China New Energy Group Company (CNER)

[10 bagger]

CNER.. $0.33

China New Energy Reports Full Year 2009 Financial Results

PR Newswire - Apr 16 at 06:00

Company Symbols: NASDAQ-OTCBB:CNER


TIANJIN, China, April 16 /PRNewswire-Asia-FirstCall/ -- China New Energy Group Company (OTC Bulletin Board: CNER) ("China New Energy" or the "Company"), a natural gas network developer and distributor of natural gas to residential, industrial, and commercial users in small and medium sized cities in China, announced its financial results for the twelve months ended December 31, 2009.

Full Year 2009 Highlights
-- Revenue increased 114.4% to $11.8 million compared to 2008
-- Gross profit increased 139.8% to $8.6 million
-- Gross margin increased 780 basis points to 73.5%
-- Operating income increased 214.1% to $4.9 million
-- Operating margin increased to 42.0% from 28.7%
-- Net income from continuing operations was $6.8 million, or $0.04 per
diluted share, compared to a net loss from continuing operations of
$1.6 million, or ($0.09) per diluted share, last year
-- Adjusted net income from continuing operations, which excludes the
non-cash impact of the change in fair value of derivative financial
instruments, was $3.2 million, or $0.02 per diluted share, up 247.1%
from adjusted net income of $0.9 million, or $0.01 per share, last
year(*)

"We achieved strong growth in revenues, gross and operating margins, and earnings in 2009," said Mr. Yangkan Chong, Chief Executive Officer. "This performance was driven by both organic growth and growth via strategic acquisitions. We increased the number of households connected to our natural gas network, grew the number of industrial customers we service, and expanded into new and attractive markets. We expect to continue to benefit from the strong demand for natural gas in China in the current year and thereafter."

Full Year 2009 Results

For the twelve months ended December 31, 2009, revenues were $11.8 million, an increase of 114.4% from $5.5 million in 2008. The increase was primarily due to an increase in the number households and industrial users connected to the Company&;s natural gas network. The number of connected households almost doubled, increasing from 13,400 at the end of 2008 to 26,600 by the end of 2009. Revenues from connection fees were $11.1 million, an increase of 125.5% from $4.9 million last year. Revenues from natural gas sales were $0.7 million, an increase of 19.0% from $0.6 million last year.

Cost of sales was $3.1 million, an increase of 65.8% from $1.9 million last year. The increase was primarily due to a corresponding increase in the number of households and industrial users connected to the Company&;s distribution network as cost of sales consists primarily of connection costs and purchase of natural gas from the Company&;s suppliers. Gross profit was $8.6 million, an increase of 139.8% from last year. Gross margin was 73.5%, an increase of 780 basis points from 65.7% last year. The increase in gross margin was primarily due to the high margin involved in connection services provided to industrial users.

Operating expenses were $3.7 million, an increase of 82.2% from $2.0 million last year. This increase was primarily due to the corresponding increase in revenues generated during the year; expenses related to the Company preparing to expand its business, such as adding more resources in areas like business development, outside consultants, and the hiring of additional staff to help strengthen the Company&;s internal controls; and registration rights penalties. Operating income was $4.9 million, an increase of 214.1% from $1.6 million last year. Operating margin was 42.0% compared to 28.7% last year.

The Company&;s full year 2009 and 2008 financial statements include a non-cash impact from the change in fair value of derivative financial instruments of $3.6 million and ($2.5 million), respectively.

Net income from continuing operations was $6.8 million, or $0.04 per diluted share, compared to a net loss from continuing operations of $1.6 million, or ($0.09) per diluted share, last year. Excluding the non-cash impact from the change in fair value of derivative financial instruments, the Company&;s adjusted income from continuing operations was $3.2 million, or $0.02 per diluted share, up 247.1% from $0.9 million, or $0.01 per diluted share, last year.(*)

In December 2009, the Company sold its Acheng Division for RMB 40 million (approximately $6 million). In 2008, The Company disposed of its interest in its Hunchun Sing Ocean subsidiary. The results of Acheng Division and Hunchun Sing Ocean are classified as discontinued operations on the Company&;s financial statements.

In fiscal 2009 and 2008, the Company recorded non-cash deemed preferred stock dividends of $2.2 million and $7.0 million, respectively, related to issuance of its Series A and B preferred shares. Net income attributable to common shareholders was $5.2 million, or $0.05 per diluted share, compared to a net loss attributable to common shareholders of $8.6 million, or ($0.09) per diluted share, last year. Adjusted net income attributable to common shareholders, which excludes the non-cash impact of the change in fair value of derivative financial instruments and non-cash deemed preferred dividends, was $3.8 million, or $0.02 per diluted share, up 281.7% from adjusted net income attributable to common shareholders of $1.0 million, or $0.01 per diluted share, last year (*)

(*) See table following this press release for a reconciliation of income
from continuing operations and diluted EPS to exclude the non-cash
impact from the change in fair value of derivative financial
instruments and for a reconciliation of net income attributable to
common shareholders to exclude the non-cash impact from the change in
fair value of derivative financial instruments and non-cash deemed
preferred dividends.

Financial Condition

As of December 31, 2009, the Company had cash and cash equivalents of $2.7 million and working capital of $0.9 million. The Company has no long term debt. Shareholders&; equity was $15.0 million as of December 31, 2009. Capital expenditures for 2009 were approximately $5.1 million, which was primarily for the construction of gas pipelines and stations.

Recent Developments

In March 2010, the Company sold its subsidiary, Yingkou Zhongneng Gas Development Co., Ltd., for RMB 21.9 million (approximately $3.2 million).

In March 2010, the Company entered into an agreement to acquire a 70% equity interest in Beijing Century Dadi Gas Co., Ltd. and its affiliated companies (collectively, "Dadi Gas"). Dadi Gas is primarily engaged in the business of the supply of natural gas and construction and development of a gas pipeline network in Northern China. The total purchase price has not yet been determined, but will be based on a multiple of Dadi Gas&;s net profits for the fiscal year ended December 31, 2009, and has been capped at RMB 392.2 million (approximately $57.5 million).

In January 2010, the Company entered into an agreement to acquire Fuzhou Flying Dragon Zhongran Gas Inc. ("Fuzhou Zhongran") for RMB 26 million (approximately $3.8 million). Fuzhou Zhongran has the exclusive operating license from the Dongxiang County government in Jiangxi Province for the construction and development of a natural gas pipeline network for 30 years.

In December 2009, the Company entered into an agreement to acquire Fuzhou City Lean Zhongran Gas Inc. ("Lean Zhongran") for RMB 4.8 million (approximately $0.7 million). The purchase price is based on an appraised value of Lean Zhongran as of September 30, 2009, and will be adjusted to reflect the appraised value of the assets as of the closing date.

In December 2009, the Company acquired Wuyuan County Zhongran Gas Ltd. ("Wuyuan Zhongran") for RMB 6 million (approximately $0.9 million). Wuyuan Zhongran has an exclusive operating license from the local government for the construction and development of a gas pipeline network and gas supply in the county for 30 years.

In December 2009, the Company acquired Zhanhua Jiutai Gas Co. Ltd. ("Zhanhua Jiutai") for RMB 16.5 million (approximately $2.4 million). Zhanhua Jiutai has a 50-year exclusive right and operating license from the local government to construct and develop a gas pipeline network and supply gas in Zhanhua County.

Business Outlook

China New Energy primarily operates in the northeastern cities of China, around Bohai Bay, which is one of the seven key areas in the PRC government&;s general plan for natural gas development. The Company plans to continue to capitalize on the rise in natural gas consumption in China as the country shifts away from oil and coal to cleaner fuels like natural gas, and as the natural gas pipeline infrastructure in China continues to improve. Improved living standards and real estate development are driving demand for natural gas consumption in China and local governments now often require new residential buildings to incorporate natural gas connections in their designs.

The Company&;s growth strategy is to focus on under-penetrated, growing small- and medium-sized cities and enter into favorable franchise agreements with local governments for long-term exclusive rights to develop the local natural gas distribution network and supply natural gas in their area. China New Energy looks at the following criteria when identifying attractive areas for geographic expansion: size and density of population, concentration of industrial/commercial activities, environmental policies of the regional government, potential for further development, exclusivity of distribution, and required methods of delivery. The Company is also focused on diversifying its revenue stream towards a greater focus on industrial customers and natural gas sales. The Company&;s recently completed and announced acquisitions are in line with these selection criteria.

Mr. Chong concluded, "We are optimistic about our business and believe that with the acquisitions we made in 2009 and those that we have announced in 2010, China New Energy is well positioned to capitalize on the continued rising demand for natural gas consumption in China."

Conference Call

The Company will host a conference call at 9:00 a.m. Eastern Time on Friday, April 16, 2010, to discuss its financial results for the twelve months ended December 31, 2009. The call will be hosted by Mr. Yangkan Chong, Chief Executive Officer, and Mr. Eric Yu, Chief Financial Officer. To participate in this live conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: [phone]. International callers should call [phone]. The conference passcode is 68498286.

If you are unable to participate in the call at this time, a replay will be available for 14 days starting on Friday, April 16, 2010, at 10:00 a.m. Eastern Time. To access the replay, call [phone]. International callers should call [phone]. The conference passcode is 68498286.

Use of Non-GAAP Financial Information

GAAP results for years ended December 31, 2009 and 2008 include the significant non-cash charges which do not relate to the operation of the business including deemed preferred dividends related to the Company&;s Series A and B preferred stock and non-cash expenses related to the change in fair value of derivative financial instruments. These are non-cash events which do not affect the Company&;s operations. To supplement the Company&;s consolidated financial statements presented on a GAAP basis, the Company has provided non-GAAP financial information excluding the impact of these items in this release, which are adjusted net income from continuing operations, adjusted diluted earnings per share from continuing operations, adjusted net income attributable to common shareholders and adjusted earnings per share attributable to common shareholders. The Company&;s management believes that these non-GAAP measures provide investors with a better understanding of how the results relate to the Company&;s historical performance. The additional adjusted information is not meant to be considered in isolation or as a substitute for GAAP financials. The adjusted financial information that the Company provides also may differ from the adjusted information provided by other companies. Management believes that these adjusted financial measures are useful to investors because they exclude non-cash expenses that management excludes when it internally evaluates the performance of the Company&;s business and makes operating decisions as these measures provide a consistent method of comparison to historical periods. As a result, the provision of these adjusted measures allows investors to evaluate the Company&;s performance using the same methodology and information as that used by the Company&;s management. Moreover, management believes that these adjusted measures reflect the essential operating activities of the Company. Adjusted measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the adjusted financial measure. However, the Company&;s management compensates for these limitations by providing the relevant disclosure of the items excluded. A reconciliation of each adjusted measure to the nearest GAAP measure appears in the table at the end of this release.

About China New Energy Group Company

China New Energy Group Company ("China New Energy" or the "Company") is a vertically integrated natural gas company engaged in the development of natural gas distribution networks, and the distribution of natural gas to residential, industrial, and commercial users in small and medium sized cities in China. The Company generates revenues primarily from the connection fees it charges its customers for interconnecting to pipelines in its natural gas distribution networks, and fees for natural gas usage. For more information, please visit http://www.cnegc.com .

Safe Harbor Statement

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Any statements set forth above that are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such factors include, but are not limited to, the Company&;s ability to access natural gas for distribution, and ability to identify and develop operational locations under favorable terms, changes in natural gas pricing mechanism imposed by the Chinese government, changes in the regulatory environment and future national or regional economic and competitive conditions, and other factors detailed from time to time in the Company&;s filings with the United States Securities and Exchange Commission and other regulatory authorities. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

For further information, please contact:

Eric Yu, Chief Financial Officer
Email: [e-mail]
Web: http://www.cnegc.com

Investor Relations Contact:

CCG Investor Relations
Mr. Athan Dounis, Account Manager
Phone: [phone]
Email: [e-mail]

Mr. Crocker Coulson, President
Phone: [phone]
Email: [e-mail]
Web: http://www.ccgirasia.com