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Simon Monger
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I have been an active trader and investor for more than 10 years, having traded financial instruments ranging from options to futures. I tend to focus on undiscovered companies that have exceptional value on their balance sheets, but lack coverage by traditional news and media sources. I built... More
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  • China Natural Gas Turns Up the Heat 0 comments
    Jul 17, 2009 2:45 PM | about stocks: CHNG

    China Natural Gas, Inc. (OTC:CHNG) may be relatively new to the Nasdaq, having moved from the infamous OTC-BB less than a month ago, but its great prospects could make it a red hot investment over the next couple of years. The company is positioned to be China’s leading natural gas retailer and distributor through its fueling station network, exclusive pipeline gas supply, continuous upward migration along the industry value chain, and strong brand.

    Natural gas accounted for only 3 percent of total Chinese energy use in 2006, compared to 24 percent in the United States. However, adoption of the “clean” fuel is expected to quickly grow at a rate of 5.2 percent per year between 2006 and 2030, according to International Energy Outlook 2009 estimates. Meanwhile, natural gas penetration in taxis and buses has been quickly increasing in Chinese urban areas thanks to government encouragement.

    In 2007, China’s State Development and Reform Commission officially listed CNG/Gasoline hybrid fuel vehicles in the country’s “encouraged development” category. As a result, many local governments issued policies to provide substantial subsidies for taxis and buses to remodel into CNG-compatible vehicles. Meanwhile, the improved economics of natural gas over gasoline is making it an attractive option for individuals as well.

    Growing Businesses

    China Natural Gas operates 35 compressed natural gas (CNG) fueling stations and several engine conversion shops in Shanxi and Henan provinces. These stations and technologies provide two key economic advantages for individual and commercial drivers. First, CNG-fueled vehicles emit 87% less nitrogen oxide, 70% less carbon monoxide, and 25% less carbon dioxide. But perhaps more importantly, CNG offers a 50% cost savings over gasoline.

    China Natural Gas also operates one of only four liquid natural gas (NYSEMKT:LNG) plants in China. The project was approved by the State Development & Reform Commission under State Council as well as China Petro, the country’s monopoly of natural gas resources. With LNG supply in great shortage in China and only four plants in operation, this segment is able to generate consistent profits with an extremely high barrier to entry for competitors.

    Cheap Valuation

    China Natural Gas has consistently grown at high double digit rates over the past three years, while maintaining solid operating and profit margins. Meanwhile, the company’s enviable balance sheet contains not only a healthy current ratio but a high level of cash. Combined with a price-earnings ratio of just 7.5x and a PEG ratio of less than 0.1, this stock is very attractively priced by almost any measure used by professional investors.

    Last quarter, China Natural Gas earned net income of $4.2 million, or $0.29 per share, on revenues of $18.5 million. Meanwhile, the company’s balance sheet showed a current ratio of 2.51 and cash of $9.05 million or $0.62 per share. On a price-earnings-to-growth (NYSE:PEG) basis, the company is trading at less than 0.1, which suggests that it is substantially undervalued given its growth prospects and potential going forward.

    Conclusion

    Natural gas is a growing energy sector in China, particularly in the automotive industry. China Natural Gas is well-positioned within this niche industry with 35 CNG fueling stations, a LNG plant, and big plans for growth in the future. Meanwhile, the company’s stock trades at a substantial discount to its intrinsic value, given the strong growth prospects going forward. As a result, this is a stock that long-term investors may want to take a look at adding to their portfolio.

    Themes: China, Natural Gas Stocks: CHNG
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