On August 11, 2009, China Natural Gas (OTC:CHNG) announced Q2 results with the following selected highlights:
- Revenue increases 22.80% to $20.7 million (Y/Y)
- Gross margin increases 4.17% to 49.60% (Y/Y)
- Net income increases 34.5% to $5.2 million (Y/Y)
- EPS increases 29.6% to $0.35
- Reaffirmed revenue growth of 15-20% ($78-$83 million) for FY09
- Reaffirmed earning growth of 15-20% ($17.50-$18.50 million) for FY09
Both revenue and earning growth figures meet expectations and the company reaffirmed FY guidance. So why did the stock go down after the announcement? The stock had moved up significantly a couple of days before the announcement. It appears that investors were expecting financial results to beat estimates and even raise FY guidance.
Unfortunately, the company did not do so and investors sold on the good earnings news. In light of current economic environment, CHNG can still meet its expectations so the company is on track based on its own expansion plan. For long-term investors, you can buy more when stock price drops below $9.00.
The company issued a press release detailing the results as follows:
Second Quarter 2009 Results
Revenue in the second quarter of 2009 increased 22.8% to $20.7 million from $16.9 million in the second quarter of 2008, driven by higher sales across all revenue categories. Sales of natural gas grew 14.0% YoY to $15.7 million, from $13.8 million in the second quarter of 2008. Installation and services revenue grew 74.0% YoY to $3.4 million, from $1.9 million a year ago; while gasoline revenue increased 42.2% to $1.6 million, from $1.1 million in the prior year's period. In the second quarter of 2009, sales of natural gas, installation and services, and gasoline contributed 75.8%, 16.3%, and 7.9% of total revenue, respectively.
Gross profit in the second quarter of 2009 expanded 34.1% to $10.3 million, from $7.7 million in the prior year's same period. Correspondingly, gross margin expanded 417 basis points to 49.6% in the second quarter of 2009, from 45.4% a year ago, as the company continues to benefit from a combination of higher sales of natural gas and lower costs of natural gas supply.
Operating income in the second quarter of 2009 increased by $1.7 million, or 33.8% YoY, to $6.8 million, from $5.1 million in the prior year's period. Meanwhile, operating expenses in the second quarter of 2009 increased by approximately $0.9 million to $3.5 million, versus $2.6 million in the prior year's period, mainly due to additional expenses related to the acquisition of Lingbao Natural Gas, Co. in October 2008 as well as the addition of 6 new fueling stations added since the second quarter of 2008. Consequently, second quarter 2009 operating margin expanded 267 basis points to 32.6%, from 29.9% in second quarter of 2008.
During the quarter, the company recognized $1.3 million non-cash expense from an estimated change in the fair value of warrants, versus zero in the second quarter of 2008. Income tax expense was $1.2 million for an effective tax rate of 23.5%, as compared to an effective tax rate of 19.7% in the second quarter of 2008. As a result, net income in the second quarter of 2009 increased 10.0% to $3.9 million, or $0.26 per diluted share, from $3.5 million, or $0.24 per diluted share, in the second quarter of 2008.
Excluding the impact of the non-cash expenses (see "About Non-GAAP Financial Measures" toward the end of this release), adjusted net income grew 34.5% to $5.2 million, versus $3.9 million in the second quarter of 2008. Adjusted earnings per diluted share was $0.35, an increase of 29.6% from $0.27 per diluted share in the second quarter of 2008.
Mr. Qinan Ji, Chairman and CEO of China Natural Gas, commented,
We are pleased to have extended our solid track record of consistent growth and profitability. During this quarter, we successfully fulfilled our commitment to list China Natural Gas' stock on the NASDAQ Global Market, which was a landmark event in our Company's history. We believe this achievement highlights our dedication to not only raise our visibility among the investment community but also increase the liquidity and trading efficiencies of our common stock. I'd like to thank our investors for their support and confidence in our team, growth strategy and operating plans. We continue to leverage our strong brand and considerable operational scale to expand our geographical presence and steadily grow our CNG customer base. As demonstrated by our strong performance in revenue growth, gross margin expansion and solid cash flows, we remain confident in our outlook for the remainder of 2009.
Liquidity and Capital Resources
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.
Financial Outlook for 2009
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.
Mr. Ji concluded,
We expect to take advantage of the long-term opportunities driven by government policies and regulations, as well as the growing need for natural gas for industrial, commercial and residential uses in China. We remain steadfast in our vision, and we believe that with our successful listing on NASDAQ and our continued strong financial performance in the second quarter of 2009, we have marched several steps closer toward our goal of becoming the leader in China's fast growing natural gas market. We continue to be delighted with our growth opportunities, and we are excited about our ability to deliver sustained, strong financial results and to ultimately reward our supportive shareholders with greater share value.
Disclosure: Long CHNG