Canadian Company Spotlight

Changfeng is engaged in the construction of natural gas distribution networks and distribution of natural gas to commercial and residential customers in the greater Sanya City region of Hainan Province and Compressed Natural Gas (CNG) stations in Changsha, Hunan Province. The Company is headquartered in Toronto, Ontario and its shares trade on the TSX Venture Exchange.

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It is a relatively fun question to ask someone when they think the first natural gas pipeline was created. Try it and then educate them with the quick story when they aren’t even close to guessing correctly. In fact, natural gas pipelines were documented by Confucius when he wrote of the existence of natural gas aquifers and bamboo pipelines as early as 600 B.C. It is known that the Greeks actually discovered “burning springs” dating back to 1000 B.C., but it was the Chinese who first invented a functional way to transport the gas from one spot to another through the bamboo pipelines that Confucius referenced. If you’d like to throw in a bit more knowledge, go ahead and tell them that somewhere around 100 A.D. the King of Persia thought of the idea of using natural gas to cook, but didn’t have a way to transport it. So, he simply had the royal kitchen built near a natural spring.

The overall trend of the global economy is indeed weakening as many expected. Pure cautiousness is still being exhibited worldwide as investors are playing it safe to wait and see how things play out over the next several months. Natural gas prices have been on a solid slide with the rest of the economy since late in April, but demand is starting to rise as the price continues to slip. While not as heavily weighted or showing the massive exponential movements that oil exhibits (a 14% increase in demand from 2000 to 2008 showed a 150% rise in price per barrel), natural gas should not be overlooked as a viable energy investment as compared to oil.

For starters, oil is becoming more and more expensive to extract. It is not that the world is necessarily running short, it is just costing more to bring it to viable use. This, of course, goes without mentioning global initiatives to lessen the world’s reliance on oil as greener products are constantly being explored. Following along these lines, natural gas vehicles are becoming more mainstream as technologies are continually developed to provide for a “greener” mode of transportation.

There has also been a shift in trend to use natural gas as a form of power generation as part of these initiatives further creating a need for natural gas. Natural gas is a major source of electricity generation through the use of gas turbines and steam turbines. Most grid peaking power plants and some off-grid engine-generators use natural gas. Particularly high efficiencies can be achieved through combining gas turbines with a steam turbine in combined cycle mode. Natural gas burns more cleanly than other fossil fuels, such as oil and coal, and produces less carbon dioxide per unit energy released. For an equivalent amount of heat, burning natural gas produces about 30% less carbon dioxide than burning petroleum and about 45% less than burning coal.

China is still the world’s most populous country and, despite global economic troubles, has a growing economy. In the United States, the stimulus packages that were executed were widely publicized, but news covering other countries did not receive as much press. In fact, China launched a 4-trillion Yuan ($586 billion) economic stimulus package in November 2008. The primary focus of their package was to boost China’s domestic consumption and fixed asset investment, as well as improving industry value chains and energy conservation in order to decrease dependence on an export-driven economy.

China used to be a major oil exporter in the 1990’s, but is now the third largest oil importer in the world. The goal to increase energy conservation and reduce dependency on other countries has, in part, shown through in the Country’s demand for natural gas. Estimates have stated that natural gas consumption will account for 10 percent of China's annual total primary energy consumption by 2020 from the current 3.9 percent level. With this explosion of natural gas usage, greater distribution networks for industrial, commercial and residential customers are required. What is interesting is that China is importing a large amount of natural gas and it is a losing proposition. In fact, issues with the importing of natural gas into the Shanghai Terminal of Guangdong Province and Putian Terminal of Fujian Province are causing the importing to be slowed or even stopped. China’s foreign gas dependence is currently around 12% with the cost of importing the gas higher than domestic selling prices. This is requiring a need to increase pricing to meet the ever-increasing demand of the country.

There are companies that are looking to capitalize on the increase of natural gas usage and the supply issues that will inevitably drive gas prices higher within the Chinese borders. Changfeng Energy Inc. ("Changfeng")(TSX-Venture:CFY ), a China based natural gas distributor, is engaged in the construction of natural gas distribution networks and distribution of natural gas to commercial and residential customers in the greater Sanya City region of Hainan Province and Compressed Natural Gas (CNG) stations in Changsha, Hunan Province. The Company is headquartered in Toronto, Ontario, Canada.

Changfeng not only supplies natural gas to homes and commercial enterprises, but also constructs the pipeline that transmits the natural gas. Founded in 1995, Changfeng has developed a significant natural gas pipeline network as well as urban gas delivery networks, stations, substations and gas pressure regulating stations and currently serve in excess of 45,000 residential and over 410 commercial customers in the Greater Sanya region. Three years ago, Changfeng was granted a 30 years exclusive concession right to operate the natural gas distribution business in the Greater Sanya Region until 2036.

There are many good things to discuss for Changfeng, and they will be brought up below, but what really got us excited is how well their financials have been rolling in. In May, The Company reported their first quarter financial results which showed revenue of $5,089,456 for the quarter ended March 31, 2010 compared to $4,336,850 for the same period in 2009 representing a 17% increase. The increase was net of negative foreign exchange impact of 20% due to the strengthening of the Canadian dollar. The revenue in Chinese renminbi ("RMB") increased by 40% to 33.4 million RMB for the quarter ended March 31, 2010 from 23.8 million RMB compared to the same period in 2009.

Even though the first quarter looked good, this Company was just coming off a record year end. For the year ended December 31st, the Company reported revenue of $17,876,478 compared to $13,014,236 for the same period in 2008 representing a 37% increase.

Net income for 2009 was $1,122,714 or $0.017 per share (based on 66,025,000 weighted average shares) compared to $918,291 or $0.014 per share (based on 63,479,372 weighted average shares) in 2008. The Company had a $990,252 income tax expense in 2009 versus $186,312 in 2008. The increase was primarily due to the income generated in Changfeng's China based subsidiaries. Gross profit margin for 2009 remained the same strong 60%. Changfeng's EBITDA increased by 35% for fiscal 2009 to $3,644,676 compared to $2,692,652 in the same period in 2008.

Adding to recent positive announcements, the Company announced in May that through its subsidiary, Hunan CNPC New Energy Investment Co., Ltd., the Company established a wholly owned subsidiary called Ping Xiang Changfeng Gas Co., Ltd. This new subsidiary will be primarily engaged in the construction and distribution of pipeline natural gas in XiangDong District, PingXiang, City, Jiangxi Province, China. The Xiangdong District is one of the three administrative districts in Pingxiang City. Xiangdong District is one of four ceramic manufacturing centers and the biggest industrial ceramic production base in China. Its annual production accounts for 70% of the national production in China.

Xiangdong District is one of the three administrative districts in Pingxiang City, Jiangxi province. Adjacent to Changsha, Zhuzhou and Xiangtan Economic Zone with developed transportation system, Xiangdong District is one of four ceramic manufacturing centers and the biggest industrial ceramic production base in China. Its annual production accounts for 70% of the national production in China.

Changfeng has established a solid footprint in the much needed gas distribution space and last year the Company expanded its business strategies by beginning development into Mainland China. As part of the expansion, Changfeng established a Joint Venture with a subsidiary of China National Petroleum Corporation (CNPC) to develop its business in the compressed natural gas filling station industry in the capital of Hunan Province, Changsha City. As of 2009, China had 450,000 natural gas vehicles (NGV’s) in operation and 870 refueling stations. Changfeng is positioning itself to capitalize on the increasing number of NVG’s across the country as they target specific locations primed to require more filling stations.

During the second quarter of 2010, the Company commenced full operations of its first CNG filling station and received government construction permits for its second and third CNG retail stations, in Changsha City, Hunan province. Construction is scheduled to begin this quarter and be completed in the fourth quarter of 2010.

Changfeng should also benefit from the fact that the National Development and Reform Commission (NDRC), China’s top economic policy planning agency, recently announced that wholesale and domestic onshore gas prices were increased in June of 2010. This was the first increase in over two years and moved the selling price of natural gas to 2.60 RMB per cubic meter to residential customers and 3.80 RMB per cubic meter to commercial customers in Sanya City, and to 3.75 RMB per cubic meter at Changsha CNG retail stations, representing an increase of 8%, 22% and 14%, respectively.

From a technical standpoint, CFY.V is sliding back down near 52-week lows after a large move that nearly doubled that price per share in March when it jumped from $.29 to $.56. While CFY.V maintains regular volume, the average shares traded daily remains low. Today shares closed at $.325 (down 1.52%) with 60,100 shares traded. The 1-year low is $.28.

The lower indicators are giving a bit of mixed signals, but there are some bullish signs being exhibited. The MACD histogram is diverging towards zero and about to cross which is a classic “buy” signal in technical analysis. The PPO and ADX are aligning in a loose “pincher” formation as the PPO is low and the ADX is riding very high with the –DI in near proximity to the ADX (49.66 and 43.85 respectively). The MFI has seen a sharp increase over the last week indicating that buying is coming in to the stock and this is reiterated by the Chaikin Money Flow which is still well “in the green” as it has maintained above zero since early in May. The accumulation/distribution indicator is the most impressive indicator in the V.CFY chart. It has been on a solid uptrend since mid-April. This fact, combined with the accumulation/distribution and the Chaikin Money Flow is a positive sign for buying pressure outweighing selling pressure.

Caution still needs to be exercised because even though there are bullish crosses happening with some of the indicators, many are still in downtrends. These trends need to be broken for a sustained rise in price per share to happen. The Relative Strength Index (RSI) has struggled to get through 50 in the last few months and is once again pointed south. The strength of the V.CFY chart will come if support levels at $.30 are held with some volume entering into daily trading. A key resistance lies ahead at $.36. We are hoping for the bullish crosses of the indicators to continue and break through their downtrends while the price per share challenges this important level. Should V.CFY not be able to hold above its support level of $0.30, stop losses are strongly encouraged just below that price. At this time, like we always say, we encourage all investors to perform their own due diligence on the company and consult with a financial advisor before making any investment decisions.

With the price per share nearing historic support levels, CFY.V has caught our attention. It is a simple matter of basic economics that if China cannot find resolution to the increasing demand for natural gas, that prices should continue to increase and Changfeng is looking to capitalize on this situation. With no real, direct end in sight for this dilemma, Changfeng could be well positioned as it continues to expand its business plans and capture more market share at more profitable levels. We at AllPennystocks.com are looking for a momentum turn, and look with interest to the chart and corporate structure of V.CFY.

Mr. Huajun Lin - Founder, Chairman & CEO

Mr. Lin is the founder and principal of the company since its inception in 1995.

Mr. Wencheng Zhang - Independent Director

Mr. Zhang has 20 years experience in financial management field, and has played a significant role in the financing and business development strategies of a number of companies. Mr. Zhang currently serves as an executive director of Zhuhai ZhongNanHui Chemical Co.Ltd. and was formerly CFO of Jing'an China Corporate. Mr. Zhang holds honors degree with a major in finance from the Renmin University in Beijing China. Mr. Zhang was elected to the board in February 2008.

Mr. Dan Liu - Independent Director

Mr. Liu was formerly Chairman of Intel Corporate (China), General Manager of HP China Inc. (CHP), CEO Assistant of China Electronics Corporate, General Manager of China Electronics Leasing Company, General Manager of China Electronics Import and Export Crop. (CEIEC). The 40 years worked both in the private and public sector provided Mr. Liu with significant experience in management and communication. Mr. Liu is currently the Chairman of both Tongda Technology Co. Ltd. and Shengshitongda Inc. Mr. Liu was elected to the board in February, 2008.

Mr. Hui Cai - Independent Director

Mr. Cai spent 45 years with China National Offshore Oil Corporate ("CNOOC"), one of the largest state-owned oil companies in China, as well as the largest offshore oil and gas producer. His career spanned from technician to management. Mr. Cai was the General Manager of China Ocean Oil South Eastern Sea Company (CNOOC subsidiary company) and was retained by the company as a senior advisor following his retirement. Due to his meticulous attention to detail and technical skills, he gained a reputation as a leader and visionary among the oil and gas industry in China. Mr. Cai graduated from Huazhong University of Science and Technology with an Honors degree. Mr. Cai was elected to the board in February, 2008.

Mr. Peter Cheung - Independent Director

Mr. Cheung is a Managing Director of RedRock Capital Partners Corporation, an investment management and financial advisory company. Mr. Cheung co-founded RedRock in 2008 to advise Chinese investors to make investments in Canadian oil and natural gas companies. Prior to co-finding RedRock, Mr. Cheung was Vice President and Treasurer of Pengrowth Corporation, a $5 billion enterprise value oil and natural gas trust listed on the Toronto and New York Stock Exchange. Before that, Mr. Cheung held the position of Vice President, Energy Group, RBC Capital Markets and was a Senior Auditor at Collins Barrow Chartered Accountants. At RBC Capital Markets and Pengrowth Corporation, Mr. Cheung worked on approximately $40 billion of M&A, financial advisory, equity capital markets and debt capital markets transactions. With a Bachelor of Commerce and a Chartered Accountant designation, Mr. Cheung brings a wide range of energy, finance and accounting experience to Changfeng Energy. Mr. Cheung was elected to the board in June 2009

Mr. Robert C. Kay - Independent Director

Robert C. Kay currently serves as a Corporate Director in several companies, both privately held and publicly listed, and is the Chairman of the Canadian Commercial Corporation, a Crown Corporation of the Government of Canada. Previous notable governance roles include Board Member of the American Chamber of Commerce (Ontario Council) and Chairman of the Swiss Canadian Chamber of Commerce. Mr. Kay was also a Board Member in the Integrative Thinking Practicum in the MBA degree program at the University of Toronto and has served as a Member and Adjudicator on the Ontario Municipal Board, a quasi-judicial body. Mr. Kay has spent many years working at the executive level providing advice and counsel to both corporations and governments, domestic and foreign, on international strategic commercial development. He is a member of the Royal Canadian Military Institute, the National Association of Administrative Law Judges, and the Law Society of Upper Canada. Mr. Kay maintains his professional status as a member in good standing of the Bar of Ontario. Mr. Kay was elected to the Board in June 2009.

Mr. Graham Warren - Independent Director

Mr. Warren is a senior financial executive with over 25 years of experience with emerging companies in the oil and gas, mining, environmental, biotech and software sectors. He has extensive operations, international business, corporate finance and public market experience. Based in Toronto, Mr. Warren has a private consulting firm, Graham C. Warren Consulting, and has served as Chief Financial Officer of Umedik Inc. and Medtech Environmental Ltd, a subsidiary of Stericycle Inc. He is a past director Hanfeng Evergreen Inc (TSX: HF), where he served as Chairman of the audit committee. Mr. Warren also serves as Chief Financial Officer of Arehada Mining Inc (TSX: AHD) and Exile Resources Inc (TSXV: ERI) and is a director of Active Control Technology Inc (TSXV: ACT). Mr. Warren also serves as the Chairman of the audit committee for the Opimian Society. He holds a B.Comm. degree from Concordia University and a C.M.A. designation from the Society of Management Accountants.

Corporate Address:

25 Adelaide ST, E Suite 1612 Toronto, ON M5C 3A1

Tel: (416) 362-5032
Fax: (416) 362-2393
Email: Info@changfengenergy.com
Website: www.changfengenergy.com

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