NEW YORK, Aug. 13 /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 second quarter financial results for the period ended June 30, 2008.



    Financial Highlights for the Second Quarter 2008:
    -- Revenue increased 104.2% year over year to $16.9 million
    -- Gross profit increased 85.0% year over year to $7.7 million
    -- Income from operations increased 58.0% year over year to $5.1 million
    -- Non-GAAP net income of $3.8 million, or $0.13 per diluted share

Mr. Qinan Ji, Chairman and CEO of China Natural Gas, stated, "We are pleased to share our second quarter results with our investors. In the second quarter, we continued to expand our CNG filling station network. As of June 30, 2008, we had a total of 32 stations, 20 of which are located in Shaanxi Province, and 12 in Henan Province. We also added an additional 1,698 residential, industrial and commercial pipeline customers compared to the first quarter of 2008. We believe that the recent NDRC adjustment to retail gasoline and diesel prices will benefit our auto conversion business and support our overall long-term growth."

Mr. Ji continued, "The construction of our LNG plant is progressing on schedule. During the second quarter, we invested approximately $3.4 million in our LNG-related facilities, $2.7 million of which were used for the purchase of equipment and the remainder used for investment in infrastructure related to our LNG plant, located in Yulin, Shaanxi Province. This also brings our total investment in the LNG business to approximately $17.0 million and we expect to invest another $5.0 million in the LNG facilities in the third quarter. We are also working diligently to improve our corporate governance structure. We believe our new directors will provide us with valuable guidance in both our governance system and future business strategies as we continue to expand."

Revenue for the second quarter was $16.9 million, an increase of $8.6 million, or 104.2% compared with $8.3 million in the second 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 91,967 from 78,216 in the second quarter of 2007.

Revenue from sales of natural gas increased 103.9% to $13.8 million from $6.8 million in the prior year's period and contributed approximately 81.7% of revenue performance in the second quarter of 2008. Natural gas sales, as a percentage of revenue, remained constant at approximately 81.7%, compared with 81.8% in the second quarter of 2007. Revenue from installation and other businesses increased 105.3% to $3.1 million from $1.5 million in the second quarter of 2007, or 18.3% of total revenue.

Gross profit increased 85.0% to $7.7 million in the second quarter of 2008 from $4.1 million in the second quarter of 2007. Gross margin was 45.4% in the second quarter of 2008, compared with 43.4% in the first quarter of 2008 and 50.1% in the prior year's period. Gross margin performance reflects the increases in revenue from Company-owned CNG filling stations in the Henan Province, which generated a lower gross margin than those in Xi'an, Shaanxi Province.

In the second quarter of 2008, operating income increased 58.0% to $5.1 million from $3.2 million in the second quarter of 2007. Operating expenses in the second quarter of 2008 increased 176.5% to $2.6 million from $943,306 the year before. This increase reflected larger business operations with a total of 32 CNG filling stations during the second quarter of 2008, as well as continued expenses related to the identification of future natural gas filling station locations and costs associated with the government licensing and approval processes. Operating margin was 29.9% in the second quarter of 2008, compared to 27.1% in the first quarter of 2008 and 38.7% in the prior year's period, reflecting lower margin of the natural gas sold in Henan Province, as well as higher operating expenses associated with a larger sales force, the purchase of tankers and higher utilities expense.

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 second quarter of 2008, these non-cash non-operating expenses were approximately $379,000, or $0.01 per diluted share.

Net income for the second quarter of 2008 was $3.5 million, or $0.12 per diluted share. Excluding the impact of the non-cash expenses explained above, net income would have been $3.8 million or $0.13 per diluted share, compared with $2.7 million, or $0.11 per diluted share, in the second quarter of 2007. (Please refer to the non-GAAP reconciliation table included in this press release)

Balance Sheet

As of June 30, 2008, the Company had $29.2 million in cash and cash equivalents on hand, compared with $41.3 million as of March 31, 2008 and $13.3 million as of December 31, 2007.

Guidance

For the fiscal year 2008, the Company continues to anticipate revenue and net income growth of at least 70%. Please note that this 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.

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 $379,132 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 following table provides the non-GAAP financial measure and the related GAAP measure and provides a reconciliation of the non-GAAP measure to the equivalent GAAP measure.





                   CHINA NATURAL GAS, INC. AND SUBSIDIARIES
                 RECONCILIATION OF GAAP TO NON-GAAP MEASURES
              FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007
                                 (Unaudited)

                                                    Three months ended
                                                         June 30
                                                   2008              2007

    GAAP Net income                            3,512,892         2,745,009
    Add:
      Amortization of discount on
       senior notes (after tax effect)           251,137                 -
      Amortization of deferred
       offering costs (after tax effect)          53,246                 -
    Adjusted Net Income (Excludes all
     non-cash items)                           3,817,275         2,745,009
    *Assume an effective tax rate of 19.72%

    Weighted average shares outstanding
      Basic                                   29,200,304        24,210,183
      Diluted                                 29,323,495        24,210,183

    GAAP Basic EPS                           $      0.12              0.11
    Add:
      Amortization of discount on
       senior notes                               0.0086                 -
      Amortization of deferred
       offering costs                             0.0018                 -

    Adjusted Basic EPS                       $      0.13              0.11

    GAAP Diluted EPS                         $      0.12              0.11
    Add:
      Amortization of discount on
       senior notes                               0.0086                 -
      Amortization of deferred
       offering costs                             0.0018                 -

    Adjusted Diluted EPS                     $      0.13              0.11

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.



     CONTACT
     In the U.S.:
     Ashley Ammon MacFarlane or Wei-Jung Yang
     ICR, Inc.
     203-682-8200



                   CHINA NATURAL GAS, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                  AS OF JUNE 30, 2008 and DECEMBER 31, 2007

                                                   June 30,       December 31,
                                                    2008              2007
                                                 (Unaudited)
                                      ASSETS
    CURRENT ASSETS:
      Cash & cash equivalents                  $ 29,180,315      $ 13,291,729
      Short-term investments                              -           238,554
      Accounts receivable                           854,537           306,179
      Other receivable                              480,690           549,820
      Inventories                                   523,027           231,339
      Advances                                      993,348           663,041
      Prepaid expense and other current
       assets                                       771,327           109,722
      Loan receivable                               291,800           274,200
        Total current assets                     33,095,044        15,664,584

    PROPERTY AND EQUIPMENT, net                  45,581,330        32,291,995
    CONSTRUCTION IN PROGRESS                     15,537,703         2,210,367
    FINANCING COSTS                               1,951,746                 -
    OTHER ASSETS                                  7,030,886         3,123,052


      TOTAL ASSETS                             $103,196,709      $ 53,289,998

           LIABILITIES AND STOCKHOLDERS' EQUITY

    CURRENT LIABILITIES:
      Accounts payable                         $    365,561      $    293,970
      Other payables                                 68,458           249,719
      Accrued expense                               141,170                 -
      Unearned revenue                              893,960           327,220
      Accrued interest                              741,667                 -
      Taxes payable                               1,732,193         1,211,775
        Total current liabilities                 3,943,009         2,082,684

    LONG-TERM LIABILITIES:
      Notes payable, net of $16,693,697
       discount                                  23,306,303                 -
      Derivative liabilities - warrants          17,500,000                 -
        Total long-term liabilities              40,806,303                 -

    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 June 30, 2008
        and December 31, 2007                         2,920             2,920
      Additional paid-in capital                 32,085,775        32,046,879
      Stockholder receivable                     (2,918,000)                -
      Cumulative translation adjustment           7,274,749         3,477,025
      Statutory reserves                          2,654,063         1,802,735
      Retained earnings                          19,347,890        13,877,755
        Total stockholders' equity               58,447,397        51,207,314

      TOTAL LIABILITIES AND STOCKHOLDERS'
       EQUITY                                  $103,196,709       $53,289,998



                   CHINA NATURAL GAS, INC. AND SUBSIDIARIES
       CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
          FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
                                 (Unaudited)

                                Three months ended         Six months ended
                                      June 30                  June 30
                                 2008         2007        2008         2007

    Revenue
      Natural gas revenue   $ 13,794,866 $ 6,765,265 $ 25,140,185 $ 11,688,837
      Installation and
       other                   3,095,620   1,508,044    5,775,975    3,328,048

         Total revenue        16,890,486   8,273,309   30,916,160   15,016,885

    Cost of revenue
      Natural gas cost         7,214,469   3,463,242   13,396,743    5,955,893
      Installation and
       other                   2,010,254     666,957    3,765,178    1,400,523

         Total cost of
          revenue              9,224,723   4,130,199   17,161,921    7,356,416

    Gross profit               7,665,763   4,143,110   13,754,239    7,660,469

    Operating expenses
      Selling                  1,568,674     682,423    2,910,288    1,276,552
      General and
       administrative          1,040,000     260,883    1,979,325      682,262

         Total operating
          expenses             2,608,674     943,306    4,889,613    1,958,814

    Income from
     operations                5,057,089   3,199,804    8,864,626    5,701,655

    Non-operating income
     (expense):
      Interest income             51,476       8,330      106,761       17,739
      Interest expense          (676,569)          -   (1,036,229)           -
      Other income                 7,766       7,973        8,440        8,356
      Other expense              (64,197)          -      (71,997)           -

        Total non-
         operating
         income
         (expense)              (681,524)     16,303     (993,025)      26,095

    Income before income
     tax                       4,375,565   3,216,107    7,871,601    5,727,750

    Provision for income
     tax                         862,673     471,098    1,550,138      872,415

    Net income                 3,512,892   2,745,009    6,321,463    4,855,335

    Other comprehensive
     income
       Foreign currency
        translation gain       1,494,722     455,308    3,797,724      736,712
    Comprehensive Income     $ 5,007,614 $ 3,200,317 $ 10,119,187  $ 5,592,047

    Weighted average
     shares outstanding
        Basic                 29,200,304  24,210,183   29,200,304   24,210,183
        Diluted               29,323,495  24,210,183   29,329,733   24,210,183

      Earnings per share
         Basic               $      0.12 $      0.11  $      0.22 $       0.20
         Diluted             $      0.12 $      0.11  $      0.22 $       0.20

SOURCE China Natural Gas, Inc.