China Natural Gas' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Apr. 3.13 | About: China Natural (CHNG)

China Natural Gas, Inc. (OTC:CHNG) Q4 2012 Earnings Call April 3, 2013 9:00 AM ET

Executives

Jackie Shi – Director, Investor Relations

Shuwen Kang – Chief Executive Officer

Zhaoyang Qiao – Chief Financial Officer

Analysts

Robert Baird – Milleni Securities

Operator

Good morning and welcome to the China Natural Gas Earnings for 2012 Annual Report Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

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

Jackie Shi

Good morning and thank you for joining China Natural Gas year ended 2012 conference call. Joining us today are, Mr. Shuwen Kang, our CEO and Mr. Zhaoyang Qiao, our CFO, Chief Financial Officer.

Before we begin, I will remind all listeners that throughout this call, in addition to historic statements, 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, strategies, future events, our performance and underlying assumptions and other statements other than statements that are historic in nature.

These forward-looking statements are based on current management 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 included product and service demand acceptance, change in technology, our economic conditions, the impact of competition and pricing, the impact of the government’s regulations and other risks contained in these statements, filed from time to time with the SEC.

All such forward-looking statements whether raising our goal, and whether made by on behalf of the Company are qualified by the cautionary 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 the conference call only represents management’s estimate as of today April 3, 2013. China Natural Gas assumes no obligations to update these projections in the future as market condition change.

At this point, I would like to turn the call over to Mr. Shuwen Kang, CEO of the China Natural Gas and Mr. Zhaoyang Qiao, Chief Financial Officer. Mr. Kang will speak in Mandarin and I will translate for Mr. Kang. Mr. Kang, please go ahead.

Shuwen Kang

[Foreign Language]

Good morning to those in the U.S. and good evening to those participating in Asia. I would like to welcome you to China Natural Gas year-end 2012 earnings conference call. Today we are going to share with you our annual financial results, talk about our recent business developments and our strategic plans and conclude with our outlook for the coming year, 2013.

Jackie Shi

And Mr. Kang, thank you, Mr. Kang. And now in the interest of time for the rest of this call, I will read the remainder of Mr. Kang’s prepared statements.

Zhaoyang Qiao

[Foreign Language]

This is Zhaoyang Qiao, CFO of the Company. Before we go to declare of annual financial results for the 2012, allow me to share with you some highlights of our achievements for the fiscal year 2012.

[Foreign Language]

Our revenue increased 17% to $145.3 million for fiscal year 2012, compared to the $124.2 million for the same period in 2011.

[Foreign Language]

Our gross profit improved by 2.7% to $49.5 million, compared to $48.2 million for the year 2011.

[Foreign Language]

Our gross profit improved by 2.7% to $49.5 million, compared to $48.2 million for the year 2011.

[Foreign Language]

We increased our number of pipeline customers to 122,020 by 12,230 from the number at the end of 2011.

[Foreign Language]

As of December 31, 2012, our cash balance was $10.9 million.

[Foreign Language]

Natural Gas revenue for fiscal year 2012, increased by 24.6% to $132.3 million from $106.2 million in the same period of 2011. For the year 2012, sales of natural gas, gasoline, and installation and other services contributed 91%, 1.9%, and 7.1% of total revenue respectively.

[Foreign Language]

In the past 20 years, the demand for the natural gas in the global market has been growing steadily with an average annual growth rate of 2%. In China forever, the growth rate of natural gas consumption in recent years had significantly offset that of global market. With a compound annual growth rate of more than 14% driven by steady growth of China economy and accelerating of the industrialization and facilitated by the policy of the Chinese government to support the development of the Clean Energy Industry.

[Foreign Language]

Given the company’s considerable operational sales, strong 50 record growing from and a solid balance sheet, we are confident that at China Natural Gas we are capture our future revenue alternative arriving from the growing demand of natural gas.

[Foreign Language]

This concludes prepared remarks. Now I would like to begin our detailed discussion of our year-end 2012 results. Afterwards, I will discuss our recent updates in our business and our strategic plans and conclude with our outlook for the remainder of the 2013.

[Foreign Language]

Revenue for the year 2012 increased by 17% to the $145.3 million from the $124.2 million in the year 2011. The increase in the revenue was due primarily to the realization of the revenue from LNG, which started in July 2011, and we operated LNG plant for the whole year of 2012.

[Foreign Language]

Revenue by the sales of natural gas increased by 24.6% to $132.3 million from the $106.2 million in the prior year.

[Foreign Language]

Revenue from LNG increased by 167.9%, or $34.1 million to $54.5 million for the year 2012, from the $20.3 million for the year 2011.

[Foreign Language]

Gasoline revenue for the year 2012 was $2.8 million, representing 53.6% decrease over the same period of 2011, because of the closure of two gasoline fueling stations during the fourth quarter of 2011, and one gasoline fueling stations during the fourth quarter of 2012 due to the low gross margin of gasoline.

[Foreign Language]

Installation and other revenues decreased by 15% to $10.2 million from the $12 million in fiscal year 2011, primarily due to the slowdown in the property market, which led to a decrease in the demand for installation service. Sales of natural gas, gasoline and installation contributed to 91%, 1.9%, and 7.1% of total revenue, respectively.

[Foreign Language]

Gross profit for the end of the year 2012 increased by 2.7% to $49.5 million, from the $48.2 million in 2011. The increase in gross profit was primarily due to the increase in revenue from LNG, offset by the decrease in the gross margin of LNG from the 24.9% in 2011 to 18.7% in 2012.

[Foreign Language]

For the fiscal year 2012, gross margin increased by 4.7% to 34.1% from the 38.8% in 2011, due to the current lower gross margin level of our LNG business, as compared to the gross margins of those business lines making contribution to revenue.

[Foreign Language]

Operating expenses in the fiscal year 2012 increased by 8.3% to $29.7 million, from $27.4 million in 2011, primarily due to the increase of the transportation and depreciation expenses mainly associated with our LNG business, which started in July 2011, and we operated LNG plant for the whole year of 2012.

[Foreign Language]

Operating income decreased by a 5% to $19.8 million from the $20.9 million. Operating margin decreased by 2.2% to 13.6% from the 15.8% in the previous year.

Income tax expense in the fiscal year 2012 was $3.2 million at an effective tax rate of 22.6%, as compared to effective tax rate of 24% in the year 2011. Our net income for the fiscal year 2012 decreased by 27.7% to $11 million, or $0.52 per diluted share from the $15.3 million, or $0.71 per diluted share in the year 2011, primarily due to the loss of the $4 million on disposal of five fueling stations during the third quarter of 2012.

[Foreign Language]

Now, I would like to turn your attention to our balance sheet and the cash flow. I would like to address some key items that have significantly changed that can be materially impact our ongoing operations.

[Foreign Language]

At the end of 2012 the balance of our cash and cash equivalents was $10.9 million, benefited from our business models, our cash conversion cycle is fast and efficient one. The balance of accounts receivable was $2.1 million. Net tax provided by operating activities was $29.7 million in the year 2012, compared to the $24.5 million in the year 2011.

[Foreign Language]

This concludes the financial overview. Now I will discuss our recent developments and strategic plans.

[Foreign Language]

First, an update on the LNG project. On July 16, 2011, we completed most of the construction of Phase I of the LNG plant and began commercial production and sales of LNG. Phase I of the LNG plant has a processing capacity of 500,000 cubic meters of LNG per day, or approximately 150 million cubic meters of LNG per year.

[Foreign Language]

During the year 2012, the average cost of LNG per cubic meter was $0.29 or RMB1.81 and we saw that each cubic meter had average price of $0.35 or RMB2.22.

[Foreign Language]

Customers for our LNG business mainly include city gas companies supplying industrial, commercial and residential pipeline end user. The launch of the LNG plant is an important part of our integration strategies, which include strategic plans to develop our own network of LNG fueling stations in Shaanxi, Henan and Hubei Provinces.

[Foreign Language]

In 2012, we have built 11 LNG fueling stations in Shaanxi, Henan and Hubei, which are expected to be operational gradually in 2013.

[Foreign Language]

We have signed a contract with nine Zhengzhou business for purchasing 50 LNG fleet by the end of the December 31, 2012, seven of them have been operational.

[Foreign Language]

On our (inaudible) inspection, we are optimistic with our increasing consumption of natural gas across different industry particles.

[Foreign Language]

We believe there are huge demand potentials in China Natural Gas market as only a 4% to 5% of the energy consumptions was satisfied with natural gas, with the ratio in the state it’s over 20%, considering better demand for energy we continue to increase significantly in China, due to the faster growth of the economy. The potentials for the natural gas are huge.

[Foreign Language]

With growing market demand, favorable government policy, and potential price increase for the natural gas we have remained confident about the growth of our business.

[Foreign Language]

In concluding, we will continue to grow our business strategically by steadily expanding our CNG customer base and growing our LNG business so as to capture the opportunity that arrive in the growing natural gas market in China, leveraging our integrated strengths of the considerable operational skills and the business models. We are confident that the China Natural Gas will deliver strong, sustainable financial results, and it will ultimately reward our supportive shareholders in the long-term.

[Foreign Language]

This concludes my prepared remarks for the fourth quarter and the full year 2012. Operator, we will now open to the call for questions to Mr. Kang and myself. Please begin with the first question.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Robert Baird with Milleni Securities. Please go ahead.

Robert Baird – Milleni Securities

Hello, I was wondering about the fourth quarter. You gave us the numbers for the year 2012. Can you give me the revenue numbers and the earnings per share for the fourth quarter?

Jackie Shi

Okay, just hold on.

Shuwen Kang

[Foreign Language]

Thanks.

[Foreign Language]

Jackie Shi

Sir, just give me a second. Just hold on please. Thanks.

Robert Baird – Milleni Securities

Okay, sure.

Jackie Shi

Thank you for waiting. And the revenue for the first quarter of the Company is $44 million and earnings per share is $0.25 for the first quarter.

Robert Baird – Milleni Securities

Okay. Thank you for that. I was wondering about there was a creditor, there is a creditor who has, owns $41 million in notes and they’ve attempted to, that they filed an involuntary bankruptcy petition in February in U.S. Bankruptcy Court in Manhattan. Do you know what’s happening with that? Obviously you’re not in bankruptcy I assume. Are you attempting to negotiate some new terms with this creditor or can you tell me what’s happening with that?

Jackie Shi

Okay, just hold on, I need to confirm with our CEO.

Robert Baird – Milleni Securities

Okay.

Shuwen Kang

[Foreign Language]

And plenty of color for your questions. This is Kang, Shuwen, CEO of the Company and you should know, at February and 2013 the Apex filed just clear the fail orders lawsuit against the company following insolvency petitions, and as of now we have engaged our company’s legal counsel to respond to that and we [filed a motion] for this case, and hearing maybe put sometime in April this year, and we were definitely up to you after we got the permission for this case.

[Foreign Language]

We will show best to work with our legal counsel to finalize this case. Other hand maybe we will continue to negotiate with Apex that to try to get its results very smoothly.

Robert Baird – Milleni Securities

Okay. You acknowledged that you owe them the $41 million, right?

Shuwen Kang

Okay, yes.

Robert Baird – Milleni Securities

Okay. And you haven’t been able to re-negotiate with them.

Shuwen Kang

[Foreign Language]

And further, the total debt from the Apex side is $40 million, but up to now we have $33 million outstanding for this debt. and for the future negotiation with Apex, we’re trailed back to talk with that regarding the discount for the [warrants] and hopefully we have achieved good results for the piece.

Robert Baird – Milleni Securities

Okay. And I do think that the issue needs to be resolved, because I think it continues that the stock will continue to trade at very low levels until the issue is resolved.

Shuwen Kang

Okay. Yeah, understood.

Robert Baird – Milleni Securities

Okay

Shuwen Kang

[Foreign Language]

And in this content, yeah, we can’t agree with you more and we were trailed back to negotiate with Apex and try to category results very, very smoothly and quickly.

Robert Baird – Milleni Securities

All right. well, thank you very much for taking my questions. I appreciate it.

Shuwen Kang

[Foreign Language]

Robert Baird – Milleni Securities

Okay.

Operator

(Operator Instructions) I’m showing no further questions. This concludes our question-and-answer session. I would now like to turn the conference back over to Jackie Shi, for any closing remarks. Please go ahead.

Jackie Shi

Thank you, operator.

Shuwen Kang

[Foreign Language]

This is Mr. Kang. I am the CEO of the Company. First off, yeah thank you very much for your continuing support to our business, and to our China Natural Gas company. As you know, maybe we have currently encountered some problem and, but we will try our best to continue to grow our business model and to deliver sustainable benefits to our shareholders in long-term. Thank you very much.

Operator

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

Jackie Shi

Thank you, operator.

Operator

Thank you. Have a good day.

Jackie Shi

Bye-bye.

Shuwen Kang

Yeah, you too.

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