Chinas Leading CNG Fueling Station Operator

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China Natural Gas, Inc.
Chinas Leading CNG Fueling Station Operator
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Agenda

• Company Summary
• Market Potential
• Barrier to Entry
• Business Model
• Target Customers
• Sales, Marketing, and Business Development
• Competitive Analysis
• Financials
• Management Team

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Company Summary
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China Natural Gas, Inc.

• Chinas first natural gas retailer listed in US
  (OTCBB CHNG)
• Currently operates 35 compressed natural gas(CNG)
  fueling stations, the largest in China
• Owns one of Chinas only four liquified natural
  gas (LNG) plants
• Being awarded exclusive operation rights to
  supply natural gas for industrial, commercial and
  residencial uses in several Chinese cities or
  city districts
• Has been profitable since inception

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Highlights

• Financials
• By December 31st, 2008, revenue for 2006, 2007,
  and 2008 were 18.83m, 35.39m, and 67.72m,
  representing 87.94 and 91.35 growth rate
  respectively
• Operating margin for the companys core fueling
  station business were 42.09 and 41.57 for 2007
  and 2008
• Net profit for 2006, 2007, and 2008 were 5.45m,
  9.12m, and 15.19m, representing 28.94, 25.77,
  and 22.43 net profit margin respectively
• Operations
• Currently operating 35 CNG fueling stations in
  Shanxi and Henan Provinces, the largest in China
• Plans to acquire 25 fueling stations and two to
  three compressor stations in Xian for
  acquisition to increase the Companys market
  share from current 35 to 90 in the city, which
  has annual CNG fuel consumption exceeding 85m
• Plans to double current operations in Henan
  Province by adding 10 fueling stations and three
  compressor stations to increase market share from
  current 15 to 50 in the province which has CNG
  fuel consumption over 100m
• LNG project to be operational Q4 2009, a
  high-margin project compared to current
  businesses
• Marketing Business Development
• Successfully locked up 20 of Xian 40,000 taxi
  drivers as pre-deposit card members, which
  ensured the Companys dominant market share,
  brand awareness and customer loyalty
• Awarded exclusive gas pipeline construction and
  gas supply business to Xians new district Chan
  Ba which has a planned residents about 2 million
  and a area of 75 square kilometers
• The city of Xian Yang in Shanxi Province which
  has 5 million population and 10,000 square
  kilometers, has agreed to award the citys
  exclusive operation rights in operating CNG
  fueling stations and supplying pipeline gas

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4-Year Financials
(US Million except EPS)
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US Comparable Clean Energy Fuels Corp. (Nasdaq
CLNE)For Fiscal Year 2008
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Market Potential
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Chinese Government Promotes Vehicular Use of
Natural Gas

• In 2007, Chinas State Development and Reform
  Commission has officially listed CNG/Gasoline
  hybrid fuel vehicle as the countrys encouraged
  development category. Major participants down
  the value chain including manufacturers,
  distributors, and consumers shall enjoy a series
  of preferential treatments in taxes, rebates,
  subsidies, etc.
• As a consequence, lots of local governments
  including Chongqing, Hangzhou, Nanjing, Lanzhou,
  and Dongguan have issued policies to provide
  substantial subsidies to taxies and buses in
  remodeling into CNG-compatible vehicles.
• Today, CNG penetration in taxies and buses has
  been quickly increasing in more and more Chinese
  urban areas, e.g. More than 70 taxies and 90
  buses in Beijing are burning CNG.

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Natural Gas Growth Potential in China

• Total Reserve

• Annual Consumption

• US NG/Total Energy Usage

• China NG/Total Energy Usage

Data sources BPStatistical Review of World
Energy 2005, US Energy Information Association
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Economics of CNG ?

• CHEAPER
• Daily Taxi fuel cost (based on 250 miles per day)

• CLEANER
• Compare to gasoline, CNG-fueled vehicles emit
• 87 less nitrogen oxide
• 70 less carbon monoxide
• 25 less carbon dioxide

20.8
50 savings
Gasoline
CNG
Data source Honda Motor Company
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CNG Penetration in Taxies and Buses in Chinas
1st-tier and 2nd-tier Cities
CNG Taxi Penetration
CNG Bus Penetration
418,621
184,480
346,151
145,476
90.00
90.00
74.40
Penetration Rate
71.10
Penetration Rate
Number of CNG Taxies
Number CNG of Buses
Current
In 3 Years
Current
In 3 Years
Data CHNG Estimates
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CNG Consumption by Taxies and Buses in Chinas
1st-tier and 2nd-tier Cities 4.15 billion
CNG Bus Market
CNG Taxi Market
2,605
2,525
2,154
1,995
CAGR6.5
CAGR8.2
US Dollars (Millions)
US Dollars (Millions)
Current
In 3 Years
In 3 Years
Current
Data CHNG Estimates
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CNG Consumption by Taxies and Buses in Shaanxi
and Henan Provinces
Shaanxi Province
Henan Province
381
282
263
90.00
90.00
CAGR8.2
86.20
Penetration
Penetration
US Dollar (Millions)
179
US Dollars (Millions)
43.90
Current
In 3 Years
Current
In 3 Years
Data CHNG Estimates
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Barrier to Entry
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License Application Process for a Fueling Station

• Stringent pre-qualification process
• 13 local government departments approval
• More than 164 submissions
• Could take up to two years for approval

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LNG Project

• Highly regulated upper stream segment of China
  natural gas industry value chain
• There are only 4 LNG plants approved in China
• CHNGs LNG project was approved by State
  Development Reform Commission under State
  Council as well as China Petro, the countrys
  monopoly of natural gas resources
• LNG supply is in great shortage in China which is
  why it imports LNG from Australia
• According to our estimate, gross margin shall be
  around 66, operating margin shall be around 48,
  and net profit margin shall be around 36.
  Corresponding margins for the Companys fueling
  station business are 52, 42, and 36

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Business Model
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China Natural Gas Industry Value Chain
Regional Distributor
CHNG Strategic Business
CHNG Core Business
Low
High
Level of Regulation
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Value Preposition

• CHNG is positioned to be Chinas leading
  natural gas retailer and distributor through
  efficient operations of fueling station network,
  exclusive pipeline gas supply, continuous upward
  migration along the industry value chain, and
  strong brand leadership

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Business Scope
Fueling Station and Pipeline Gas
New Businesses
LNG Project
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Target Customers
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Bus Companies

• Bus companies are the main target customer of
  CHNGs fueling station business
• Unlike taxi companies where d rivers make
  decisions to fuel their vehicles, bus companies
  make decisions by entering into fuel purchase
  agreements with us
• In the Companys current market of Shaanxi and
  Henan Provinces, there are 22,000 buses belonging
  to 120 bus in Shaanxi.
• There are 18 big bus companies in Xian that
  account for 80 market share in the city
• Decision makers are the bus companies general
  mangers and finance managers
• This customer segment currently account for 45
  of CHNG fuel sales

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Taxi Drivers

• Taxi drivers are another main target customers of
  us
• Taxi drivers generally make their own decisions
  about where to get fuel
• Taxies in China usually drive 24 hours a day with
  two drivers divided into day and night shift
• Thare are over 70,000 taxies with 140,000 drivers
  in Shaanxi and Henan Provinces where CHNG
  currently operates
• This customer segment currently account for 45
  of CHNG sales

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Emerging Customers

• Hotels, supermarkets, restaurants, electronics
  stores they purchase CHNG fuel vouchers as
  rebates to their customers
• CHNG-compatible auto makers as rebates for their
  customers
• Government, enterprise and family users for their
  vehicles
• This customer segment accounts for 5 of sales
  but has been quickly increasing

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Our Market Share
Shaanxi Province
Henan Province
90
50
Market Share
Market Share
CAGR49.4
CAGR37.0
35
15
Current
In 3 Years
In 3 Years
Current
Data CHNG estimates
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Sales, Marketing Business Development
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Sales Organization Chart
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Sales Strategy

• Direct sales force of 20 people at corporate
  level targeting bus companies and institutional
  customers
• 200 fueling station operators and station
  managers also have sales quota each month,
  targeting individual customers at point of sales
• A significant portion of the sales personnel
  above are performance-based
• City-based sales team with same incentive
  mechanism for all branch operations
• 70 of the revenue comes from 200 plus
  operatorss influence at point of sales

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Marketing

• Event Marketing
• Donation for the earthquake
• CHNG School of Hope
• Good Citizenship Award
• Taxi drivers and traffic police award
• Direct Marketing
• Distribution of membership benefits and
  applications at train stations, restaurants, and
  night clubs where taxi drivers are frequenting
• Live model wearing CHNG clothes at annual annual
  taxi driver conferences or awards ceremonies
• Distribution of fueling guidance card for all
  CHNG stations and contact numbers
• Display of awards for various consumption of
  fuels
• Marketing Communications
• Local and national media coverage
• Sponsorship of local radio station featured
  program with CHNG name, eg. CHNG Moves Taxi
  Drivers
• Corporate executive live interview with local
  radio stations
• Distribution of CHNG petty gifts based on fuel
  consumption
• Regular taxi driver seminar for feedbacks and
  improvements

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Business Development

• Dedicated team of 10 people based in Xian and
  Beijing
• Maintains good working relationships with more
  than 20 central, provincial, and municipal
  governments
• Strong partnership with China Petro, the largest
  state-owned monopoly of petrolim and natural gas.
  CHNG secured indefinite natural gas supply
  500,000 cubic meters per day for both Shaanxi LNG
  project and Henan Province from the partner
• Entered into exclusive natural gas deals with
  municipal governments of Xian, Zhengzhou,
  Xianyang, Lingbao, and Shanxi provincial
  government
• Hubei Provincial government has exclusively
  awarded Yangtz River liners CNG remodelling and
  fueling project to CHNG

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Competitive Analysis
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Major Competitors

• CHNG is the number one player in CNG fueling
  business in both Shaanxi and Henan Provinces,
  each having 23 and 12 fueling stations
• Our major competitors in Xian include the citys
  state-owned gas company and a few other private
  operators each possessing less than 5 stations
• Xian state-owned gas company has agreed to sell
  48 of its 15 fueling stations to CHNG
• Our major competitors in Henan Province include
  Zhengzhou Gas and Zhongyou each having 7 fueling
  stations
• CHNG main competitive advantages against its
  competitors
• Management System Advantage
• The Companys private enterprise system can
  attract, motivate, and retain more talents
• Perfect safety record
• Government relations
• Strong Government Relations
• Enough Gas Supply
• Scale of Operations
• Strong Value Chain Integration

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CHNG SWOT

• Strengths
• Geographical loation
• Strategic alliances
• Management
• Value Chain Integration
• Exclusive projects

• Weaknesses
• Resource constraints
• IT infrastructure
• Recruiting of more international talents

• Opportunities
• Expansion of fueling stations
• Pipeline gas service
• Expansion of auto remodelling business
• Yangtz River fueling business

• Threats
• Government policy risks
• Emergence of new alternative energies
• New entrants from home and abroad

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Financials
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Historical Financials
Revenue and Net Income
Stable Performance
Revenue
Net Income
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Our CNG Filling Station Business
Filling Station Revenue as Percentage of Total
Revenue
Filling Station Margins
60
90
78.8
49.2
75.8
48.4
80
50
46.5
66.1
42.1
70
41.5
41.6
36.61
36.68
36.50
40
60
Gross Margin
50
30
Operating Margin
40
20
30
Net Margin
20
10
0.0
10
0
0.0
0
2005
2006
2007
2008
2005
2006
2007
2008
2007 Shaanxi vs Henan Market
2008 Shaanxi vs Henan Market
60
60
52.5
52.2
50
50
46.2
45.6
41.8
41.8
40.7
38.2
40
40
34.9
30.1
30
27.0
30
19.0
20
20
10
10
0
0
Shaanxi
Henan
Shaanxi
Henan
Gross Margin
Operating Margin
Net Margin
Gross Margin
Operating Margin
Net Margin
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Management
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Organization Structure