Thursday, June 24, 2010

New position: China Natural Gas Inc

I have been following and studying a company called "China Natural Gas Inc" (NASDAQ: CHNG) for a while now. I finally decided to take a long position in it.

The company provides pipeline natural gas for industrial, commercial and residential use and compressed natural gas (CNG) for vehicular fuel in Xi'an, China. Xi'an in Shaanxi province is a fast growing city supported by a population of approximately 8.5 million. The company is also active in Henan province which is the China's most populous province.

They have very good growth possibilities because:
  • China is likely to overall increase use of natural gas (both in absolute terms and relative to other energy sources)
  • The northern region of Shaanxi Province is the home to China's second largest natural gas reserve.
  • By the end of March 2009, CHNG had operated 35 retail CNG fueling stations. This is not much compared to how much potential there is.

To start with, the valuation of the company is very attractive. P/E is at 7.2 and if you take into account the amount of cash the company owns (roughly 30% of whole market cap in my estimate) the price is morea than attractive. P/B at 1.05 is also screaming BUY!

Some other statistics (all statistics in this article from:
ROA 11,4%
ROE 16,7%
ROI 11,9%
Gross margin 48,4%
Profit margin 22,7%

The company is fairly small (market cap 155 MUSD) but is growing at a very fast pace. It does not seem to pay dividend, but that is understandable in the current situation the company is in (growth phase). The company is low on debt even though it has an ambitious investment program (LNG plant etc.).

From stockholder point of view, I think the biggest risks related to how the company will grow (i.e. do they issue a lot of new stock in a way that does not benefit current stock holders), do they issue preferred stock (which seems to be OK'ed but not implemented) etc. Also, the usual question is that how much the management will take from the cake in form of compensation and stock options. There were also some quite "interesting" loans granted to some individuals which is something that I haven't come across before in a publicly listed company.

However, I think overall the company is a clear BUY.

In particular I like the concept of natural gas propelled vehicles. That is such a superior concept from environmental point of view and also much cheaper fuel than gasoline or diesel. Some day in not-so-distant future there will be oil crisis because there certainly will not be enough of it to go around. That is why countries like China will favor alternative energy sources and there is no other way than UP for companies like CHNG.

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