Sinoenergy: Downstream CNG Player with Upside Potential

Sinoenergy (SNEN.OB) is a China based 'downstream' player in the CNG market. In layman's terms, this company makes compressed natural gas containers, delivery vehicles, conversion kits and builds and operates CNG filling stations. Last quarter, the company reported quintessential China-like results such as year over year revenue growth of 194% and net income growth of 712%. For the first 6 months of fiscal 2008, net income was $5.2 million, or $0.14 per diluted share, up 252.1% from $1.47 million, or $0.06 per diluted share, in the six months ended March 31, 2007. Given the secular growth potential in this industry, Sinoenergy looks well positioned for continued expansion.

Strong economic growth and rising income levels have increased demand for motor vehicles and transportation fuel, making China the second-largest energy user in the world. Vehicle related pollution is increasingly becoming a significant problem in China’s cities, prompting the Chinese government to aggressively promote the use of natural gas. The use of CNG as a fuel significantly reduces the cost of operating a vehicle. Analysts estimate that at current market prices, switching from gasoline to CNG can reduce fuel costs for a bus or a taxi by more than 40%. An industry projection made by PetroChina (PTR) estimates that there will be more than 1,000 retail CNG filling stations and more than 300,000 CNG vehicles in China before the year 2010.

While China is rich in natural gas resources, it accounts for only 3% of fossil fuel consumption in China, compared to 20% globally. As a clean energy option, development of natural gas as an alternative fuel is a priority in the National Development and Reform Commission’s 11th five year plan. Officials predict that China’s natural gas demand could reach growth of 20% plus CAGR. The Chinese government has strongly encouraged the State Owned Enterprises to invest aggressively in the development of China's natural gas distribution infrastructure. The PRC government has recently offered tax incentives for foreign companies which invest in the natural gas processing business.

In Wuhan City, Sinoenergy has received government approval for the tax incentives, and the company plans to apply for these benefits in the other areas in which it will operate. In addition, according to a Fuel Tax Regulation proposed by the Chinese government, natural gas vehicles are expected to be treated under a half-tax bracket compared to vehicles powered by gasoline or diesel. Part of the Sinoenergy CNG filling station network plan will be to operate 23 stations in Wuhan City, which is the largest transportation hub and trade center in China's inland.

Sinoenergy has recently traded at the lower end of its 52 week range which could be the result of the delayed rollout of station openings in part due to obtaining government permits which has become a more comprehensive process. This weakness presents an opportunity to research this small company with large opportunities.

Disclosure: none

Comments

[tresspass:]

This is yet another progressive move by the Capatalist PRC. Less cost, availability, GREEN and this stock is a stock of the future. It's another CHNG with more upside.

The station delay is a delay and nothing more per the NR's that have come out in the past Q.

The author makes good points on the above and points to a diversity of products and services that are in the sweet spot for 2008, imo

2008 Jun 18 09:37 AM

[ChinaGasGuy:]

Matt, good synopsis, although one of the issues which has held valuations of some of the downstream players back has been the false perception that their margins are at risk like the major Chinese oil companies which must import at the market price and sell at a price set by the government. SNEN and CHNG on the other hand buy at a government fixed price from upstream suppliers and then sell based on guidelines from their local municipal governments. The municipal governments have a vested interest in seeing the CNG distributors succeed, add jobs, improve air quality, etc. and have been accomodating and flexible in regard to the 'pump price' for CNG. CNG is a considerably cheaper fuel vs. gasoline in terms of economics which provides further latitude in which to adjust pump prices. Consequently while some of the oil majors in china have seen their margins and share prices under pressure, the downstream CNG distributors have seen stable margins, phenomenal unit growth (triple digit) and accelerating adoption. Eventually the market will figure this out and award proper valuations to these little guys.

2008 Jun 18 09:49 AM

[zygas:]

I expect all sectors of this vertically integrated company to have continued high growth in the next year with the demand for more stations, station equipment, NG trucks, converstion kits and tanks along with the high margin NG retail stations. IMO, this is a sleeping giant that is gearing up for the big shift taking place in vehicular fuel. Their forte and very successful portion of their business historically was in designing and building NG retail stations and now they are building their own so I suspect they won't have much in the way of govt inspection problems holding up the release of the stations. It's just that the govt just changed the approval process and piled on more red tape yet kept the # of inspectors the same - ie. small. Its like getting homes inspected during the housing boom in 2003-2006. With all other cylinders firing well, the retail stations is just the icing on the juicy revenue cake. They also have a major interest in 1 natural gas processing/pumping plants being constructed and a minor interest in another in which supply pipelines are being built set to complete in around 2009. Margins should be high in their stations owing to their expertise and the fact that they are self-built and maintained. Add to this the fact they own most of the pumping plant and own the delivery trucks and have assurance of continued NG supply and you have a stable high margin revenue stream. I don't know all the things in the works for the future, but just the revenue stream being constructed right now, ie., investment of capital for the revamping of their manufacturing side, the processing plants being built, the high # of stations being built, the govt support, I mean, come on, can you start to see the #'s piling up on this one in the next 2 years? And look at the valuation right now...peanuts on a dollar. They just hired Ernst and Young and a new auditor and have filed for nasdaq. Once several of their planets line up, this little known gem will be well more than a triple bagger.

2008 Jun 18 07:14 PM

[Niksurfs:]

I agree with all the assessments made here, SNEN is an emerging leader and it is great little company with many ways to benefit from the PRC initiatives that are now mandates.

I own CHNG & SNEN as well as GU. These are strong emerging alternative energy plays, they have significant barriers of entry for new players. The economics with the fuel increases of 17% today make these even a more compelling buy, especially at these levels.

2008 Jun 19 12:27 PM

[The Gator:]

Recently saw this post on a message board over at yahoo. If anyone has any comments/insights it would be much apprechiated.

Be wary of companies that CCG represents. They have been linked to shady people. Frequently they are only hype machines for hot industries. Look at how CCGY turned out. CCG Elite told investors this was a biodeisel company long enough to prop the PPS for a private placement. Then we found out that the company "abandoned" biodiesel to persue "specialty chemicals"...gluestick... This is one of many examples I could give of CCG overhyping its clients.

Sadly, some investors in CCGY are still praying it will be a biodeisel company.

CCG elite has also been exposed in a Baron's article to shady auditors.

Be careful with CCG represented companies. They are good hypesters, but I wouldn't want to be overweight in any single one of their companies. Crocker Caulson is full of crock.

2008 Jun 21 01:44 PM

[yeppers:]

It's true, you gotta be careful with CCG. I don't like them too much. They will make any company seem like its in some "high tech" or "hot topic" field even if they have to stretch the truth to do so. There is one company of theirs I was looking at getting into...CCG billed it mainly as making parts for nuclear reactors...turns out its just a regular metalworking company that does a little bit of everything, hardly a "nuclear" play. Plus it turned out the company had gotten fined by the EPA and all kinds of stuff. Yuck...needless to say I'm glad I did my DD

...Plus... Crocker Caulson is a very rude man, if you've ever spoken to him. Your stereotypical arrogant New Yorker

2008 Jun 23 09:51 PM

[The Gator:]

Thanks for the insight. It is much apprechiated. Despite the shadyness of CCG I still beleive this is a promsing company with much upside. Im trying to look at it as objective as possible and recently they have made some key moves which in my opinion have enhanced its credibility.

1. Highered a new CFO
-Apparently the old CFO Laby Wu barely spoke English however the new CFO is born in Canada, speaks both english and mandarin fluently and has over 10 years auditing experience. And has worked for PricewaterhouseCoopers which is one of the one of the world's largest professional services firms. A person with over 10 years of experience, who is a chartered accountant and has done audits for some of Canadas biggest firms is a good sign of credibility and proper financial reporting.

2. Sinoenergy Corporation Engages Ernst & Young for the Implementation of Sarbanes-Oxley Act Section 404
This is yet another great move by Sinoenergy as they have highered an highly reputable external firm Ernest and Young for the implementation of the Sarbanes-Oxley Act Section 404. According to my research Section 404 pertains to

The most contentious aspect of SOX is Section 404, which requires management and the external auditor to report on the adequacy of the company's internal control over financial reporting (ICFR). This is the most costly aspect of the legislation for companies to implement, as documenting and testing important financial manual and automated controls requires enormous effort.

Under Section 404 of the Act, management is required to produce an “internal control report” as part of each annual Exchange Act report. See 15 U.S.C. § 7262. The report must affirm “the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting.” 15 U.S.C. § 7262(a). The report must also “contain an assessment, as of the end of the most recent fiscal year of the Company, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.” To do this, managers are generally adopting an internal control framework such as that described in COSO.

Seems like a very legit move that creates consistent financial information on the highest standards in compliance with the SEC




Im my opinion these two moves made by Sinoenergy were key moves to gain credibility in the market and more so gain credibility for a NASDAQ listing. Perhaps there listing is under review and these two moves are enhancing credibility and NASDAQ is making Sino make minor improvements in order to grand them a listing on NASDAQ. I hope the listing will be coming up by the end of summer.



Any comments/criticisms/in... are much apprechiated. This stock looks to be posied for high growth and it only seems like a matter of time.

2008 Jun 24 12:43 PM

[User 208916:]

Here, see..

Sinoenergy Corporation Opens Four New Retail CNG Filling Stations
Wednesday July 2, 8:00 am ET


BEIJNG, July 2 /Xinhua-PRNewswire-Fir... -- Sinoenergy Corporation (OTC Bulletin Board: SNEN - News; ''Sinoenergy'' or the ''Company''), a manufacturer of compressed natural gas (CNG) vehicle and gas station equipment and a designer, developer and operator of retail CNG filling stations in the People's Republic of China, today announced the opening of four new retail CNG filling stations that started selling CNG as of July 1, 2008.
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Three of the new CNG filling stations are located in Zoujia Wan, the City of Wuhan, Hubei Province. The fourth CNG filling station is located in Dawulu, the City of Pingdingshan, Henan Province. Each of the stations has four filling outlets, and is open 24 hours a day, seven days a week. Targeted sales for each CNG filling station, set by the Company and used in its business planning, are 10,000 cubic meters per day (equal to 353,147 cu.ft.) The designed maximum physical capacity of a standard CNG filling station is about 18,000 cubic meters per day (equal to 635,665 cu.ft.) All of the four new retail CNG filling stations are fully licensed by local governments to operate and sell CNG for use in CNG powered vehicles.

The Company has now opened and is operating a total of eleven retail CNG filling stations in Central and Eastern China.

Wuhan is the capital of Hubei Province and the biggest city in Central China, with a population of over 9 million people. The city has about 7,000 CNG powered vehicles. There are fewer than 14 retail CNG filling stations in Wuhan, and the Company believes that at least 20 to 30 retail CNG filling stations are needed to meet current demand for CNG. Sinoenergy plans to develop and open additional retail CNG filling stations in Wuhan in 2008.

''We are very pleased to have four new stations open and operating in Wuhan and Pingdingshan,'' said Mr. Bo Huang, CEO of Sinoenergy Corporation. ''Opening three new CNG stations in Wuhan is a significant milestone that we achieved after extensive coordination and communication with a number of local government agencies. Although Wuhan's government approval process took longer than we expected, the successful opening of three stations in Wuhan has reinforced and strengthened our ability to work in the future with Wuhan's government. Sinoenergy will continue to develop and maintain close contact with local government agencies in Wuhan and other markets to accelerate the development of our CNG filling station business throughout Central and Southeast China.''

About Sinoenergy

Sinoenergy is a manufacturer of compressed natural gas (CNG) vehicle and gas station equipment as well as a developer and operator of retail CNG stations in China. In addition to its CNG related products, the Company manufactures a wide variety of pressure containers for use in different industries, including the design and manufacture of various types of pressure containers in the petroleum and chemical industries, the metallurgy and electricity generation industries and the food and brewery industries.

Safe Harbor Statement

This announcement contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact in this announcement are forward-looking statements, including but not limited to, future changes in the wholesale and retail price for CNG for vehicles in China; changes in policy by the national, provincial and municipal government of the PRC regarding CNG prices, the CNG vehicle industry, the construction and operation of retail CNG filling stations and related issues; the Company's ability to raise additional capital to finance the Company's activities; the effectiveness, profitability, and the marketability of its products; the future trading of the common stock of the Company; the ability of the Company to operate as a public company; the period of time for which its current liquidity will enable the Company to fund its operations; the Company's ability to protect its proprietary information; general economic and business conditions; the volatility of the Company's operating results and financial condition; the Company's ability to attract or retain qualified senior management personnel and research and development staff; and other risks detailed in the Company's filings with the Securities and Exchange Commission. These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectations, assumptions, estimates and projections about the companies and the industry. The Company undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances, or to changes in its expectations, except as may be required by law. Although the Company believes that the expectations expressed in these forward looking statements are reasonable, they cannot assure you that their expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from the anticipated results.


For more information, please contact:

Sinoenergy Corporation
Ms. Anlin Xiong, Vice President
Tel: [phone] x860
Email: anlinxiong@sinoenergyc...
Web: www.sinoenergycorporat...

CCG Elite Investor Relations Inc.
Mr. Crocker Coulson, President
Tel: [phone] (New York)
Email: crocker.coulson@ccgir....
Web: www.ccgir.com

2008 Jul 02 11:30 PM