across China and can vary across provinces. For example, the prices at which we procure and sell CNG and piped natural gas are lower in Shaanxi than in Henan. Accordingly, our results of operations and, in particular, our revenue, cost of revenue and gross profit and gross margin are affected significantly by factors which are outside of our control. As we expand our natural gas business into other provinces, we expect our results of operations to continue to be affected significantly by the regulation of natural gas prices in the PRC.

Government policies encouraging the adoption of cleaner burning fuels. Our results of operations for the periods reviewed have benefited from environmental regulations and programs in the PRC that promote the use of cleaner burning fuels, including natural gas for vehicles. As an enterprise engaged in the natural gas industry, our VIE benefits from a reduced income tax rate of 15% compared to the standard 25% enterprise income tax rate in the PRC. In addition, the PRC government has encouraged companies to invest in and build the necessary transportation, distribution and sale infrastructure for natural gas in various policy pronouncements such as by officially including CNG/gasoline hybrid vehicles in the country's "encouraged development" category. These policies have benefited our results of operations by encouraging the demand for our natural gas products and also by lowering our expenses. As we plan to expand into the LNG business, we anticipate that our results of operations will continue to be affected by government policies encouraging the adoption of cleaner burning fuels and the increased adoption of CNG and LNG technology.

The overall economic growth of China’s economy. We do not export our products outside China and our results of operations are thus substantially affected by the growth of the industrial base, the increase in residential, commercial and vehicular consumption and the overall economic growth of China. While China's economy has experienced a slowdown in 2008 and a recovery period in 2009 and 2010, Although the government has initiated extensive domestic stimulus spending, expanded bank lending, increases in the speed of regulatory approvals of new construction projects and other economic policies, we are currently unable to predict the overall direction of PRC economy. Our results of operations rely on the overall success of China’s economy and may be affected by the macro economic trends.