China Natural Gas, Inc. (CHNG)

great balance sheet, great growth potential in Shaanxi province, has support of Chinese government, expanding into Henan province

I like the entry point, and in for a wild ride

Ouch! Earnings down and o/s shares up = - 30% day.
Big day for me EWBC up 55%, CHNG down 30%. Sold some EWBC, bought some more Chng. Too good a stock to stay down.

If you can short the pop, why not "long the drop", just hope it's not gonna be a dead cat bounce: the only fear with anything China is that the government can wipe out business on a whim; nevertheless, that's a long shot. I like the odds.

chng

Major natural gas play in two populated provinces. China just announced public policy supporting clean fuels. Strong growth is certain, and the balance sheet is rock solid. The price of natural gas will also factor into earnings, as they are currently low. When natural gas prices rise, earnings will rise.

While the dollar is up and all natural gas has taken a toll, this partifular stock seems to fall when other natural gas companies are inclining upward. I don't think China has enough investment in natural gas at this time and is using other companies other then CNGH.

o/s small, float small.. p/e decent. recent outlook for growth.

ROIC at 13; small China energy stock with lots of room to run.

- Gas pipelines have a sustainable competitive advantage from basically being monopolies for the geographies that they cover.
- Stock is undervalued relative to its growth prospects.
- Natural gas demand is growing rapidly in China.

CHINA!

momentum

Bargain!!!

china growth

China's natural resources is a good place to be right now and the numbers and position of this company are promising.

I agree with LuvNJoy about the potential for CHNG. A few edits. First, it is LNG, liquid natural gas, not LGN, unless this is a European version. I trust it was a simple mistake. Also, if the revenues from LNG will be 40% of total revenues in 2010, and assuming higher earnings from LNG than stations, the calculation would be as follows:

17.5 to 18.5 in earnings for 2009
4 to 6M additional earnings from 8 new stations and tankers, depending on when they are placed in service, at 751K in earnings per station / tanker

21.5 to 24.5 in earnings for 2010, not including the earnings from the LNG pipeline. LNG earnings are 30-40% of total, so divide 21.5 to 24.5 by .6 to .7, for potential total earnings of 30.7 to 40.8 (21.5 / .6 on the low side, to 24.5 / .7 on the high side).

30.7 to 40.8 in earnings for 2010, would be an increase of 13.2, or 75% on the low side ($30.7 - 17.5) / 17.5, to an increase of $22.3, or an increase of 120% on the high side (40.8 - 18.5) / 18.5.

Even the low end of this range of an increase of 75% in earnings to $30.7, with LNG representing only 30% of the total earnings, and not a full year of earnings from the additional filling stations would be a good year. With the 20.328M in shares, this would be an earnings per share of $1.51. At the current price of $11.26, this would be a P/E of 7.45. Assuming the P/E simply stays at the current 12.5 multiple based on tje 11/26 / .90 estimate in 09 earnings, the stock should rise the roughly 70% in earnings over the year.

Their unique niche should allow them to continue to grow their earnings with the funds that they currently have available, and from additional earnings, for many years to come, as their are not any meaningful direct competitors. Their is a large market to build out to establish a national name in the CNG market as the premier filling station, distribution and regional pipeline company in China.

Let's face it at 12 to 13 times earnings, with a big addition to earnings next year, due to the LNG pipeline revenues coming on line, and additional revenues from this and future pipelines, being complimented with ongoing additions to the filling station / tanker holdings, and you easily have a ongoing 20% to 30% per year earnings growth potential for the company. This does not include the potential impact of rising natural gas prices, and ongoing subsidies and support by the Government helping out the earnings.

Where else can you get a Company with the potential of a 50 to 100% growth in earnings over the next year, with the potential to grow earnings for years to come at 20% plus, for 12 to 13 times current earnigs, and 7 to 8 times 2010 estimated earnings.

Their unique niche strategy of alligning with other managers of fillling stations, to build out the market more rapidly, and to establish a national brand name in the Natural Gas distribution market, seems very promising. It may be a unique niche that they can build out for many many years to come, and may become a very attractive acquisition target for a major nat gas player.

Foolish Friends:

There are so many reasons that I love China Natural Gas, or CNG as they are known as in China, their symbol is CHNG, and only a few things that scare me:

Most importantly, I really believe that the world needs to invest in clean energy, as the risks of global warming are in my view way too real. CHNG is investing in natural gas on the “front lines,” where it is most important. As one article I found was titled “Developing China’s natural gas: the most critical issue is to develop the end user market” (Energy, Jan 03). The other clean renewable energies are very exciting as well, but in my view, they are not going to solve the need for China in particular to move away from coal, and China and the world to move away from petroleum any time soon. This is especially true for taxis and busses, as plug-in hybrids are simply not affordable for cities and taxis, especially in China, even in the US. Look how little the US has changed to hybrids that use petroleum, let alone plug-in hybrids. Could natural gas hybrids be the vehicle of the future?

Natural gas is making that change real now for autos, busses, businesses, industry and energy companies in China and globally, which is CNG / CHNG’s focus. They are literally starting a new business of owning from the end user market, with a focus on filling stations, up to the regional pipelines; including the pipelines, compressor stations, tankers, retrofit facilities and the filling stations. They not only are the largest owner of natural gas filling stations in China, with 35, they have the potential to become very big over the years, developing out this very important market for this Country, which appears to really need what they are offering. Isn’t it surprising that they are the largest owner of natural gas filling stations with 35 stations? Imagine how much market potential they have. Most stations are individually owned or are owned by the government. They have an agreement to purchase 51% of the government owned stations in Shaanxi Province. Not only is natural gas ½ the cost of petroleum for busses and taxis, their primary target market, it reduces the harmful emissions dramatically (87% less nitrogen oxide, 70% less carbon monoxide, and 25% less carbon dioxide). So CNG / CHNG is solving one of China’s most critical needs, to reduce air pollution from busses and taxis, the primary mode of transportation in China, as most people do not have cars, while creating a new and very important end user market for natural gas.

As I have read the blogs here on fool.com and other articles and blogs, it is obvious that one of the primary concerns is the dilution from the public offering recently. My observations are that although they now have 20.328 million shares outstanding, that this is a non-issue. Why? Because they are forecasting $17.5 to $18.5 million in earnings this year, which means an EPS of .86 to .91 per share, given the higher number of shares, or a price to earnings ratio at the current $12.20 per share of 13 to 14 times earnings. This of course does not reflect the potential growth in earnings impact of investing the roughly $47 million that they just raised in working capital. These funds will allow them to finish the $45 million pipeline, which they have already invested $32 million of the funds needed to build the pipeline. Plus they will be able to invest in 8 additional filling stations and tanker trucks, along with possibly adding another compression facility and/or other conversion sites to change taxis and busses to natural gas from petroleum. The impact of these funds, in my view, will be very accretive to earnings, as most of the funds needed to build out the pipeline are already invested, and due to the earnings (EBITDA) return on filling stations and related facilities.

Even with the additional over allotment of 858,654 shares being added, and the warrants that were granted to the bond holders, which represent an additional 1,833,654 shares, I do not see these shares as diluting earnings per share. Why? Because, if they sell the over allotment shares at $8.75 a share and the warrants are exercised at $8.93 this will provide an additional roughly $23 million in working capital.

Consider their forecast for 2010, which is available as a pie graph on their Investor Fact Card, under the Investor Relations tab, then Corporate Presentations, on their web page at naturalgaschina.com. They forecast that the LGN component of revenues next year will be a major portion of their revenues, roughly 30-40%, based on their pie graph. The profitability of the LGN pipeline they estimate will be even greater than the fueling stations. Add to this the additional revenues from the 8 additional filling stations and tankers, and you have the likelihood of an increase by 60% or more in earnings and revenues next year. In their Corporate Presentation they show their estimates of the cost of self-built and acquired filling stations and tanker combos, at roughly $1.7M and $2.4M, respectively, with EBITDA from each of $751K per station/tanker combo. Adding eight additional stations/tankers would increase EBITDA by approximately $6M over the next year. Add the additional 30-40% increase in earnings from the pipeline, ($17.5 - $18.5 09Earnings times .3 to .4), and you have additional earnings of $5.25M to $7.4M from the LGN pipeline. Add the $6M from additional filling stations/tankers combos to the additional $5M to $7M in earnings from the pipeline revenues, and you have the potential for a 60-65% increase in earnings next year. Should natural gas prices increase, revenues and earnings, I believe, could likely double, like they did from 2006 to 2007, and from 2007 to 2008.

Given the additional revenues from the LGN facility and additional stations and tankers, it seems safe to assume a sixty percent increase in revenues and income to roughly 1.44 in earnings per share in 2010 (roughly .90 for 2009 times 1.6), based on their development plan and their estimates for revenues next year on their Investor Fact Card. Assuming the same price to earnings ratio of 14 to 15 times earnings, this would result in a sixty percent increase in the stock price.

Should they start to get serious investor interest, due to this growth, and the earnings multiple doubles to 28 times earnings, which is much lower than the current approximately 35-38 times earnings that the average China stock is trading at, this would result in a stock price of $40.32 ($1.44 times 28 = $40.32), more than a three fold increase in the stock price. Keep in mind that these revenue and earnings increases do not factor in any increase in natural gas prices, which is very likely to occur and would likely increase both revenues and earnings, nor an ongoing decrease in the US dollar, which would increase the earnings of the Company’s stock in US dollar terms.

Given the high valuation of stocks relative to earnings in the US (now at over 20 times 2009 estimated earnings according to Standard and Poors) and at over 35 times earnings on the Shanghai index, investors are looking for promising growth companies where the valuations have not been bid up dramatically. This should bode well for CNG / CHNG in the next year. Should earnings double to around $1.80, due to rising natural gas prices, higher than expected revenues from the new LGN pipeline, and higher demand at their stations, and the multiple expand to 28 times earnings, this could result in a $50.40 share price ($1.80 2010EPS potential, times 28 potential earnings multiple), or over four times the current price. Is this impossible? I do not think so, what about you? Even at a double in the stock price over the next year, how many stocks at their currently lofty valuations are likely to double over the next year?

Should they raise the additional $23 million from the over allotment allowance and the exercise of the warrants issued, that would allow them to purchase approximately 8 additional filling station / tanker combos, double the 8 planned stations in the offering memorandum. Adding another roughly $6M in EBITDA, to the increase of $6M from the planned 8 filling stations and tankers, and the roughly 30-40% increase in earnings from LGN sales, due to the completion of the pipeline this year, and sales in 2010. See why I do not believe the issuance of more shares, or the warrants are likely to dilute earnings per share (EPS)?

The fact that they only have $45 million in long-term debt is another plus. This is the advantage of issuing more stock, versus being saddled by too much debt. In tough economic times, better to keep debt to a minimum. The interest rate on the debt appers to be at around 5%, based on their interest expense, and if I am correct, is not due until 2014, allowing them plenty of time to grow their business, before needing to refinance.

A very big plus to the current offering proceeds and likely additional capital from the possible over allotment and warrant exercise funds, is that these funds should not only take the Company to “the next stage” of their development, or to a serious small cap company stage, it may well make them self-funding from that point forward. Assuming $17.5 to $18.5 M in earnings for 09, rising to roughly $40 M in the next two years, or less, this will allow them to add approximately 16 new station / tanker combos per year at around $2.2M per station/tanker, which will increase each year as earnings increases. Given the estimate of $751K per station / tanker in earnings (EBITDA), this would result in a rise in 2011 revenues of roughly $12M, which would increase year after year. This does not take into account any rise in natural gas prices, further increasing earnings. With this type of earnings, they would likely be able to fund additional pipeline expansions through ongoing growth in earnings.

Given the uncertain nature of the economy, I am worried about investing in other businesses that may not

CHNG has just finished their investor conference and the response can be seen by the stock rise at the end of today 9/10/09). I was happily buying shares at $11.37 after reading their offering prospectus, which is available on their web page. This memorandum and their compelling story of building out the natural gas stations in one of the biggest regions in China, coupled with their fleet of delivery vehicles and movement into industrial delivery and pipeline services made me convinced that the company had a bright future.

Their stable growth path, conservative balance sheet, consistent earnings and revenue growth, and sound development plan which is laid out in the offering prospectus, and is also seen in the slide show that they gave today at the investor conference (9/10/09) made me a believer.

This was along with the big pluses that the Government is subsidizing the conversion of busses and taxi-cabs (the primary mode of transportation for most Chinese people) to natural gas hybrids, which CHNG offers, and the Government has targeted goals, backed up with subsidies to increase the industrial use of natural gas substantially in the coming year. This can be seen on the slides and in the prospectus as well.

Having just gone through an extensive review of all of the major holdings and new purchases by Matthews funds, Thornburg, and a host of other major international money managers, I still came back to CHNG as the play that appeared to have enormous upside potential, and was very very attractively priced at around 10 times earnings. The average China stock is trading at 38 times earnings, so although I found plays that I found very interesting, like Shandong Weigao Group Meical Polymer, which you can invest in on the Grey market, they are trading at 38 times earnings and already are at a 3.5B market cap USD.

CHNG is only trading at 11-12 times earnings after today's rally, and has a market cap of only 185M.

Given China's need for clean energy, and their desire to move away from petroleum as much as possible, plus CHNG's very well thought out growth plan and conservative financial profile, it appeared to me to be a big potential play.

The only thing that I could not figure out was why the stock had been so weak when the market had been so strong. With the secondary issuance of stock to raise $50M in capital to continue their development plan, the stock rallied from $8.75 to $12. It was down today to around $11 and I was happily buying in throughout the day at around $11.37.

Then they put the conference slides on the web and I started reading those, really getting excited about the future potential of this little hidden gem. I went to put in another order and the conference attendees seemed to agree. The stock had jumped to $12, and closed the day at $12.49 and is up to $12.55 in the after hours.

Growth stocks make money by growing their earnings, and due to the expansion or contraction of the stocks valuation relative to those earnings. IF CHNG simply rallies to the average stock valuation of 38 times earnings in China, you have a tripple. If they continue to grow at north of 30% per year, due to China's enormous need for natural gas based transportation and energy, this stock could well be a ten bagger in five years. Add to this the possible depreciation of the US dollar relative to the Renminbi, and you have what seems to me to be a very very promising opportunity.

resources,china, good basics, income statement, balance sheet, insider owner ship