China Natural Gas: Deeply Undervalued 38 comments
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Business Summary
China Natural Gas (CHNG) is a company incorporated in the state of Delaware that, through its subsidiaries, is engaged in the distribution and sale of natural gas and gasoline to commercial, residential and industrial customers in the Xi'an area and the Shaanxi province of the People's Republic of China. It is one of the leading providers of pipeline natural gas for industrial, commercial and residential use and compressed natural gas for vehicular fuel in Xi'an, a fast growing Chinese city supported by a population of approximately 8.5 million , and the first China-based natural gas company publicly traded in the US. The company has three profitable business segments: retail sale of natural gas at company-owned natural gas fueling stations; end user delivery of natural gas services to residential, commercial and industrial customers; and conversion of gasoline-fueled vehicles to hybrid (natural gas/gasoline) powered vehicles. The city of Xi'an has approximately 20,000 Taxis, 5,000 buses and 3,000 special purpose vehicles that are powered by compressed natural gas.
The company also owns and operates a high pressure pipeline network of approximately 120 kilometers in the Xi’an area and is building a local government supported liquefied natural gas processing and distribution plant in Jingbian, Shaanxi province, which is scheduled to be completed in December 2009.
A Buffett-style analysis
1) Industry Prospects
The outlook on the natural gas business in China is very positive; the sector is attracting hundreds of million of dollars of investments; consider for example that in mid-August, PetroChina (PTR) announced it had cut a $41 billion liquefied natural gas purchase deal with ExxonMobil (XOM). The deal says PetroChina will purchase $41.29 billion worth of LNG from Exxon’s stake in the massive Chevron (CVX)-operated Gorgon LNG Project in Australia.
The LNG business is still in its infancy and growth prospects are huge, especially with China’s commitment toward reducing emissions: natural gas is a much cleaner fuel than oil or coal.
In China, natural gas currently is a minor fuel in the overall energy mix, representing only 5 percent of total primary energy consumption but it is growing at a rate of almost 6 percent per year. (source: International Energy Outlook 2009 – U.S. Department of Energy)
China Natural Gas is well positioned to profit from this trend, thanks to its upcoming LNG terminal in Jingbian, which will operate as a virtual monopoly in the area. Also the company will benefit from a recent joint venture with a Petrochina subsidiary aimed at building new CNG stations along existing pipelines.
2) Management
The company looks well managed; the CEO, Mr. Qinan Ji, has more than twenty years' experience in the energy and petroleum industries in operational, administrative, management and government relation roles. All projects have been delivered as scheduled and planned and the management is using free cash flow to fuel growth. The markets also seem to have faith in the management: the company has recently placed $50 million worth of shares with institutional investors, but the stock dilution has been welcomed with a 24% rise in the stock price, because all the money will be used to accelerate existing projects and sustain new ones, like the construction of new CNG stations and the completion of the LNG terminal.
3) Financials
China Natural Gas has been successfully growing its revenue in the past years:
Return on equity is an excellent 25% and the company is trading at just twice book value and at a P/E of around 10.
Highlights from the recent earnings release:
As of June 30, 2009, the Company had $9,701,176 of cash and cash equivalents on hand compared to $29,180,315 of cash and cash equivalents as of June 30, 2008. Net cash provided by operating activities was $14.4 million for the six months ended June 30, 2009 compared to net cash provided by operations of $8.1 million for the six months ended June 30, 2008. The Company paid $10.4 million to the LNG processing plant as a prepayment on equipment as well as an additional investment to construction in progress. Accounts receivable was a modest $1.0 million, and Days Sales Outstanding remained solidly below 10 days.
The Company reaffirms its projection for the full year 2009 of revenue growing 15% to 20% to a range of $78 million to $83 million, from $68 million in 2008. The Company also reaffirms its net income guidance of a range of $17.5 million to $18.5 million, a 15% to 22% growth from $15.2 million in 2008.
Current Long Term Debt to Equity ratio is a safe 54%
All these numbers point to a well manged company with a healthy balance sheet and excellent growth prospects.
4) Valuation
After the shelf offer, the outstanding number of shares will rise to about 21 millions. Assuming FY 2009 net income of $18 million, EPS will stand at $0.86 per share.
A simple discounted cash flow valuation with a very conservative earnings growth of just 15% per year for the next five years and an 11% discount rate, returns a fair value of $19 - $20 per share.
With the stock trading in the $11 - $12 range, we are presented with a 40% margin of safety.
Yet, this is a very conservative valuation and taking into account the industry prospects and China’s commitment to reduce emissions, the virtual monopoly with the upcoming government supported LNG plant, the joint venture with Petrochina to build new gas stations and a management that has been able to grow revenue at a double digits rate in the past years, I consider China Natural Gas a hidden gem, and am confident in giving the company a fair value of at least $25 per share.
Bottom line:
I see a big discrepancy between what I consider the company’s intrinsic value and its market price due to the fact that, with a market cap of just 170 million dollars, the company is flying well below Wall Street's radar; also worthy of notice, Nasdaq listing has just been approved (June 2009 – it was trading on the OTC board before), so the company is quite unknown to institutional investors – but this is just temporary, and the recent surge in trading volume might suggest that this hidden gem won’t stay hidden for long, so individual investors should take advantage of this situation and buy shares before institutions realize how undervalued this company is and start accumulating shares, commanding a higher market price.
Moreover, once the LNG plant will be fully operational, revenue and earnings will take a huge leap forward, because profit margins on LNG are higher than with compressed natural gas, and the company has already inked deals with municipalities and power plants to which it will sell LNG.
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This article has 38 comments:
I like this pick.
However, I am deeply suspicious of Chinese shell companies - it seems to be too much trouble to buy a defunct listing just to get hot money from the US into China...if anyone has an opinion on this I am all ears.
This is not a company I am familiar with, so thankyou for insight, I am looking for some energy ADR, so will do some research on this one.
The short version of my question is, where are they getting their gas, and how are they hedging the commodity market risks?
If the business model is like the pipeline companies in the US where the contract is for the transportation of NG regardless of the market price, then this could be a very good investment.
However, if the business is to buy NG on one end, and sell it on the other, taking the commodity price risk, then I will pass.
In my opinion, you would have to wonder 'why'.
On Sep 22 07:12 AM Peter Medved wrote:
> Very good article & great response to original commenter too
> !!
>
> This is not a company I am familiar with, so thankyou for insight,
> I am looking for some energy ADR, so will do some research on this
> one.
"Why wasn't the domestic stock market (China) enough to pull in sufficient capital?"
"Why isn't this company, if it is such a hot idea, large enough to go the traditional ADR route?"
"Why list in America other than to offer shares to Americans that want to buy a hot idea?"
"What is their recourse in America?"
On Sep 22 09:23 AM Ricard wrote:
> In my opinion, you would have to wonder 'why'.
>
> On Sep 22 07:12 AM Peter Medved wrote:
www.chinamericaholding...
www.aainvestments.com/...
Still, many folks claim that the Chinese just do not have the advantages as other nations. Indeed, I believe this is nonsense, and I am not sure why everyone says that. Whereas, the nation may lack oil reserves, other than that, China has abundant resources, more coal in China than almost anywhere. There is uranium, copper, gold, natural gas, and you name it. They just don't have the infrastructure yet to keep up with their ominous production needs.
The massive production needs thanks to the United States middle class buying up all their products. Nevertheless, geologically speaking China is a gold mine for raw materials, the trick is to dig it out without polluting the runoff streams that lead to rivers and into the ocean, which are already over taxed with pollutant runoff. So, China is doing fine on natural resources with lots of reserves, while Taiwan on the other hand has virtually no resources whatsoever.
----------------------...
Money without intelligence is like a car without a road.
www.intelligentinvesti...
finance.yahoo.com/news...
On Sep 22 09:54 AM Obamitall wrote:
> Apparently enough readers agree with this article to drive the price
> up about 9% this AM. The early volume is almost at the daily average
> volume. So at this point it would be wise to sit back and wait for
> a better price.
Yup classic PUMP & DUMP. Except this wasn't done through mass emails. I'm sure the writes sold some if not all of his position. I think it's risen too far too fast just as the market has in general. So if you buy here as an investment understand that you will see this stock back in the $4-$6 range. The first poster got a lot of flack from the guy when he pointed out this company didn't pay a dividend. Well if you buy here and watch it go down to $6 you would not even get a dividend payment, why are you holding it then? Because you are an idiot? Because you still believe in buy & hold like the santa and the tooth fairy? Sure everyone has their own strategies for how to invest, perhaps that guy needed more dividend income...
But this is typical in the investment world today, there's so much talk about growth in china in the media that every idiot and his mother are jumping into any company with the word china.
All-in-all, this was an awesome pump & dump. Please see it for what it is, you KNOW the author sold some as it jumped =)
Also, I have been a China watcher for 40 years; I love the country, but it is a little bit like the old 'wild west' in a lot of ways, so your caution is well advised.
I guess the general thesis makes enough sense here for me to buy a bit. As I said earlier however, small investments in such situations (relative to total portfolio) make sense, and should be viewed speculatively to at least some extent.
Interesting too that this stock is up almost 15% today.
In my opinion, you would have to wonder 'why'."""""""
And wonder why they had to sell $50 million in new stock if they are so "profitable"
This is a capital intensive utility with no reserves serving residential &
(natural gas/gasoline) powered vehicles.
In china, the gov. caps the price of auto gas,
do they cap the price of methane too?
Biomethane(bio-gas) is exactly the same methane as in natural gas(fossil methane). The two can be mixed in any proportion with no loss of function or performance. Methane is a greenhouse gas that has 17X the heat capture ability of CO2. Mixing biomethane that would have ordinarily escaped into the atmosphere(ie: sewage treatment)---and burning it, exchanges high greenhouse effect CH4, for low greenhouse effect CO2. There will be less greenhouse atmosphreric warming by doing this than if the methane were allowed to escape into the atmosphere. With just a 6% mixture of biomethane with fossil methane----you achieve a balance point. Any mixture over 6% biomethane and you reduce the net greenhouse warming effects of the resulting emissions. Methane is clean, abundant, cheap and easy to handle. Methane is much easier to obtain than coal, and requires far less capital investment than coal mining, and the environment damage from methane is completely minimal compared to coal or petroleum. You don't get methane from stripmines. Unlike coal, contaminants and pollutants can be removed before it is used(since it is a gas).
Methane can also be used along with liquid fuels in diesel engines. Bifuel diesel engines easily overcome all of the problems with diesel use---(cold weather starting and fuel gelling problems, particulate emissions from petroleum diesel) and with a comparative octane of ~120 can make full use of the high compression/high thermal efficiency that diesel engines offer. Diesels can typically get as good mileage per BTU input(or better) than complex and expensive hybrids. And bi-fuel use in diesel engines can also be used to generate electricity directly-----allowing more dispersed generation and reduced transmission losses. You can generate the electricity where you need it with no loss of power to get it from centralized plants----reducing transmission power loses, and the capital expense of long distance electrical transmission(no high tension cable, towers, transformers, maintaince etc.)
And natural gas uses completely off the shelf technology that is in widespread, familiar use and manufacture now. No nasty surprises about what will work and what won't.
Natural gas is the "Clean Coal" we've been spending billions of $$$ to try to create. Clean, efficient, cheap and abundant---no one uses electric to try to heat their home or water heater if natural gas is available, it is that much cheaper to use. Natural gas can be converted to butane or propane for more mobile use also.
I think there is an excellent potetial for greatly expanded use of natural gas here and world wide if people will just stop long enough to look at all the advantages it offers.
As for the comment where some one suggests you buy shares for reasons other than making making money,I have a bridge in Hu nan province for sale...really cheap.
Those in favour of buying into Chicom companies need a serious reality check.
On Sep 22 08:56 AM auto44 wrote:
> If China knows what and how to do, why is the U.S. so incapable of
> seeing and doing the same thing in regards to ng for transportation..
> Think crooked politions. China may be less a perfect society but
> the government at least recently seems to be putting the good of
> is public ahead of it's political greed.
It is actually cheaper to "go public" by buying a company in bankruptcy than it is to do an IPO and pay for the listing fee.
If you add up all the fees by accounts, attorneys, the exchange, the SEC, it is not cheap to go public from scratch. But, if you can get another company, to pay for all of those fees to do an IPO (with other investors money) and then go Chapter 7. You can purchase those same fees at a discount.
That is just smart business.
Back years ago in New England there were two dress shirt manufactures who fell on hard times, they then merged thinking that would help their poor business model (they couldn't compete on labor because the competition went overseas years before). They eventually had to file for Chapter 7 and a savvy investor bought the bankrupt company to obtain a public listing at a discount. These two dress shirt makers were Hathaway and Berkshire.
#2 Why list in the U.S. over China
If you are a businessman in China, and you can raise $100 million dollars in the U.S. faster and cheaper, wouldn't you do it?
China may do a lot of things better than the U.S., but capital formation is not one of them yet. It is faster and easier to raise a pot of capital here than it is there. How many big hedge funds, big insurance companies, big banks, big retirement plans, big mutual funds do they have in China? If you have to raise the same amount over there, your marketing costs to raise funds would be a lot higher, maybe double. This is money that you could be doing something else with, like building a new CNG station to service your customers.
Bottom line, it is still a better business decision to raise capital here than it is there.
Both of these decisions are smart decisions and show intelligent management at the helm. If you were in China you would look to do the exact same thing that these guys did.
Once you have gone through some early rounds in the U.S., and once your company has matured, along with the Chinese financial markets which broadens the investor base there, you then come back for an offering there. From zero to 10 you use "other peoples" money, ours in the U.S., then once you reach a certain threshold, you come back to the home market.
How they have executed in raising capital and obtaining a public listing have been brilliant. If they can do they same in marketing natural gas to customers in China, this is a winner.
On Sep 21 07:20 PM Ricard wrote:
> Interesting pick, agreed with the majority of the comments that this
> stock has a lot going for it.
>
> However, I am deeply suspicious of Chinese shell companies - it seems
> to be too much trouble to buy a defunct listing just to get hot money
> from the US into China...if anyone has an opinion on this I am all
> ears.
CORRECTION: I meant "accountants" not "accounts".
On Sep 21 10:43 AM secmaven wrote:
> And the dividends paid by this utility are? Nothing. So all of
> our income here must come from the successful exploitation of the
> greater fool theory.
However, your statement below can go both ways. It is exactly the level of scrutiny that I would question. When things go right, everything's fine, and we all play in the sun. When things go wrong, what happens? Furthermore what will be the signs of such? I would want the scrutiny to be as high as possible so that management is given as few incentives as possible to lie, cheat and steal. Period. That is called due diligence, and by your own statement it is lacking in these shell companies. Also, your statement that they may feel more responsible towards their own people than they do to us is something to be apprehensive about.
Most of these companies are small-to-micro caps. News in China alone is probably hard to come by, to say nothing about news translated into English available by some major publication. You may say that they are subject to US GAAP standards, but what are accountants going to to? Fly to China and verify operations? No, they're going to look at the books, and believe whatever they're told about them. And what are we going to do if they do lie? Deport them?? Tell them 'don't do it again'? This sounds like moral hazard waiting to happen, regardless of the integrity of the majority of operations.
I know about of the economic aspects of shell listings, and agree that it is smart business...perhaps too smart. My suspicions are about the questions I can't answer. Besides the above, let's talk about the capital base - what % of the investors are actually Chinese? I would feel much better about an overall foreign minority position in these kind of companies, but that does not seem to be the case.
It makes me uneasy that we are more excited about Chinese operations than the Chinese. That alone sets off alarms in my head.
I can easily imagine a scenario where some distant setup falls apart, and is still able to sell to a most willing foreign public additional shares in a nearly bankrupt operation. After all, why not? Are you going to care about people 10,000 miles away that are 10 times more affluent than you losing their country club membership, or about your own family and your worker's family keeping their jobs and putting food on their tables? I mean, this COULD be THE TIME that the capital works in your favor and everything pays out!
This does not have to be just the Chinese...it could be anyone, anywhere far off with an idea that may rhyme more here than it does there.
On Sep 22 09:00 PM Don-n-ABQ wrote:
> PS: I forgot to mention that: If you raise capital in China from
> the Chinese you receive one type of scrutiny. If you raise it in
> the U.S. it is another. There is less pressure to perform here
> than there. The "pressure factor" has to be factored in too.
>
> CORRECTION: I meant "accountants" not "accounts".
THAT'S BALONEY, BUFFIT THOUGHT HE COULD MAKE A GO OF THE COMPANY WHEN HE BOT IT.
LATER HE CHANGED HIS MIND.
In turn, the underlying demand for natural gas and perhaps a new seasonal demand pattern that would result from this 'new' source of demand.
The fact that this guy is on the BOD is huge in terms of credibility.
Source: 10-K pg 46
Lawrence Leighton, Director - Mr. Leighton has had an extensive 40-year international investment banking career. Beginning at what is now Lehman Brothers, he advised on financing for the Mexican Government and leading Mexican corporations. As Director of Strategic Planning for the consumer products company, Norton Simon Inc, he initiated and executed the acquisition of Avis Rent-a-car. Subsequently, he was a Limited Partner of Bear Stearns & Co., a Managing Director of the investment bank of Chase Manhattan Bank and then President and Chief Executive Officer of the U.S. investment bank of Credit Agricole, the major French Bank. Among his transactions have been advising Pernod Ricard, the major European beverage company, on its acquisitions in the United States; and advising Verizon, the major U. S. telecom company, on its dispositions of certain European operations. Mr. Leighton received his BSE degree in engineering from Princeton University and an MBA degree from Harvard Business School. He holds a commercial pilot’s license with instrument rating
I have no idea how your math works. Can you show how five years of earning (eps 0.86?) give a value of $19-20???
www.gurufocus.com/fair...
I used the following parameters:
EPS $0.86 (Year 2009)
Growth rate in the next 5 years = 15% (very conservative)
Terminal Growth Rate = 5% (very conservative!)
Discount rate = 11%
Book Value = $5
On Sep 24 03:50 AM sorsorday wrote:
> "A simple discounted cash flow valuation with a very conservative
> earnings growth of just 15% per year for the next five years and
> an 11% discount rate, returns a fair value of $19 - $20 per share."
>
>
> I have no idea how your math works. Can you show how five years of
> earning (eps 0.86?) give a value of $19-20???
You've probably never heard of Value America, nor that Smith put in $10 million of his own cash into the firm. That's because within two years of its IPO, it filed for bankruptcy amid lakes and rivers of red ink.
You would think that having the support of the founder of one of the most successful logistics firms in the world would be crucial to internet retailing. Yet, that turned out not to be the case, and that man is himself now $10 million poorer.
He was just one of the many 'star' players on its board, and those directors presided over one of the worst basket-cases to come out of the dot-com era.
Caveat emptor.
On Sep 23 09:45 PM worldclass777 wrote:
>
> The fact that this guy is on the BOD is huge in terms of credibility.
>
>
> Source: 10-K pg 46
> Lawrence Leighton, Director - Mr. Leighton has had an extensive 40-year
> international investment banking career. Beginning at what is now
> Lehman Brothers, he advised on financing for the Mexican Government
> and leading Mexican corporations. As Director of Strategic Planning
> for the consumer products company, Norton Simon Inc, he initiated
> and executed the acquisition of Avis Rent-a-car. Subsequently, he
> was a Limited Partner of Bear Stearns & Co., a Managing Director
> of the investment bank of Chase Manhattan Bank and then President
> and Chief Executive Officer of the U.S. investment bank of Credit
> Agricole, the major French Bank. Among his transactions have been
> advising Pernod Ricard, the major European beverage company, on its
> acquisitions in the United States; and advising Verizon, the major
> U. S. telecom company, on its dispositions of certain European operations.
> Mr. Leighton received his BSE degree in engineering from Princeton
> University and an MBA degree from Harvard Business School. He holds
> a commercial pilot’s license with instrument rating
Look at solar cells .wind mills etc.
In any investment in China ,Investing in a chinese company is best
An outsider will be copied and will be beat
Just a few months ago everyone was saying that China would
fail because of exports.They have adjusted well
They think long term ..Look at their purchase of natural resources
We could use some of the same polititions here. .