China Natural Gas said its revenues in the second quarter of 2012 increased by 38.8% to $37.90 million from $27.31 million in the second quarter of 2011.

Shuwen Kang, CEO of China Natural Gas, Inc. commented: "We are pleased to share the results of our second quarter, as we believe that they demonstrate continued progress toward our sector and geographic growth and forward integration objectives. The company has successfully commenced commercial production of its Jingbian liquefied natural gas (LNG) plant on July 16, 2011, which represents a key milestone in its corporate history.

Our network of compressed natural gas, or CNG, fueling stations currently contains 35 stations, a significant presence in the markets we operate in. Our outlook for the second half of the year is promising as we continue to grow our business, and we look forward to sharing any future developments as they materialize."

Second Quarter 2012 Financial and Operating Results

Revenues in the second quarter of 2012 increased by 38.8% to $37.90 million from $27.31 million in the second quarter of 2011, driven by the company's LNG production facility in Jingbian County, Shaanxi Province started operations. Natural gas sales grew by 56.7% year-over-year to $34.93 million, up from $22.29 million in the second quarter of 2011. Gasoline revenues in the second quarter of 2012 decreased to $0.70 million, down by 64.5% from $1.97 million in the same period of the prior year, which was mainly attributable to the closure of three gasoline fueling stations during the first and fourth quarter of 2011. Installation and services revenue decreased by 25.6% year-over-year to $2.27 million from $3.05 million in the comparable period of 2011. In the second quarter of 2012, sales of natural gas, gasoline, and installation and other services contributed 92.2%, 1.8%, and 6.0% of the total revenues, respectively.

Gross profit in the second quarter of 2012 increased by 23.1% to $13.83 million, from $11.23 million in the same period of the prior year. Gross margin in the second quarter of 2012 was 36.5%, compared to 41.1% a year ago. Gross margin decreased primarily due to the current lower gross margin level of the company's LNG business, as compared to the gross margins of those business lines making greatest contribution to revenue.

Operating income in the second quarter of 2012 was $6.57 million, an increase of 23.1% year-over-year from $5.34 million in the second quarter of 2011, primarily attributable to the realization of revenue and gross profit of LNG, which started in July 2011.

Income tax expense was $1,25 million for an effective tax rate of 19.8%, as compared to an effective tax rate of 19.5% in the second quarter of 2011.

Net income in the second quarter of 2012 increased by 15.5% to $5.07million, or $0.24 per diluted share, from $4.39 million, or $0.21 per diluted share, in the second quarter of 2011. Net margin decreased to 13.4% during the three months ended June 30, 2012 from 16.1% during the three months ended June 30, 2011, primarily due to the decrease in gross margin.

As of June 30, 2012, the Company had $6.30 million in cash and cash equivalents, compared to $9.62 million in cash and cash equivalents at December 31, 2011. The decrease was primarily attributable to the construction of the LNG plant and other projects, and the repayment of the loans from Shanghai Pudong Development Bank and of the principal of the Abax Senior Notes.

Net cash provided by operating activities was $18.85 million for the six months ended June 30, 2012, compared to net cash provided by operations of $12.72 million for the six months ended June 30, 2011. The increase was primarily due to the decrease in prepaid expense and other current assets, increase in accounts payable and accrued liabilities and decrease in accounts receivable.