China Natural Gas: There's Still Time to Catch Some Growth

China Natural Gas, Inc., (CHNG.OB), is the first China-based natural gas company publicly traded in the US. It currently owns and operates a 120 kilometer long compressed natural gas pipeline in Xi’an, China, a fast growing Chinese city supported by a population of approximately eight million and is the “gateway” to the broad Western regions of China. CHNG has three profitable business segments: end user delivery of natural gas services to residential, commercial and industrial customers; wholesale natural gas to retail natural gas filling stations; and retail natural gas at company-owned natural gas filling stations. The city of Xi’an has approximately 20,000 Taxis, 3,000 buses and 2,000 special purpose vehicles that are powered by compressed natural gas.

I’m quite certain I've posted CHNG.OB in bull mode several times, though for some odd reason I never went further than looking at the chart and saying to myself , “hmm, interesting. I’ll add it to bull mode”. I’m regretting it now, as this stock looks very attractive and good money could have already been made.

Fundamental Analysis:

CHNG.OB is a small cap company with a current market cap of $99.5m, compared to the Oil & Gas industry's 2.5b average cap. While its current PS ratio is trading at a higher multiple than the industry's, the important thing to note is CHNG’s PE ratios, with trading at 13.7x multiple compared to the industry's 17.3x PE. Even more impressive is their forecasted growth into the future with a one year forward PE of just 3.67x. For the current year, CHNG is expecting to report .39eps and a huge jump to follow in 08′ with expectations of 1.12eps, and 1.39eps in 09′. Hypothetically speaking, if CHND continued on average its trading multiple of 13.7x we could expect price per share to be trading in the mid teens in 2008, if the company doesn’t run into any trouble. The financial condition also looks great here, with a high current ratio and no long term debt, making this an attractive growth stock.

Technical Analysis:

Price made a very bullish breakout from a key resistance point of 3.5 last week, which I will serve as very heavy support if the price makes a dip from here. In yesterday's session, price continued this rally on above average volume breaking out from a bullish pennant continuation pattern. This chart is very bullish and volume has been fairly consistent in 2007.

Long term chart:

Short term chart:

Conclusion

I really wish I would have dug into this company back when it was trading in the 2’s, and not now that it just breached $4/share. But even at this price the stock looks very attractive in my book, and I think it should continue to trend higher given its fundamentals, and bullish technicals. Although, given that the price has recently made a very strong 50% rally in a short amount of time, it's possible that we could see some profit taking, maybe even back to 3.50 support, which would be a bargain for these shares. So for now I will only fill a 1/2 position, and look to buy the second 1/2 on a dip if I can.

Disclosure: Author has a long position in CHNG.OB

Comments

[john gaats]

Sounds like a Chinese local player. Does it plan to be exchange traded any time soon?

[SeekingAlphaEditors]

I just checked their latest press release which says this:

"Additionally, today China Natural Gas announces several new corporate initiatives. By the end of 2007, the Company expects to staff and have functioning a representative office in the U.S. in order to facilitate communication with new and existing shareholders and accountants, as well as potentially manage the process to list the Company's securities on a national securities exchange. The Company also anticipates the appointment of a global auditing firm as well as the appointment of additional independent board directors."

biz.yahoo.com/prnews/0...

[Joe Mama]

Aside from SEC docs, how are we supposed to learn anything about this company? Do they hold earnings calls? It doesn't appear that way. I don't see any transcripts on Seeking Alpha.

[David Zhang]

You must have missed this article:

"China Natural Gas: Tempting Financials, Sketchy Shareholder Relations"
china.seekingalpha.com...

[Bobwins]

How did you get your eps numbers?

"For the year 2007, the Company expects revenue to increase 70% to $32.0 million from $18.8 million in 2006. The Company expects net income to increase 70% to $9.3 million in 2007 from $5.5 million in 2006. For the year 2008, the Company anticipates revenue and net income growth of at least 70%."
2006=5.5/22 or .25eps
2007= 9.3/24.2 or .38eps
2008= +70% or 15.81/26(assuming warrants in the money)= .61eps

So today's price 4.43/.25=17.7 p/e ttm
2007 4.43/.38= 11.65 forward p/e
2008 4.43/.61= 7.26

Is there another PR with different company guidance?

[Cameron Fous]

Hey bnorikane,

I got my #'s from the Etrade and Yahoo finance analyst reports.

-fous

[Cameron Fous]

Another thing to note is that they expect 70% to be conservative growth #'s

"For the year 2008, the Company anticipates revenue and net income growth of at least 70%."

[pwu8]

CHNG has three lines of business:

- residential gas sales for newly constructed building
- whole sale of gas and compressed gas to gas filling stations
- company onwed compressed gas filling stations (for viehcles)

The company stated it's the last that's going to drive the company's high growth. The company has 14 stations operational today and is planning to have 20 under construction by end of 07. Each new station can potentially add $0.02 to the eps - you can do the rest of calculations from here.

~p

[David Zhang]

P: What's your take on CHNG and their ability to execute?

[pwu8]

Obviously CHNG has had hiccups in Q1 and maybe in Q2 in building new CNG filling stations. The original expansion plans thus were delayed, by a quarter or two. We would otherwise be looking at $5 in May, $8 in Aug, $10-12 before end of 07, and $20 range in 08 when they launch LNG productions.

The reason for the delay is UNKONWN, which is the frustrating part of investing in CHNG. It could be a licensing dealing with local government officials in He’nan province – outside of CHNG’s home territory. That would not be uncommon for China today. CHNG may have to learn how to pay and pave their way into regions beyond Shaan’xi province.

Besides the execution, two top obstacles for CHNG so far were (1) the lack of PR and the US representative, and (2) lack of investors (there were less than 100 stock owners not so long ago) and the trading volume. CHNG is addressing both issues by hiring a PR firm in the US, and to list the stocks also in a Chinese exchange, both by end of 07. I’m encouraged.

~p