China Natural Gas: Growth Appears Certain

| About: China Natural (CANL)

China Natural Gas (OTC:CHNG) is a small natural gas utility company in Shaanxi Province, PRC. It is a Delaware registered company that transports, transmits and distributes natural gas to residential, industrial and commercial customers in China.

CHNG also operates natural gas filing stations in Xian. Yes, there are cars using natural gas instead of gasoline in China. According to the Chinese government (2006), Xian has 5,000 buses and 20,000 taxis using natural gas as fuel. CHNG is opening up more natural gas stations all over the region. It just opened 4 new stations in this December. Of course, CHNG has a “monopoly” license from the Chinese government as the sole natural gas provider in its region. Financially, the company has grown more than 200% in both revenue and earnings for the last couple of years. I have no doubt that the company has great growth potential. You can check out the company website here

China Natural Gas recently reported second quarter earnings and the results are great. Here are the highlights.

Financial Highlights for the Second Quarter 2008:

  • Revenue increased 104.2% year over year to $16.9 million
  • Gross profit increased 85.0% year over year to $7.7 million
  • Income from operations increased 58.0% year over year to $5.1 million
  • Non-GAAP net income of $3.8 million, or $0.13 per diluted share

Another catalyst for the stock is that the company is applying for NASDAQ listing. The company's CFO confirmed that CHNG is applying for NASDAQ listing, but the purpose of the listing is for issuing more stocks. CHNG needs a total of $130 million capital for expansion. The company is applying for a $60 million loan from Bank of China, and is planning to issue $70 million in new equity once the stock is listed on NASDAQ. This is a great move by the company, as the equity cost of capital would be lower when the stock is listed on NASDAQ compared to issuing stocks now on the OTC bulletin board.

Of course, the equity ownership would be diluted when new stocks are issued. Generally, issuing more shares is not beneficial to existing equity owners because the earnings will be diluted. However, the diluted earnings would be more than offset by the earnings growth. This is the ultimate purpose of raising capital for expansion. As long as the company can meet its expected earning growth, the stock price should go up. For example, let’s say a company earns $10,000 with 10,000 shares outstanding; the company issues 50% more shares, but the earnings grow 80%. Here are the results:

So, as long as growth rate for the earnings and the shares outstanding is the same, there is no dilution of earnings. Based on the historical earnings performance, I have confidence in the management to meet its earnings target growth. No doubt that natural gas is a growing industry in China due to high oil prices and environmental concern. In fact, the Chinese government is promoting cleaner energy, and natural gas companies will benefit from this environment policy. Thus, the future of natural gas in China is bright, and CHNG’s plan for expansion is an appropriate business strategy to take advantage of the potential growth prospects.

Disclosure: Author holds a long position in CHNG.OB