China Natural Gas Remains Undervalued
China Natural Gas, Inc. [[CANL.OB]] shares have risen nearly 200 percent off of their 2009 lows, but the company continues to trade below its intrinsic value by many measures. The Chinese market for natural gas remains in its infancy and is poised to grow, while the company’s extensive pipelines and strong presence ensures that it will remain uncontested in many of the territories that it operates. So, is it too late to get in this stock?
China Natural Gas distributes compressed natural gas to residential, commercial and industrial customers through company-owned pipelines as well as through company-owned fueling stations for hybrid vehicles where it also sells traditional gasoline. The company also converts gasoline-powered vehicles to hybrid vehicles at its Auto Conversion Division. The natural gas used in these operations is purchased from government-owned and private companies.
China Natural Gas operates 35 fueling stations in two provinces, where it primarily services taxis, buses and private cars that operate on compressed natural gas technology. The gas is purchased for 1.22RMB/cubic meter and sold for 2.35RMB/cubic meter net of value added taxes. The daily processing capacity of to support these stations is 250,000 cubic meters from three compressor stations that allow trucks to compress and transport the gas to stations.
China Natural Gas also has 96,033 residential, commercial and industrial customers of its natural gas pipeline. These customers purchase natural gas by prepaid cards that can be inserted into the connection equipment in order to initiate gas flow. Its customers include residential and commercial users of the gas for heating as well as industrial customers that use it as a raw material in their production processes.
China’s rapidly expanding economy is stretching the limits of its energy resources. In fact, the country is the second largest consumer of energy after the United States, with an annual energy consumption growth rate of 12.8% between 2002 and 2006, and 10.8% between 2006 and 2008. During the same period, natural gas consumption grew at 13.3%, but only accounts for about 3% of the country’s total energy usage, compared to the world’s average of 23%. Given the country’s focus on a stable environmentally-friendly solution, the market for natural gas is expected to grow very rapidly over the next 20 years.
Last year, China Natural Gas reported net income of approximately $15.2 million, or $0.52 per share, on revenues of approximately $67.72 million. Despite this 48.5% growth in net income, the company continues to trade at just 8.4x earnings, even after its substantial move higher. In fact, the company’s PEG ratio stands at under 0.20, which suggests that the stock is extremely undervalued. Meanwhile, the company’s future looks very promising as China moves towards natural gas as a highly-available, low-cost solution to its environmental problems.
Despite all of the positive news, there are several risks to doing business in China. The regulatory environment remains very uncertain, which has many investors nervous about making investments in the country. The company also faces margin risks by relying on outside suppliers to provide its natural gas, since it could be difficult to pass price increases on to customers without negatively impacting profit margins.
In the end, China Natural Gas is a profitable company with a robust customer revenue stream and solid growth prospects. There are some risks associated with the stock, but it remains undervalued by several measures, and could represent a great value going forward. Short-term investors may want to wait for a pullback before picking up shares, but long-term investors may want to pick up shares for the long-term.
CONTACT: Daniel Minton, Managing Director, 406-862-5400, daniel@accelerize.com