- Closes the Quarter with 35 CNG Filling Stations - NEW YORK, Nov. 12 /PRNewswire-FirstCall/ -- China Natural Gas, Inc. (OTC Bulletin Board: CHNG), one of the leading providers of pipeline natural gas for industrial, commercial and residential use and compressed natural gas (CNG) for vehicular fuel in Xi'an, China, today announced its third quarter financial results for the period ended September 30, 2008. Financial Highlights for the Third Quarter 2008: -- Revenue increased 102.7% year over year to $18.4 million -- Gross profit increased 119.7% year over year to $9.5 million -- Income from operations increased 173.2% year over year to $6.4 million -- Net income of $5.1 million, or $0.18 per diluted share -- Non-GAAP net income of $5.2 million, or $0.18 per diluted share Mr. Qinan Ji, Chairman and CEO of China Natural Gas, stated, "We are pleased to share our third quarter results with our investors. Despite the non-cash interest expenses incurred in the third quarter, our net income increased 161.8% year over year and 46.2% from the second quarter of 2008. The strong performance speaks to the strength of our business as well as the favorable market environment. In the third quarter, we continued to expand our CNG filling station network. As of September 30, 2008, we had a total of 35 stations, with 23 located in Shaanxi Province and 12 in Henan Province. We have also added 1,107 residential, industrial and commercial pipeline customers since the end of the second quarter of 2008." Mr. Ji continued, "As planned, we invested approximately $6.9 million in equipment and consulting fees related to our LNG project in the third quarter. We also continued to upgrade our management team with the appointment of Mr. Richard Wu, our new CFO. We remain optimistic about the future and believe we have the right management team in place to continue our expansion." Revenue for the third quarter was $18.4 million, an increase of $9.3 million, or 102.7%, from $9.1 million in the third quarter of 2007. The significant increase in revenue was due primarily to an additional 15 CNG filling stations and a year over year increase in residential, industrial and commercial pipeline customers to 92,984 from 83,979. Revenue from sales of natural gas increased 103.2% to $15.4 million from $7.6 million in the prior year's period and contributed approximately 83.4% of revenue performance in the third quarter of 2008, consistent with 81.7% in the second quarter of 2008 and 83.2% in the third quarter of 2007. Revenue from installation and other businesses increased 100.1% to $3.0 million, or 16.6% of total revenue, from $1.5 million in the third quarter of 2007. Gross profit increased 119.7% to $9.5 million in the third quarter of 2008 from $4.3 million in the third quarter of 2007. Gross margin was 51.6% in the third quarter of 2008, compared with 45.4% in the second quarter of 2008 and 47.6% in the prior year's period. Gross margin performance reflects the higher margin revenue generated from the natural gas sales in the Henan province. In July 2008, the Company renewed its supply contract in Henan to purchase natural gas at a price of RMB 1.0 per cubic meter, compared with RMB 1.55 per cubic meter previously. In the third quarter of 2008, operating income increased 173.2% to $6.4 million from $2.4 million in the third quarter of 2007. Operating expenses in the third quarter of 2008 increased 56.0% to $3.1 million from $2.0 million the year before. This increase reflected larger business operations involving 35 CNG filling stations during the third quarter of 2008, as well as ongoing selling-related expenses. Meanwhile, general and administrative expense decreased by 5.8% year over year to $968,000 as a result of benefits of economy of scale over centralized corporate functions and the Company's cost control efforts. Operating margin was 34.9% in the third quarter of 2008, compared with 29.9% in the second quarter of 2008 and 25.9% in the prior year's period, reflecting higher gross margin offset by higher operating expenses associated with a larger sales force. During the first quarter of 2008, the Company began to recognize non-cash non-operating expenses for the amortization of debt discount and deferred offering costs related to the 5.0% Guaranteed Senior Notes ("Notes") issued to Abax Lotus in January and March 2008. In the third quarter of 2008, these non-cash non-operating expenses were $119,938, or less than $0.01 per diluted share. Net income for the third quarter of 2008 was $5.1 million, or $0.18 per diluted share. Excluding the impact of the non-cash expenses explained above, net income would have been $5.2 million or $0.18 per diluted share, compared with $2.0 million, or $0.07 per diluted share, in the third quarter of 2007. (Please refer to the non-GAAP reconciliation table included in this press release.) Balance Sheet As of September 30, 2008, the Company had $20.4 million in cash and cash equivalents on hand, compared with $29.2 million as of June 30, 2008 and $41.3 million as of March 31, 2008. Guidance Please note that financial guidance excludes the impact of interest charges, amortization and other costs associated with the Company's 5.0% Guaranteed Senior Notes due 2014 in an aggregate principal amount of $40 million and warrants representing the right to purchase 2,900,000 shares of the Company's common stock to Abax Lotus Ltd. Today the Company raised its full year 2008 revenue and net income expectations. The Company now anticipates year over year revenue growth in 2008 to be 92%, bringing total revenue for the year to $68 million. This expectation is up from prior guidance of year over year revenue growth of 70%, or approximately $60.2 million for the year 2008. The Company now anticipates year over year net income growth in 2008 to be 77%, bringing total net income for the year to approximately $16 million. This expectation is up from prior guidance of year over year net income growth of 70%, or approximately $15.4 million for the year 2008. Conference Call China Natural Gas management team will hold a conference call on Thursday, November 13, 2008, at 8:00 am ET to discuss its third quarter 2008 results. Listeners may access the call by dialing 1-888-206-4835 or 1-913-312-0710 for international callers. A webcast will also be available via the Company's website at http://www.naturalgaschina.com/. A replay of the call will be available through November 20, 2008. Listeners may access the replay by dialing 1-888-203-1112 or 1-719-457-0820 for international callers, access code: 4859321. About Non-GAAP Financial Measures This press release contains non-GAAP financial measures for earnings that exclude the effect of non-cash non-operating expense of $119,938 related to the Senior Notes issued in January and March 2008. China Natural Gas' management uses those non-GAAP financial measures when it internally evaluates the performance of business and makes operating decisions, including internal budgeting and performance measurement. China Natural Gas believes that providing the non-GAAP measures is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand China Natural Gas' financial performance in comparison to historical periods, and it allows investors to evaluate China Natural Gas' performance using the same methodology and information as that used by China Natural Gas' management. However, investors need to be aware that non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. The Company has provided a reconciliation table of the non-GAAP measure to the equivalent GAAP measure. About China Natural Gas, Inc. China Natural Gas, Inc., ("CHNG"), is the first China-based natural gas retailing company publicly traded in the U.S. It currently owns and operates a network of CNG retail filling stations as well as a 120 kilometer long compressed natural gas pipeline in Xi'an, China. Xi'an is a fast growing Chinese city supported by a population of approximately eight million and is the "gateway" to the broad Western regions of China. CHNG currently retails natural gas at company-owned filling stations, delivers natural gas services to residential, commercial and industrial customers, and converts gasoline- fueled vehicles to hybrid (natural gas/gasoline) powered vehicles. Currently it is estimated that there are 5,000 buses and 20,000 taxis using CNG in Xi'an. This press release contains forward-looking statements regarding revenue and net income growth and our LNG processing and distribution plant. Words such as "anticipates," "expects," "intends," "plans," "targets," "projects," "believes," "seeks," "estimates" and similar expressions are intended to identify such forward-looking statements. These statements are based on the current expectations or beliefs of China Natural Gas, Inc. management; are not guarantees of future performance; are difficult to predict and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements, including the fluctuation of natural gas prices, demand for natural gas, the availability of natural gas supplies, changes in governmental regulations and/or economic policies, civil unrest, weather and general economic conditions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. Unless legally required, CHNG undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. CHINA NATURAL GAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited) Three months ended Nine months ended September 30 September 30 2008 2007 2008 2007 Revenue Natural gas revenue $15,354,461 $7,555,131 $40,494,646 $19,243,968 Installation and other 3,046,739 1,522,958 8,822,714 4,851,006 Total revenue 18,401,200 9,078,089 49,317,360 24,094,974 Cost of revenue Natural gas cost 6,973,035 4,020,039 20,369,778 9,975,932 Installation and other 1,935,798 738,211 5,700,976 2,138,734 Total cost of revenue 8,908,833 4,758,250 26,070,754 12,114,666 Gross profit 9,492,367 4,319,839 23,246,606 11,980,308 Operating expenses Selling 2,098,343 939,496 5,008,631 2,216,048 General and administrative 968,169 1,028,197 2,947,494 1,710,459 Total operating expenses 3,066,512 1,967,693 7,956,125 3,926,507 Income from operations 6,425,855 2,352,146 15,290,481 8,053,801 Non-operating income (expense): Interest income 13,536 23,831 120,297 41,570 Interest expense (212,774) - (1,249,003) - Other income (expense) (55,391) 31,148 (118,948) 39,504 Total non- operating income (expense) (254,629) 54,979 (1,247,654) 81,074 Income before income tax 6,171,226 2,407,125 14,042,827 8,134,875 Provision for income tax 1,034,636 445,463 2,584,774 1,317,878 Net income 5,136,590 1,961,662 11,458,053 6,816,997 Other comprehensive income Foreign currency translation gain 756,316 455,308 4,554,040 1,320,878 Comprehensive Income $5,892,906 $2,416,970 $16,012,093 $8,137,875 Weighted average shares outstanding Basic 29,200,304 27,122,196 29,200,304 25,191,521 Diluted 29,279,590 27,286,286 29,316,837 25,223,465 Earnings per share Basic $0.18 $0.07 $0.39 $0.27 Diluted $0.18 $0.07 $0.39 $0.27 CHINA NATURAL GAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2008 and DECEMBER 31, 2007 September 30, 2008 December 31, 2007 (Unaudited) ASSETS CURRENT ASSETS: Cash & cash equivalents $20,384,702 $13,291,729 Short-term investments - 238,554 Accounts receivable 1,622,508 306,179 Other receivable-employee advances 865,800 549,820 Inventories 445,420 231,339 Advances to suppliers 1,226,341 663,041 Prepaid expense and other current assets 891,255 109,722 Loan receivable - 274,200 Total current assets 25,436,026 15,664,584 PROPERTY AND EQUIPMENT, net 55,153,057 32,291,995 CONSTRUCTION IN PROGRESS 19,410,492 2,210,367 DEFERRED FINANCING COSTS 1,849,288 - OTHER ASSETS 10,278,250 3,123,052 TOTAL ASSETS $112,127,113 $53,289,998 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities $715,890 $487,710 Other payables 98,090 55,979 Unearned revenue 384,745 327,220 Accrued interest 350,002 - Taxes payable 1,911,550 1,211,775 Total current liabilities 3,460,277 2,082,684 LONG-TERM LIABILITIES: Notes payable, net of $16,104,432 discount 23,895,568 - Derivative liabilities - warrants 17,500,000 - Total long-term liabilities 41,395,568 - COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY: Preferred stock, $0.0001 per share; authorized 5,000,000 shares; none issued - - Common stock, $0.0001 per share; 45,000,000 authorized shares 29,200,304 shares issued and outstanding at September 30, 2008 and December 31, 2007 2,920 2,920 Additional paid-in capital 32,098,740 32,046,879 Accumulative other comprehensive gain 8,031,065 3,477,025 Statutory reserves 3,228,224 1,802,735 Retained earnings 23,910,319 13,877,755 Total stockholders' equity 67,271,268 51,207,314 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $112,127,113 $53,289,998 CHINA NATURAL GAS, INC. AND SUBSIDIARIES RECONCILIATION OF GAAP TO NON-GAAP MEASURES FOR THE THREE MONTHS ENDED September 30, 2008 AND 2007 (Unaudited) Three months ended September 30 2008 2007 GAAP Net income 5,136,590 1,961,662 Add: Amortization of discount on senior notes (after tax effect) 79,508 - Amortization of deferred offering costs (after tax effect) 20,316 - Adjusted Net Income (Excludes all non-cash items) 5,236,414 1,961,662 *Assume an effective tax rate of 16.77% Weighted average shares outstanding Basic 29,200,304 27,122,196 Diluted 29,279,590 27,286,286 GAAP Basic EPS $0.18 0.07 Add: Amortization of discount on senior notes 0.0027 - Amortization of deferred offering costs 0.0007 - Adjusted Basic EPS $0.18 0.07 GAAP Diluted EPS $0.18 0.07 Add: Amortization of discount on senior notes 0.0027 - Amortization of deferred offering costs 0.0007 - Adjusted Diluted EPS $0.18 0.07 DATASOURCE: China Natural Gas, Inc. CONTACT: Ashley Ammon, ICR, Inc., (US) +1-203-682-8200, , or Wei-Jung Yang, (China) +86-8523-3088, , both for China Natural Gas Web site: http://www.naturalgaschina.com/

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