China Natural Gas (CHNG.OB)

Dear Bottarelli Research Member,

Amid some skittish and nervous trading, a series of 200-point up and 400-point down-moves left the major market averages trying to sort out which direction to move next. Now that earnings have all been reported, June will give us a strong clue as to how the battle to move higher (or lower) will play out. Oil temporarily pulled back, but then shot aggressively higher. Thursday offered a nice upside pop, but today, all of those gains quickly evaporated. When I see violent upside and downside moves like this, it tells me that the markets remain in a state of indecision. Therefore, if the markets begin to break down even further, we’ll add another protective put on the Dow Diamonds (DIA – AMEX). But until we get that signal, let’s remain on course, because many of our latest small-cap positions — especially our recent picks on BEXP and NOG — have been handing us stellar returns.

This week, we’ll continue to build our small-cap portfolio with promising alternative energy plays. Piggy-backing on last week’s SYNM pick, the push for cheaper fuel sources around the globe is running stronger than ever. So this week, we’ll set our sights on China, where automobiles are now being driven on Compressed Natural Gas (CNG).

CNG is a very effective alternative fuel because it not only combats China’s major pollution problem, but it’s also a very clean and very reliable way to cut fuel costs. According to my research, CNG offers a 40%-60% cost savings over gasoline.

Folks, that’s a pretty big number. But that’s just the beginning. In addition to this tremendous cost savings, CNG also emits 80% less nitrogen, 70% less carbon monoxide, and 20% less carbon dioxide into the air. Put it all together, and that’s a powerful set of numbers.

These statistics set the table for today’s newest small-cap pick…

You see, the small-cap company you’ll learn about today has positioned themselves as the very first company to own operational CNG filling stations. As you read this, they currently operate a total of 28 CNG stations with many more coming soon.

They’re also one of the leading providers of pipeline natural gas for residential, commercial, and industrial customers. They total over 70 miles of existing pipeline serving 90,269 customers, and they have big plans to expand their services into other regions of China. This means we have a company that is not only firmly rooted in the Chinese markets, but they’re also growing like a weed. That’s a really nice combination for a small-cap pick.

Now, you’ve undoubtedly heard about China’s rapid population growth — and this leads directly to Chinese customers buying homes, cars, appliances, and so forth. But it also creates tremendous demand for natural gas. And when you toss the benefits of CNG into the equation, today’s pick is a “double play” on massive Chinese natural gas demand plus the global implementation of CNG. That, my friends, equates to major potential.

As this company continues adding more CNG filling stations, you can bet that their earnings will also reflect this growth. In fact, if you look closely, you’ll see that their earnings are already smoking hot! In their latest earnings report, their revenue for the first quarter was $14.0 million, an increase of 108.0% over the $6.7 million they earned in the first quarter of 2007. Their gross profit also increased 73.1% to $6.1 million (up from $3.5 million in the first quarter of 2007), and their operating income increased 52.2% to $3.8 million from $2.5 million in the first quarter of 2007.

These are very impressive year-over-year numbers, and they’ll only get better. That’s why today’s pick is the type of small-cap company that early-stage investors like us want to own. I firmly believe that natural gas has the ability to solve many of our country’s energy issues, and I’m not alone. T. Boone Pickens — who I have tremendous respect for — recently stated that natural gas is going to play a huge role in unwinding our dependence on foreign oil. It’ll also have a huge impact on helping keep our environment cleaner, making the benefits unmistakable. One day soon, I hope we have CNG filling stations on every street corner in America. The time has certainly come.

On that note, this week’s pick is China Natural Gas (CHNG.OB). As I write, CHNG is just coming off its 2008 lows around $5.00, and this has officially trigged an extended upside forecast on my charts. I expect to see this pick double within a year, especially as things heat up in the CNG market in China. We also we have the Summer Olympics coming, and this could be a major upside trigger for this pick as well. Therefore, let’s buy CHNG up to $7.00 per share and enjoy the ride!

UPDATES

Genoil (GNOLF.OB): I’m getting frustrated with the lack of movement in GNOLF, so I plan to place a live call into Genoil company headquarters next week to get a better understanding of what we should expect going forward. In the meantime, I’m putting them on my “short leash.” After my due diligence call, I will let you know what action to take. In fact, I already have been researching some new companies that could replace GNOLF in our small-cap portfolio. But for now, let’s sit tight until I can gather more information. Hold.

Echelon Corporation (ELON – NASDAQ): On Tuesday May 27^th, ELON announced that the city of Øvre Eiker in Norway has chosen a smart streetlight solution from Luminext (who is one of ELON’s partners) to reduce their total energy usage. This solution uses Echelon’s LonWorks technology to reduce the city’s energy usage by 45% percent and lower maintenance costs by 35%. We still view ELON as a huge beneficiary in the push for energy savings, and that’s why Bryan and I want you to hold this dynamic company. We feel it’s extremely undervalued, and very soon Wall Street will recognize the value of their energy conservation technology. Hold.

ISIS Pharmaceuticals (ISIS – NASDAQ): Just as we suspected, shares of ISIS are coming back to life after experiencing an unjust sell-off. They just received a $4.6 million payment from Alnylam Pharmaceuticals (ALNY – NASDAQ) which represents a portion of up-front fees in a recently-announced transaction between Takeda Pharmaceuticals and Alnylam. In addition, ISIS also has the potential to receive future milestone and royalty payments. But the real reason why we love ISIS is the fact that they own (or control) more than 1,500 patents which have generated over $100 million in licensing fees. And best of all, this number keeps on growing. I fully expect ISIS to receive a substantial buyout offer from a major drug company, and I think the time is getting much closer than anyone realizes. Hold.

Evergreen Solar (ESLR – NASDAQ): Evergreen Solar and Ralos Vertriebs (out of Germany) just signed an agreement valued at approximately $750 million for solar panel deliveries beginning in 2008 and extending through 2013. Combined with another agreement signed last week, Evergreen has a new contractual backlog of approximately $1 billion. This leads me to believe that ESLR is red hot once again, and these contracts prove it. If you do not own ESLR (or you would like to add more to your position), these levels represent a great time to move. Buy/Hold.

Brigham Exploration (BEXP – NASDAQ): This week, BEXP announced the successful completion of two additional Vicksburg wells which resulted in record level production! Brigham also announced their second consecutive successful Williston Basin Red River well. As we have been saying, both BEXP and NOG are poised to give us eye-popping returns, so congratulations on a very quick 70% return! But I have to tell you, this is only the beginning. Be sure to take a quarter of your profit off the table (if you haven’t already) and let the remainder ride for more upside. Hold.

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Sincerely,

The First China-Based Natural Gas Retailer,
Now Publicly-Traded in the U.S. for Under $7.00 Per Share

Before getting into today’s newest pick, let’s first take a quick look at the chart of the Russell 2000 Small Cap Index (RUT).

Despite the fact that the Dow has lost over 700 points over the last ten trading days, the RUT has actually been one of the strongest indices on Wall Street.

As you can see from the chart below, the RUT has just broken above its 200-day moving average. This is a very bullish sign, especially considering that small caps tend to be a leading market indicator.

Therefore, Mark and I remain firm to our word about the mid-April market bottom, and we feel especially good that our small-cap positions are now leading the way! So on that positive note, let’s dive right into this week’s new pick. We’ll begin with an interesting story from the top Ivy League universities in the country…

You see, when it comes to recruiting top candidates for highly-paid Wall Street investment banking, hedge fund, and consulting jobs, times have dramatically changed. For example, companies like Goldman Sachs and Merrill Lynch no longer seek out candidates with the highest grade point averages or placement test scores. Rather, they’re now looking for entrepreneurial-minded individuals who achieve the best stock market performance records from their dorm-room investment clubs.

As crazy as that sounds, it’s true. For example, one such investment club from Yale University is called “Globalfund.” Some have described it as a cross between Yale’s secretive Skull & Bones society and a young tycoons club — and that’s probably a very fair assessment.

Launched in 2006, Globalfund is an invitation-only club that evaluates candidates based on their investment ideas. And they’re extremely picky. Among their hand-picked members, the “partners” (who are the founding members) reject three out of every four investment ideas brought to the group’s attention.

According to 22-year old Philip Uhde (who is the group’s founder and president) anyone who is interested in finance at Yale wants to join his group. But he only accepts a small group who bring him the best and brightest investment ideas.

I bring this story to your attention because of a fellow named Harry Greene, who is the group’s other founding partner. A 23-year-old senior majoring in economics and mathematics, Greene’s top Gloabalfund recommendation was none other than today’s pick, China Natural Gas (CHNG.OB).

Greene performed his due diligence on CHNG by calling their investor-relation representatives from his dorm room and performing a background check in Mandarin (which is a language he mastered after spending a year in Beijing). Upon his recommendation, shares of China Natural Gas tripled in the Globalfund account after four months — and that’s when members took their profits off the table.

But just recently, they bought back into the stock, making Globalfund the only “analysts” (if that’s even the correct word) who are currently recommending these shares. And today, we’re going to join these brilliant minds of Yale’s elite Globalfund investment club and be among the first group of early-stage investors to own China Natural Gas right alongside them.

As a brief overview, China Natural Gas is the first China-based natural gas retailing company publicly traded in the U.S. They own and operate a network of 28 CNG retail filling stations and a 120 kilometer compressed natural gas pipeline in Xi’an, China.

This is a powerful strategic location for CHNG to operate because Xi’an is a rapidly growing Chinese city. With a population of approximately eight million, it’s often called the “gateway” to the western regions of China. But more importantly, the city currently supports 5,000 buses and 20,000 taxis using compressed natural gas, and these numbers are projected to continue growing exponentially.

In fact, China Natural Gas announced on Wednesday April 2^nd that they built two new CNG filling stations in Xi’an City, which officially brought their total up to 28. I would not be shocked if this number increases up to 100 over the next 1 to 2 years.

According to China Natural Gas CEO Mr. Qinan Ji, “We believe there is significant opportunity to build out our filling network as more and more drivers and local governments seek the benefits of CNG, which is significantly more affordable and energy efficient than gasoline. In fact, in Xi’an City alone, we estimate there are roughly 700,000 motor vehicles, of which only eight percent are currently using CNG. We are working diligently to capitalize on this market opportunity.”

Just imagine the potential here. Just in Xi’an City, only 8% of the 700,000 motor vehicles are using CNG. Apply that multiple across all of China, and the market opportunity for China Natural Gas is absolutely staggering.

But let’s back up a moment and answer a simple question:

“What is Compressed Natural Gas (CNG)?”

By definition, compressed natural gas is a substitute for gasoline, diesel, or propane fuel. CNG is made by compressing natural gas to less than 1% of its volume at standard atmospheric pressure — and it’s stored and distributed in hard containers.

In response to high fuel prices and environmental concerns, compressed natural gas is starting to be used across the globe in light-duty passenger vehicles, trucks, medium-duty delivery trucks, transit busses, and school buses. It’s not only cleaner than other fuels, but it’s also much safer than motor fuels. In the event of a fuel spill, for example, natural gas is lighter than air, so it disperses quickly when leaked or spilled.

CNG is often confused with liquefied natural gas (LNG). While both are stored forms of natural gas, the key difference is that CNG is a compressed form and LNG is a liquefied form. This is an important distinction because it allows CNG to have a lower cost of production and storage compared to LNG, as it does not require an expensive cooling process and cryogenic tanks.

Now here’s the thing…

Although CNG is not widely known (or accepted) here in the United States, it is quickly growing in major markets across the globe. A quick review of the locations below clearly shows that CNG is gaining a very strong international presence.

• Canada: Since Canada is a large producer of natural gas, it’s only logical that CNG is used in Canada as an economical motor fuel. CNG and propane refueling stations are easy to find in Canada’s major cities, and Canada’s industry has actively developed CNG-fueled trucks, bus engines, transit buses, and taxis.
• Europe: In Germany, CNG-generated vehicles are expected to increase to two million by the year 2020. The cost for CNG fuel is half the cost of other fossil fuels in Europe, making a strong case for expanded usage.
• South America: Argentina and Brazil have the two largest fleets of CNG vehicles. In fact, a “Blue-network” of CNG stations is being developed along the major highways of Chile and Bolivia to allow for long-haul transportation fuelled by CNG.
• Asia: CNG has emerged into one of the major fuel sources used in car engines in Iran, Pakistan, Bangladesh and India. The use of CNG is now mandated for the public transport system in India’s capital of New Delhi, primarily because in Asian economies, CNG costs are at Rupees 18.90 (USD $0.46) per kilogram compared with Rupees 50.00 (USD $1.25) per liter of petrol. The cost saving is immense along with reduced emissions and environmentally-friendlier cars.

As of July 2007, Pakistan was the largest user of CNG in Asia and second largest user in the world. The Delhi Transport Corporation operates the world’s largest fleet of CNG buses, and Egypt has more than 63,000 CNG vehicles and 95 fueling stations nationwide. (And an interesting side-note: Egypt was the first nation in Africa and the Middle East to open a public CNG fueling station in January 1996).

As you can see, CNG is rapidly emerging in various countries across the globe, and it’ll only be a matter of time before U.S. investors take notice of a China-based CNG play like China Natural Gas. Plus, as Mark mentioned above, the stock is now trading under $7.00, which is significant for two reasons. One, shares hit a new 52-week high at $15.50 on October 16^th 2007 and have since dropped by over 50%. This offers us a superb entry point. And two, we feel this 50% drop is overblown due to Q1 2008 earnings that produced the following:

• Revenue increased 108.0% year over year to $14.0 million.
• Gross profit increased 73.1% year over year to $6.1 million.
• Income from operations increased 52.2% year over year to $3.8 million.

Strong earnings like this, combined with a rapidly-growing presence in top CNG markets, make shares of China Natural Gas (CHNG.OB) a powerful and potentially explosive winner. Therefore, let’s go ahead and add shares to our small-cap ledger now!

PLAY: Buy shares of China Natural Gas (CHNG.OB) at or under $7.00, good for the week.

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Sincerely,