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Worthless Pennies Blog on China Natural Gas (CHNG) May Be Fraudulent Itself

|Includes: China Natural Gas, Inc. (CHNG)
The InstaBlog from Worthless Pennies regarding China Natural Gas is suspicious, full of innuendo and false allegations and may have crossed the line into outright fraud itself. The bloggers self-describe themselves as an informal group of analysts working for an elite hedge fund. That is Blog Fraud Signal #1; they refuse to identify themselves; Blog Fraud Signal #2-They are short the stock; thus, their blog is self-serving; Blog Fraud Signal #3-They offer not one shred of concrete evidence for their allegations. 
They have maligned and libeled the company and its officers and implicitly libeled their Accounting Firm.   I doubt that any of these so called analysts have visited the company, have ever sat in on a due diligence session that funds demand before giving a company $50 million. The last due diligence meeting I was in lasted almost 3 full days and every document, bank account statement, license, joint venture agreements, contracts were examined and reexamined. I have personally visited the company in China, met with management, and seen their facilities. 
Rodman & Renshaw, the premier investment banking firm in the US for public China based companies, raised $50 million for the company in November 2009. Do you really think the funds participating in this deal forked over $50 million without doing their due diligence? Moreover, the so called "analysts" who wrote this blog have probably never experienced a NASDAQ due diligence process, which is extremely rigorous and which China Natural Gas obviously passed.
In short, the blog is sophomoric in its analysis and offers nothing substantive. It is full of logical fallacies and inconsistencies. CHNG has consistently met its guidance (see below); the article the blogger referenced related to supply and demand issues of natural gas in China has nothing to do with the business of CHNG (see below); the analysts clearly do not understand either the business model of CHNG or the natural gas industry in China.
They commit the fallacy of bifurcation when they take the appointment of a new CFO (who speaks impeccable English and has been with the company for years and is qualified for the position) as evidence that something is amiss; again, they offer no evidence; they reference an acquisition CHNG made and claim the Company committed securities rules violations but their is no SEC action against the company on this issue or any other.
Free Speech rights in America do not give anonymous bloggers the right to libel, to spread malicious rumors about public companies or their officers.  I would not be surprised if the company took legal action against these so called "analysts" and the hedge fund that hired them to write the blog. In fact, they are probably paid bloggers, hired guns, hired to spread false rumors on stocks the hedge fund is shorting.    
In sum, consider the following:
It is true that Supply shortages have resulted recently due to low temperatures and high residential heating demand, however the Government responded by protecting consumer use and cutting back on supplies to industrial and commercial users. Bottom line, natural gas shortages do not affect vehicle transportation sales which is the overwhelming bulk of CHNG’s sales.
As for management changes, it is true that there has been high CFO turnover, however this is not uncommon of high growth and maturing Chinese companies. Further it is crucial in China to have company officers and board members close to provincial and national government party leaders and CHNG’s independent directors are prominent businessmen including former city politicians and members of the Communist Party, officers of other NASDAQ listed companies and international bankers.
As for margins being controlled by the government, the Company’s latest growth initiative, its LNG plant, will have LNG consumer prices set by market prices not the Government. Consequently CHNG is sourcing their product (natural gas) under low Government prices and selling at the market generating good margins (above 25%).
There have been some insider dealings, but there is no evidence that any fraud has taken place. Again, it is common practice in China to have related party transactions and it is a western belief that these are always negative/unfair dealings. This is a disclosure issue that is being skewed by the author.
I do not believe CHNG has given Q1 guidance. They did however meet their previous 2008 guidance (first $60 million, then upped to $68 million). Further the company has already booked $59.4 million in FY09 requiring just $18.6 million to beat last year’s Q4 revenue.
Dave Gentry
RedChip Companies, Inc.

Disclosure: CHNG is a client of RedChip Companies, Inc.