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Executives

Jackie Shi – Director, IR

Zhaoyang Qiao – CFO

Shuwen Kang – CEO

Analysts

Robert Baird – Milleni Securities

China Natural Gas, Inc. (OTC:CHNG) Q3 2012 Earnings Call November 12, 2012 8:30 AM ET

Operator

Good morning and welcome to the China Natural Gas Earnings for Third Quarter 2012 Conference Call. All participants will be in a listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Jackie Shi, please go ahead.

Jackie Shi

Thank you. Good morning and thank you for joining China Natural Gas third quarter 2012 conference call. Joining us today are, Mr. Kang CEO of the company and Mr. Zhaoyang Qiao, the Chief Financial Officer. I will be interpreting for Mr. Qiao today. We appreciate your patience with interpretation.

Before we begin, I would like to remind all listeners that throughout this call, in addition to historic business, the company and its representative may make statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to China Natural Gas. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, our performance and on line assumptions and other statements other than the statements that are historic in nature.

These forward-looking statements are based on management’s expectations and are subject to risk and uncertainties that may result in expectations not being realized and it may cause actual outcome to differ materially from expectations reflected in these forward-looking statements. Potential risks and uncertainties including product and a service demand acceptance, change in technology, our economic conditions, the impact of the comparison of pricing, the impact of government’s regulations and other risks contained in these statements, filed from time to time with the SEC.

Also forward-looking statements whether raising our goal, and whether made by on behalf of the company, express, quality, cash flow statements because forward-looking statements are subject to risk and uncertainties, we caution you not to place undue reliance on these statements. Forward-looking statements made during this conference call only represented management’s estimates as of today November 12, 2012. China Natural Gas assumes no obligations to update these projects in the future at market condition change.

At this point, I would like to turn the call over to Mr. Qiao, the CFO of Natural Gas. Mr. Qiao, please go ahead.

Zhaoyang Qiao

(Interpreted). Welcome everyone to China Natural Gas third quarter 2012 earnings conference call. Today we are very pleased to share with you our quarterly financial results to talk about our future advancements. It is Zhaoyang Qiao the CFO of China Natural Gas.

First, before we go into the details of our third quarter financial results for 2012, please allow me to share with you some highlights of our performance during this quarter. We remain optimistic about the continued support of government policies that are encouraging the adoption of the cleaner burning fuel and the increased adoption of CNG and LNG technology, which we anticipate we have a positive impact on the results of our operations over the coming years.

So far, we have made certain progress in the expansion of both our CNG and LNG business into Hubei Province. In April 2010, we received the approval from local government authorities in Hubei Province to be with LNG fueling station, posting land and in harbors. And the reserve LNG stations, we are currently going through lessons with procedures and had fuelled these LNG stations.

Our revenue in the third quarter 2012 decreased 15.8% to $31.06 million from the $36.90 million in the third quarter of 2011. The decrease was primarily attributable to the sales volume decrease.

The sales of Natural Gas was $27.9 million for the third quarter of 2012, which is down 13.4% from the $32.23 million in the third quarter of 2011. The sales of Natural Gas, gasoline and installation continued steadily 89.8%, 2.1% and 8.1%.

Our gross profit in the third quarter of 2012 decreased 26.1% to $10.48 million, compared to the $14.18 million in the third quarter of last year. The decrease in part, gross profit was primarily attributable to the decrease in the natural gas revenue from our fuelling stations and increase in protecting cost of LNG.

The operating income in the third quarter of 2012 was $2.72 million, representing a decrease of 61.1% year-over-year from the $7 million in the third quarter of last year, primarily attributable to the decrease in gross profit of natural gas, and the increase in the selling expenses.

The operating margin decreased about 8.8% during this quarter compared to the 19% a year ago. In the third quarter of 2012, the income tax expense was $0.09 million compared to $1.53 million in the third quarter of last year.

Net loss in the third quarter of 2012 was $1.5 million compared to the net income to the $4.55 million in the third quarter of 2011 primarily attributable to the increase in non-operating expenses related to the loss of the $4.02 million on disposal of five fuelling stations during the third quarter of 2012.

Now, I would like to turn your attention to our balance sheet and the cash flow. Because the balance sheet is a snapshot and the moment in time, I would like to address specifically only lined items that have significant change or that at least had material impact to our ongoing operations.

By the end of the third quarter our cash and cash equivalents was $8.16 million compared to the $9.62 million as of December 31, 2011. The decrease was primarily attributable through the construction of R&G plans and other projects and is the repayment of the loan from the XED and principle of payback senior loans.

Reflecting our business models, our cash, our converting cycles are very attractive. As of today, accounts receivable was $2.06 million and our day sales outstanding remains below 10 days.

The net cash provided by operating activities was $21.08 million for the nine months ended September 30, 2012 compared to net cash provided by operations about $15.75 million for the nine months ended September 30, 2011. The increase was primarily due to the decrease in prepaid expenses and other current assets, increase on earnings revenue and decrease in accounts receivable.

And this concludes the prepared remarks from Mr. Qiao. And operator, so we are open to the questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from Robert Baird of Milleni Securities.

Robert Baird – Milleni Securities

Hello, I wanted to ask about the news item on September 11, when you announced that the holders of the senior notes I think in the amount of $40 million had notified the company that the company is in default and that they wanted to take action to address that situation. I wonder what’s happening with that, have you renegotiated the terms of those notes.

Jackie Shi

Okay. Just hold on, I need to translate it to our teams.

Robert Baird – Milleni Securities

Okay.

Shuwen Kang

This is CEO, Mr. Kang of the company. So, thank you very much for your question. As you know, at end of the July this year, and we are communicating with the Apex side to negotiate the new terms for these senior notes. And currently we’re still in the process of negotiation with Apex side. And there is, new demand commence, we will keep you posted there maybe 8-K or something like that.

Robert Baird – Milleni Securities

All right, okay. The other question I had is, have you – can you provide us with any kind of revenue guidance for the fourth quarter or next year, revenue guidance or earnings guidance, will you return to profitability. I guess, the main reason you weren’t profitable in the quarter was the $4 million one time item.

Shuwen Kang

Okay.

Robert Baird – Milleni Securities

Okay.

Jackie Shi

Okay, just hold on.

Zhaoyang Qiao

(Interpreted). This is Mr. Qiao, CFO of the company and thank you for your questions. As we said, it’s the guidance for Q4 of this year, maybe we were same as the – the same as the last year.

Robert Baird – Milleni Securities

The same as.

Zhaoyang Qiao

(Interpreted). Same as 2011.

Robert Baird – Milleni Securities

The guidance for the entire year of 2012?

Zhaoyang Qiao

(Interpreted). For the Q4.

Robert Baird – Milleni Securities

For the Q4, okay sure.

Zhaoyang Qiao

(Interpreted). And for the 2013 guidance, our sales side and the company just adjusted its developmental strategies. We will decrease our current CNG business and we are expanding into our new business, LNG business as you can see from our earnings results, the company just bought 50 LNG vessels and we were focused more on our LNG business. And so far for the entire 2013, maybe the revenue and the profit maybe seemed increase but we can’t give you a specific numbers right now.

Robert Baird – Milleni Securities

Okay. But you think it would be similar to 2012, is that what you’re saying?

Zhaoyang Qiao

(Interpreted). As I said earlier, and we will decrease our CNG business and we will increase our LNG business in the forthcoming years. From personal estimates and the revenue and the profit maybe at least the same as the last year, it went to a better maybe in the future maybe I mean it’s perfect and revenue maybe much here than previous years.

Robert Baird – Milleni Securities

Okay, all right, thank you for that. And one other question, the stock price is pretty bad and I’m wondering do you have any thoughts on the stock price and what might be done to make it better?

Jackie Shi

Okay, just hold on.

Shuwen Kang

(Interpreted). This is Mr. Kang, CEO of the company. And he said, thank you very much for your questions. And you know, and the stock price is – they are bad at this stage. And then because of the company’s the third quarter financial result and company’s US litigation matters. And from its current perspective and it will deal with better way with US litigation matters and we will increase our profit under the revenue guidance in the forthcoming quarters. We think the stock price maybe keep on increasing in the future.

Robert Baird – Milleni Securities

Okay. When you say US litigation, are you referring to shareholder litigation against the company, is that what you are talking about?

Shuwen Kang

(Interpreted). Yeah.

Robert Baird – Milleni Securities

What’s happening with that, that’s just ongoing?

Shuwen Kang

(Interpreted). Currently we are in the protest of the negotiation with SEC side.

Robert Baird – Milleni Securities

Okay. All right, thanks very much for taking my questions.

Jackie Shi

Okay, thank you.

Operator

(Operator Instructions). I’m showing no further questions. I would like to turn the conference back over to management for any closing remarks.

Jackie Shi

Okay, thank you.

Zhaoyang Qiao

(Interpreted). Okay, ladies and gentlemen. This is closing remarks from Mr. Qiao. As you know, we appreciate everyone’s time and support and a chart from the shareholders. We are doing our best to continue to operate our business. And we are looking at very promising future for the natural gas industry as a whole. And during the next one or two years, we believe the company will have a major step forward. Thank you very much for your time.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

Jackie Shi

Okay. Thank you.

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