CHNG
China Natural Gas
You'll want to read this, filed with the SEC:
Annual Report
Here are some excerpts:
What is it?
"We transmit and distribute natural gas to commercial, industrial and residential customers in the Xian area, including Lantian County and the districts of Lintong and Baqiao, in the Shaanxi Province of The Peoples' Republic of China ("China" or the "PRC"). Shaanxi Province is located in central China and has a population of approximately 36 million in an area of over 200,000 square kilometers (about 77,225 square miles). Xian, the capital of Shaanxi Province, is located in the southern part of Shaanxi Province and has a population of approximately 8 million people, with about 5 million people living within the urban area.
"We operate three primary business lines:
o Distribution and sale of compressed natural gas (CNG) through Company-owned CNG filling stations for hybrid (natural gas/gasoline) powered vehicles (17 stations as of March 21, 2007);
o Distribution and sale of CNG to third party-owned CNG filling stations for hybrid (natural gas/gasoline) powered vehicles; and
o Distribution and sale of natural gas to residential, commercial and industrial customers through Company-owned pipelines. As of March 31, 2007, the Company distributed and sold natural gas to approximately 75,000 pipeline customers.
"We buy all of the natural gas that we sell and distribute to our customers. We do not mine or produce any of our own natural gas and have no plans to do so during the next 12 months. The natural gas that we buy is available in two forms: (1) piped natural gas; and (ii) CNG."
How much money does it have compared to last year?
"As of December 31, 2006 the Company had $5,294,213 of cash and cash equivalents on hand compared to $675,624 of cash and cash equivalents as of December 31, 2005."
How much money does it make?
"Gross profit. The Company earned a gross profit of $9,110,790 for the twelve months ended December 31, 2006, an increase of $6,664,128 or approximately 273%, compared to $2,446,662 for the twelve months ended December 31, 2005. The increase in gross profit is due to a material increase in gas sales and installation revenues in 2006, partially offset by an increase in cost of sales.
"We had total revenues of $18,828,790 for the twelve months ended December 31, 2006, an increase of $13,978,091 or approximately 288%, compared to $4,850,699 for the twelve months ended December 31, 2005. The increase in revenues was due primarily to the construction of 14 new company-owned filling stations during 2006 as well as an increase in the number of residential, commercial and industrial pipeline customers from approximately 50,000 in 2005 to approximately 75,000 in 2006.
"New pipeline customers pay approximately 60% of the construction costs to connect to our pipeline system up front and the balance is payable as part of their monthly natural gas bill. During 2006, our installation revenues increased approximately 62% over the previous
year and our sales of natural gas increased approximately 700% over the previous year. Four customers accounted for approximately 47%, 18%, 8% and 6% of the Company's installation revenue for the year ended December 31, 2006.
"Pursuant to the tax laws of China, general enterprises are subject to income tax at an effective rate of 33%. The Company is in the natural gas industry whose development is encouraged by the government. According to the income tax regulation, any company engaged in the natural gas industry enjoys a favorable tax rate. Accordingly, the Company's income is subject to a reduced tax rate of 15%.
"The Company expects to construct an additional 15 CNG filing stations in 2007. The Company expects the funds for these investing activities will come from the Company's operating cash flow."
And last but not least, a recent press release with estimates from the company.
Earnings Guidance PR
ANALYSIS
Now, given that they are essentially a government-mandated monopoly for the wholesale and retail distribution of natural gas in the Xian region of China. What is the economy like there?
Well, namely it is a PRC-sanctioned Hi-Tech Development Zone that has seen nearly 30% annualized growth since 1991. Source
Xian is also where the terracotta warriors are!
I think these guys need natural gas for their semiconductor manufacturing company!
Images
Plus, Boone Pickens is even into natural gas transportation in China which concludes with this: Source
"We completely agree with Pickens' comments to reporters, saying, "We think that (natural gas refueling stations) will be very big business in China." This development is not unlike the growth of cellular phones in China. The country skipped the enormous infrastructure implementation for traditional landlines and zoomed to mobile telecommunications. Judging from our communications, and from what others have told us, the clarity of reception and reliability surpasses the standards in North America.
"Building more NGV refueling stations will help drive the demand to bring more natural and CBM gas into China's distribution network. It will probably become a major trigger to capture both international media and investor attention for this sector. In our new book, we
reviewed the number of Chinese auto manufacturers investing in hybrid cars, including at least one line which would be powered entirely by CBM gas. Replacing significant percentage of gasoline and diesel with natural and CBM gas for powering transportation vehicles (and yes, even jet fuel is past the drawing boards), would suggest a major paradigm shift for the world's most populous country.
"While we take natural gas for granted in the United States, the Chinese have taken this fuel source very seriously and embraced it. By devoting their energies in developing their transportation systems with increased natural gas consumption, the country's atrocious pollution history might also be reversed."
CONCLUSION
WIth 15 more filling stations, increased residential demand, and increased commercial demand for installations, this company is on solid footing. Let's remember that the 14 filling stations built last year were the primary reason for a 700% increase in sales and they are already committed to building 15 more next year (07) with that guaranteed by the recent press release to be 23 by the end of 07 and 42 by the end of 08. With sales at these stations rising at a 700% clip the following estimates are probably conservative but the trend is driven by the emerging middle class of Xi'an as they need public transportation, taxis, and private cars, which are almost all run on natural gas there.
This highlights the Pickens' money-making paradigm shift which looks to exploit the transition from man-powered public transportation (rickshaws, bicycles, feet, etc.) to mechanically-powered public transportation (buses, taxis, middle class cars). China, primarily because of its middle class' relatively late development in modernity, was largely able to skip the fossil fuel stage of development and dive right into NG-powered transport. I think the authoritative and monopolized rule of the PRC government plays a benefical role in this regard as they largely have the power to mandate standards without the influence of aging industry lobbyists and concerns for constituent states. Hence, the larger opportunity here as NG filling stations roll out across the country in response to the central government's demand for clean energy in advance of the '08 Olympics and, I think, as part of the long-term governmental goal to show up the US on environmental standards. Let's remember the impact of consumer cars in a country the size of China and what that would cost politically and financially. Moreover, the PRC wants to buy as little oil as possible from the Middle East due to transport costs. The PRC is also being practical and acting long in advance as only an ideologically ingrained socio-capitalist regime can.
Since it costs $800,000 to startup a station (mean estimate based on 06 report) and since they built 14 last year paid for out of cash flow which contributed approx. $10m in increased revs i will assume each station contributes $10m/14 in revs or $714,285.71 which makes sense, the station would probably pay for itself in a little over a year or more. So with 42 stations at the
end of 08 x that number we have estimated revs from the gas stations alone conservatively at $30 million for 2008. Plus, we have the installation business and the industrial business which was stated to grow at the rate of 60% a year and contributed likely $8m to revenues in 2006 per the annual report. Growing $8m @ 60% per 2 annum equals around $20 million. So let's get to forecasting for 2008 revs... $30m + $20m = $50m
Now let's look at the new press release. They are expecting revs of 32 million for 07 and earnings of $9.3 million. That's a margin of 29% even including all their expansion which they have stated to come from cash flow. That''s about par for a transmission company see Spectra Energy for example but that doesn't account for all the growth they are paying for.
Now let's apply the profit margin rate of 29% to our 08 forecasted revs of $50m = $14.5 million in earnings.
Current shares outstanding: 24,210,183
x approx. price of $8
equals $194 m market cap
meaning its trading at a reasonable forward 13.38 p/e with expected
growth of 64% between 07 and 08.
This is a PEG (Price/Earnings to Growth Ratio) of nearly .21 meaning
it could run almost 400% before it is fairly valued as a growth stock.
Plus, with the volatility OB you could get in at an even cheaper price.
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