Sino Gas Intl (OTC BB:SGAS)

GeoTeam® Note: 2011 vs. 2010 Adjusted EPS was $0.22 vs. $0.21

First Quarter 2011 Financial Highlights YOY

• Total revenue increased 14.78% to $7.99million
• Gross Profit Increased 13.93% to $2.42 Million
• Operating Income decreased 35.81% to $0.61 Million
• Net income improved to $106,555
• Diluted Earnings per share was  0.004 vs. (0.01)
• Adjusted Diluted Earnings per share was $0.01 vs.  $0.02

Fourth Quarter Results and Full Year EPS:

• Total revenue increased 36.07% to $11.2 million
• Connection Fees Revenues Increased 16.73% to $5.13 Million
• Gas Sales Increased 58.18% to 6.07 Million
• Gross Profit Increased 23.11% to $5.16 Million
• Operating Income Increased 49.8% to $3.59 Million
• For the Year, the company earned $0.15 per share.

Mr. Yu-Chuan Liu, Chairman and CEO of Sino Gas said, "Our improved operating results are indicative of the continuing strong demand for natural gas in China with the Government's support, rapid urbanization, clean energy promotion and rise in income levels. We will continue to focus on our existing projects in small and medium-sized cities in China, and pursue new business opportunities.

• full year EPS was $0.22 vs. $0.15
• fourth quarter EPS was $0.15 vs. $0.08

Net income for the three months ended September 30, 2010 was $1.03 million, compared with net income of $1.21 million for the same period of 2009. Driven by the increase of sales, and improvement of gross margin from both connection fee revenue and gas sales, operating income achieved an improvement of 20.68% to $1.86 million compared to the operating income of $1.54 million for the same period of 2009. However, the increase in operating income was offset by the additions of amortization costs of convertible bonds. Excluding non-cash, non-operational items of amortization expense of convertible bonds in the total of $0.15 million, our adjusted net income in the third quarter of 2010 would have been $1.17 million.

Material Challenges:

Numerous small- to medium-sized cities left undeveloped, but competition is growing as there are many small new players in the market attracted by the profitability and growth potential of the business. In addition, we are also facing competition from stronger competitors, as large-sized city markets are becoming saturated and our competitors are beginning to expand into smaller cities. We are facing limited opportunities in developing into first-tier cities in China, as most of them have already been taken by other large gas distributors, such as Xin’ao Gas Co. Ltd (largest in China) in the past decade. In addition, potential users in small- and medium-sized cities need to be educated in the benefits of natural gas. This is especially true for new markets where there is no use of natural gas. Small cities where residents depend more on coal tend to be more reluctant in the use of new energies than large cities. China’s energy market is highly regulated by the government with regard to purchase price and sale price of natural gas. Whenever there is an adjustment to purchase price by the government, gas distributors would increase the sale price correspondingly, subject to a public hearing and government approval. The increase of natural gas prices in China is lagging behind that in the international markets. The Chinese government has seldom adjusted natural gas and we cannot rule out the possibilities of an increase of natural gas prices by the government in the future. Although we can adjust the sale price accordingly after the increase of purchase prices, passing the increase to end users, this adjustment would make natural gas more expensive as compared to other alternative energies. Thus, this increase of price may adversely affect our business development.

Outlook

Mr. Yu-Chuan Liu, Chairman and CEO of Sino Gas said, "We achieved record third quarter revenue in company history. The Company's improving operating results demonstrates the growth that we experience through the strong demand for natural gas and urbanization in China.  We will continue to expand our presence in small and medium-sized cities in China both through the growth of our network and in pursuing new business opportunities. "

Mr. Yugang Zhang, CFO of Sino Gas, added "We will continue to improve our company's operations. Meanwhile, we will actively ensure that the Sino Gas story is conveyed to the investor community by continuing our participation at major financial conferences and other investor relations activities."

2010 Second quarter via filing:

• Net revenues were $5,916,218, representing a decrease of 19.31% from the same period of last year.

The decreases in our net revenues for the three months ended June 30 were due to the following factors:

• Decrease of gas sales. Gas sales to residential users continued to grow. However, that increase could not offset the decrease of sales to industrial users. There were adjustments of production lines in two of our industrials users, which caused the reduction of gas consumption in those two industrial users.
  
• Decrease of connection fees from residential customers.  Lower average connection fees per unit in this quarter compared with the same period of last year. In the second quarter of year 2009, we developed certain residential projects with higher connection fees per unit. · We connected 10% less residential households during the second quarter of 2010 compared to the same period of last year.
  
• Gross profit for the three months ended June 30, 2010 was $1,905,885, representing an increase of 24.13% from the same period of last year.
  
• Our operating income for the three months ended June 30, 2010 was $896,626, representing an increase of 53.45% from the same period of 2009.
  
• Net loss for the three months ended June 30, 2010 was $0.14 million, compared with net income of $0.42 million for the same period of 2009.
  
• Excluding non-cash non-operational items of amortization expense of convertible bonds in the total of $0.53 million, our adjusted net income in the second quarter of 2010 would have been $0.39 million.  EPS would have been $0.01 vs. $0.01.

Outlook:

Mr. Yu-Chuan Liu, Chairman and CEO of Sino Gas said, "The Company's continually improving operating results demonstrate the growth that we continue to experience through the leveraging of our 1040 km infrastructure pipelines by successfully adding to our customer base. We see the continued strong demand for natural gas in China and the Government's strong support of urbanization and clean energy promotion. We will continue to be opportunistic in terms of expanding our already major presence in small and medium-sized cities in China both through the growth of our network and in pursuing new business opportunities."

Mr. Yugang Zhang, CFO of Sino Gas, added "Our continued success in adding to our imbedded customer base and our improved operating results are indicative of the continued strong trends being experienced in China in urbanization, rise in income levels, and promotion of clean energy. We will actively ensure that the Sino Gas story is conveyed to the investor market by continuing our participation at major financial conferences and other investor relations activities, including the Rodman and Renshaw Growth Conference taking place in September, 2010."

Please note: On July 6, 2010, GeoTeam is removed all Chinese stocks that were on GeoBargains and GeoSpecial lists to respective Radar lists as we complete our "quality assessment."

Added to the GeoSpecial list on October 14, 2009 @ $0.85
 
Catalyst: Was selling below book despite profitable operations.
Peak performance: Reached a high of $1.39 on October 22, 2009
Current Price: $0.61
 
Current road block:  Lack of investor awareness; Shares are quite illiquid; Low margin business; While revenues have begun to grow rapidly and non-GAAP profitability in its 2010 first quarter has been attained, the raw EPS number was still small after a very strong 2009 fourth quarter; Negative stigma from China’s attempt to tame its “real estate bubble” (Sino's growth is partly dependent on the residential real estate market);  Current ratio (current assets / current liabilities) is less than 2 to 1; Dilution could be a significant issue at some point as the company has 7.98 million out of money warrants outstanding with exercise prices ranging from $0.75 to $4.04 and in-the-money preferred stock that can be converted into 4.7 million shares of common stock; Company will not likely attain a premium P/E.

Remains on the GeoSpecial list for patient risk tolerant investors. Still sells below book value per share of $2.35 and is profitable; Recently hired an IR firm.  SGAS is not a high priority choice for us unless the company reports some dramatic EPS progress.

Investors must be aware that routine equity financings seems to be a great likelihood:

"Natural gas distribution is a capital-intensive industry that requires large amounts of capital for the construction of pipelines and gas stations, and the purchase of transportation vehicles. The Company would be constrained by inadequate capital when developing into larger cities or engaging in merger and acquisition activities. With such situations, the Company would require additional fundraising to finance such business activities."

Sino Gas released its 2009 10K today.  At first glance it appears that the company did $0.07 vs $0.03 for the 4th quarters of 2009 and 2008, respectively.  Here is some commentary from the release:

"We expect the percentage of gas sales relative to total revenue will continue to increase and the percentage of connection fees relative to the total revenues to decrease, since more customers will be added into our gas distribution network.

The company is also considering opportunities to diversify its business by expanding into related areas, such as pipeline and gas fueling stations. However, we do not expect to develop into these areas on a large scale immediately.."

Excerpt from GeoBargain & Special Update - Performance Laggards Article

Sino Gas Intl (OTCBB:SGAS)

SGAS Shares have pulled back after a brief stint over $1.00. It is possible that shares came under pressure due to an S1 filing allowing certain shareholders to sell their shares. The Company did release improved 2009 third quarter results and offered an upbeat outlook. We will keep the stock coded as a GeoSpecial as it is selling under its book value per share. The stock is in an industry that seems to get little attention as evidenced by a lack of questions during the Company’s last conference call.

Going forward, Sino Gas will continue to focus on the existing projects, explore their potentials, increase the penetration rate, improve our gas distribution networks, and enhance operating efficiency and cost structure.

In the past several years, Sino Gas has strategically and geographically positioned itself in China. The company has heavily invested and built a good foundation and networks to get to the next level. The company currently operates on 35 gas distribution networks in different parts of China, including 29 with concession rights. We will continue to target good opportunities to expand into small and medium size cities, and increase our market share as capital becomes available.

As of today, Sino Gas has only developed small portion of the market we cover. We are optimistic about our future growth.

Source: 2009 Third Quarter Conference Call.

See original discussion notes. 

Going forward, Sino Gas will continue to focus on the existing projects, explore their potentials, increase the penetration rate, improve our gas distribution networks, and enhance operating efficiency and cost structure.

In the past several years, Sino Gas has strategically and geographically positioned itself in China. The company has heavily invested and built a good foundation and networks to get to the next level. The company currently operates on 35 gas distribution networks in different parts of China, including 29 with concession rights. We will continue to target good opportunities to expand into small and medium size cities, and increase our market share as capital becomes available.

As of today, Sino Gas has only developed small portion of the market we cover. We are optimistic about our future growth.

Source: 2009 Third Quarter Conference Call.

As GeoTeam members may have gathered, we are actively seeking companies that are selling under book that may offer hidden value. The returns from these plays have been nothing short of amazing. China Agritech Inc (NASDAQ:CAGC), Orient Paper Inc (OTC BB:OPAI) and China Gengsheng Minerals (OTC BB:CHGS) are examples of stocks that we mentioned at opportune times.

We constantly stress that investors need to approach these plays with caution. Sometimes, all the due diligence won’t uncover some of the problems that exist behind closed doors. Furthermore, we unfortunately don’t have the time to interview 50 companies in a timely fashion. But we are willing to take an immediate chance based on a risk/reward basis, especially if the companies are profitable. One of the biggest unknowns is the likelihood that these firms will partake in dilutive events in order to rectify liquidity situations—situations that are often the cause for discounted stock prices. As always, we are eager to receive investor input while performing our due diligence so we can all profit quicker.

Our “book value” list has grown to near 50 stocks, all of which we are tracking. Two that we have added to our portfolios are Equicap Inc (OTC BB:EQPI) and Sino Gas Intl. Holdings (OTC BB:SGAS). We are coding both of these stocks as special situation plays.

Equicap Due Diligence

Equicap’s book value per share is $0.44. The GeoTeam is seeking input from investors on this stock. On the surface EQPI seems to benefit from the stimulus plan. An interview is needed to confirm this assumption.

Equicap manufactures and distributes gears and gearboxes mainly used in or together with diesel engines for industrial and agricultural machinery, fork lifts, excavators, construction equipment, tractors, pumps and other machinery. The Company also had served the auto industry but recently sold this business to focus on its core more substantial industrial and agricultural segment.

From a net income perspective, the Company’s position is not overly attractive. However, a more thorough inspection of its filings reveals that a good deal of the losses was the result of one time non-cash charges and legal expenses:

Fiscal Year 2009 vs. 2008 Financial Snapshot

Equicap Stats

As far as we can tell the financial statements are clean.

• No long term debt
• Current ratio is 2.3:1
• Cash per share is $0.14
• In 2009 The company turned cash flow positive: $1.7 million
• At June 30, 2009, Equicap had working capital of $6,202,353 and believes that it has sufficient operating capital for its current operations.

For a final analysis, investors would need to at a minimum consider the following:

• Even after adding back unusual charges, Equicap is still losing money. Furthermore, 2009 losses exceed 2008 losses. We ultimately need to ascertain if the company will turn a profit.
• It seems that the Company has not issued a news release since August 2008.
• In 2008, for the gear segment, two customers accounted for 86% of sales.
• “As the demand for gear and gearbox products has grown in China, the competition within that market has also grown and has become severe. There are many local manufacturers making gears and gearboxes, and most of them are willing to compete for customers and market share through low pricing. There are also many global manufacturers interested in the large Chinese market who are entering the market and selling gear and gearbox products having better quality and design.” (Source, 2009 10K)

• The company had some legal issues with certain investors. In July 2009, it settled these issues through buying back stock from these investors.
• 2007 and 2008 financial targets were not reached.
• Short term bank loans: $2 million.
• Need to determine capital needs.

The GeoTeam is requesting an interview.

Sino Gas Due Diligence

Sino Gas’s book value per share is $1.90. (Fully diluted Book value: $1.68, taking into account about 9 million shares from dilutive instruments that have exercise prices starting at prices above $3). The GeoTeam is seeking input from investors on this stock as well.

Sino Gas is a leading developer of natural gas distribution systems in small and medium sized cities in China, as well as a distributor of natural gas to residential, commercial and industrial customers in China.

We have been tracking SGAS for a while and is a stock that has been on a tear over last few days, moving about 75% to the upside since October 8, 2009.

We haven’t really delved into the story but thought savvy investors might want to take a closer look at it. Per press releases and SEC filings, the company is profitable and seems bullish about being able to resume growth during the recovery from the global recession.

“The Chinese government has adopted new policies to address the slowdown of the real estate market, such as reducing stamp duties and transactions fees, lowering interest rates, and loosening bank lending policies. The Chinese government has also decided to inject stimulus package to boost the overall economy, including allocation of funds for mass housing projects. We have seen signs of recovery of the real estate market in China in recent months.” (Source: 2009 June 10Q)

Sino Gas Stats

• Current Ratio is less than 1
• Account payables are higher than its accounts receivable and cash positions.
• As of the most recent quarter net margins are noticeably thin at 6%

The GeoTeam will request an interview and provide more details if warranted.

Disclosure: Long EQPI, SGAS