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6 pts

Opinion on  China Natural Gas Inc. (CHNG)
China Natural Gas stock price could be double within 18 months.

Oct 06, 2008 11:48 PM UTC
Return Risk
+3.51% HIGH
Analyst

Fundamental Analysis  

I believe China Natural Gas (OTCBB: CHNG) would get the attention and interest from institutional investors, so the stock price may go up after the Nasdaq listing. 

The company CFO confirmed that CHNG is applying for Nasdaq listing, but the purpose of the listing is for issuing more stocks. CHNG needs a total of $130 million capital for expansion. The company is applying $60 million loan from Bank of China, and planning to issue $70 million new equity once the stock is listed on NASDAQ. This is a great move by the company as the equity cost of capital would be lower when the stock is listed on Nasdaq comparing to issuing stocks now on OTC bulletin board.
 
Of course, the equity ownership would be diluted when new stocks are issued. Generally, issuing more shares is not beneficial to exiting equity owners because the earnings will be diluted. However, the diluted earnings would be more than offset by the earning growth. This is the ultimate purpose of raising capital for expansion. As long as the company can meet its expected earning growth, the stock price should go up. For example, let’s say a company earns $10,000 with 10,000 shares outstanding. The company issues 50% more shares but the earnings grow 80%. Here are the results:

 
Before
After
Earnings grow 80%
$10,000
18,000
Shares outstanding grow 50%
10,000
15,000
EPS
$1.00
$1.20

So, as long as growth rate for the earnings and the shares outstanding is the same, there is no dilution of earnings. Based on the historical earnings performance, I have confidence in the management to meet its earnings target growth.
 
No doubt that the natural gas is a growing industry in China due to high oil prices and environmental concern. In fact, the Chinese government is promoting cleaner energy and natural gas companies will be benefited from this environment policy. Thus, the future of natural gas in China is bright, and CHNG’s plan for expansion is an appropriate business strategy to take advantage of the potential growth prospects.
 
CHNG is a good potential long-term investment deserve your interest.


CHNG:  This call was made on 10/06/08 @ $2.85
Rating:   Positive   $2.85 (10/06/08)
Gain/Loss:   +5.26% in 57 days
Target:   $10.00 (+250.88%) in > one year


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