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Executives

Jackie Shi - Director of IR

Shuwen Kang - CEO

Fang Zhang - Corporate Secretary

Zhaoyang Qiao - CFO

Analysts

China Natural Gas, Inc. (OTC:CHNG) Q1 2013 Earnings Call May 17, 2013 9:00 AM ET

Operator

Good morning and welcome to the China Natural Gas Earnings for the First Quarter 2013 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.

Jackie Shi

Good morning and thank you for joining China Natural Gas First Quarter 2013 conference call. Joining us today are, Mr. Kang, our Chief Executive Officer; Ms. Fang Zhang, our Corporate Secretary; Mr. Zhaoyang Qiao, our Chief Financial Officer.

I will be interpreting for Mr. Qiao today, and we appreciate your patience with those interpretations.

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 management’s expectations and are subject to risks and uncertainties that may result in expectations not being realized and it may cause actual outcome to differ materially from the expectations reflected in these forward-looking statements. Potential risks and uncertainties included in our product and service demand exceptions, change in technology, our economic conditions, the impact of competition and pricing, and 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, expressed and qualified by the cash flow statements, because forward-looking statements are subject to risks and uncertainties, we caution you not to place undue reliance on these statements. Forward-looking statements made during this conference call only represents management’s estimate as of today May 17, 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 to Mr. Qiao. Mr. Qiao will be speaking in Mandarin and I will translate for Mr. Qiao. Mr. Qiao, please go ahead.

Zhaoyang Qiao

[Interpreted] Welcome everyone to China Natural Gas first quarter 2013 earnings conference call. Today we are very pleased to share with you our quarterly financial results, to talk about our recent developments and our strategic plans and conclude with our outlook for the remainder of 2013.

This is Zhaoyang Qiao, the CFO of the Company. Now in the interest of time for the rest of this call, I will read the remainder of Mr. Kang’s prepared statements.

First, before we go into the detail of our first quarter financial results for the 2013, please allow me to share with you some highlights of our achievements during this quarter. Our revenue increased by 10% to $35.5 million during the first quarter of 2013, from the $32.28 million for the same period in 2012, primarily due to the increased capacity of our LNG plant.

Over the same period our gross profit increased by 13.8% to $12.93 million from $11.36 million, where net income increased by 139.6% to $4.67 million or $0.22 per diluted shares during the first quarter of 2013. 1.95 million or $0.10 per diluted share for the same period in 2012. Primarily due to the increase in the cost profit of LNG decreased in the general and administrative expenses under the reduction of income tax risks endured by Jingbian LNG Factory.

As of March 31, 2013, our cash balance was 10.7 million and our operating activities provide a net cash of 4.97 million in the first quarter of 2013.

Regarding the environment of our industry, we remain optimistic about continuing support from the government which had been encouraging, adoption of the cleaner view and the increased use of CNG and LNG technology which we anticipated where we are (stimulus) on the results of our operations over the (top making) gas.

We are confident that by implementing our comprehensive gross strategy which incorporates the market potentials for converting vendors to using LNG and the construction of the Phase II and Phase III of LNG plants. We are aware of position that fuel capitalized on the increasing demand for the clean and again internal. So the strategic partnership infrastructure developments and excellence in service we will continue to establish our company at a leader in this rapidly balancing industry.

This concludes Mr. Kang’s prepared remarks. Now I would like to begin detailed discussion of our first quarter 2013 results. After that, we’ll be open to your questions.

Our revenue in the fourth quarter of 2013 grew by 10% to $35.5 million from $32.28 million in the first quarter of 2012. The growth in our revenue was primarily driven by the increased capacity of our LNG plant.

Sales revenue of natural gas grew by 9.5% year-over-year to $30.18 million from the $29.4 million in the first quarter of 2012. Gasoline revenue is in the first quarter 2013 decreased by 42.5% to $470,000 from the $0.83 million in the same period of the last year. Mainly because of the closure of the one gasoline fueling stations during the first quarter 2012, installation and automobile commercial service revenues increased by 38.6% it gets to $2.84 million from the $2.05 million a year ago.

In the first quarter of 2013 sales of natural gas, gasoline and installation and automobile commercial service contributed 19.7%, 1.7% and 8% of total revenue of this activity.

The gross profit in the first quarter of 2013 increased 13.8% to 12.93 million from the 11.36 million in the same period of last year. Gross margin in first quarter of 2013 was 36.4% compared to 35.2% a year ago. Gross margins increased primarily due to the increase in the gross margins for the power LNG business.

Operating income in the first quarter of 2013, was 5.84 million, an increase of the 57.9% a year over year from the 3.7 million primarily attributable to the increase in the gross profit of LNG and the decrease in the general and administrative expenses, our operating expenses in the first quarter of 2013 decreased by 7.5% to 7.09 million as compared to the 7.66 million in the same period of 2012.

Income tax expenses was 890,000, at an effective rate of 15.9% as compared to the 790,000 and effective tax rate of 28.9% in the first quarter of 2012. The decrease in the effective income tax rate was primarily due to the reduced income tax rate of 15% enjoyed by Jingbian LNG factory beginning of January 1st 2013.

Net income in the first quarter of 2013, increased by 139.6% to 4.67 million or $0.20 per diluted share from 1.95 million or $0.10 per diluted share in the first quarter of 2012.

Now I would like to draw your attention to our balance sheet and cash flow. At the end of first quarter of 2013, our cash and cash equivalence was 10.7 million, compared to the 10.86 million at end of year 2012. The decrease was primarily attributable to the construction of the LNG client and other projects and the payment of loan from the (inaudible) investment bank. Thanks to our business models our cash conversion (inaudible). Our account receivable was a modest 3.29 million; net cash provided by operating activities was 4.97 million in the first quarter of 2013, compared to the 7.42 million in the first quarter of 2012. The decrease was primarily due to the increase in (inaudible), accounts receivable and other receivables and our adjustments for non-cash expenses items.

Looking at the outlook of the China Natural Gas market in (inaudible) we are optimistic (inaudible) increasing production of natural gas across different industry verticals. The energy demand is kind of expected to climb steeply over the next two decades.

On the pricing of our products, we are confident of our future price level of natural gas in our coal market. Currently, China Natural Gas prices are regulated by the government, such prices usually were below the price level on the international market. We also believe that the retail price for the gasoline and the diesel which is yearly maturely fare than those of the natural gas where another stimulus to driven consumption and price of natural gas price in the future.

In concluding, we will continue to focus on steadily expanding our LNG retail network and enhanced customer base and growing our LNG business to formulate and build an integrated value chain, leveraging our strength of considerable provisional skill and attractive business model. We are confident that the China Natural Gas will deliver strong, sustainable financial results to ultimately reward our supportive shareholders with the greatest share value in the long term.

Now, this concludes my prepared remark for the first quarter of the 2013. Operator, we will now open to the call for questions for Mr. Kang and myself.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). There are no questions at the present time.

Shuwen Kang

Operator may be you can turn the call over to Mr. Shi for the final remarks.

Jackie Shi

[Interpreted]

Thank you. On behalf of everyone at China Natural Gas, I would like to thank all of you for your continued support and interest in our company. As always (inaudible) it is our responsibility to each shareholder. We seriously invite every shareholder to come to Shiyan, China to visit in person and as to see market in Shiyan, China. We remain committed to maintaining the shareholder value in the future. We hope you understand that we are very dedicated to our aim of being a leading natural gas provider in China. We are carefully conducting due diligence, the valuation, the necessary partnership and working with local governments to bring the natural gas service to green cities in the most economical way. Please don’t hesitate to email or call us with your questions. Thank you very much.

Operator

Thank you. The conference has now concluded.

Jackie Shi

Thank you very much for your time.

Operator

Thank you.

Jackie Shi

Okay, bye-bye.

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