AFR analysis - target price of $0.25

http://www.copyright link/markets/e...watch-sino-gas--energy-nextdc-20160121-gmb8gs

Macquarie Wealth Management maintains an "outperform" for Sino Gas & Energy (ASX:SEH) and a target price of $0.25.
"SEH has received all regulatory approvals by MOLAR to receive payments for Sanjiaobei gas sales, which will provide confidence that similar approvals for Linxing are forthcoming. However, the decision by PCCBM to revise the revenue sharing mechanism during the pilot phase (ahead of ODP) has understandably seen the SGE operating company cease further investment. In our view, this appears a temporary issue surrounding revenue sharing during the "gray" pilot phase rather than licence ownership issues, with remedies potentially including an early back-in by PCCBM or in the worst case a deferral of future investment until ODP is secured (when PCCBM will have to back in and there is seemingly a firmer revenue sharing structure under the PSC).
Following the decision by the NDRC to cut non-residential city gas prices last November, we had previously assumed realised well-head gas prices would fall to U$7.5/mcf. Consequently, the revised price of U$7.04-7.10/mcf is not necessarily surprising (albeit with the gas buyer for Sanjiaobei swapped from Jiahao New Energy to Guoxin). Furthermore, while we assume prices remain constant over the 3-year term (and indefinitely in real terms), from November there is scope to increase pricing by ~20%.
SEH has prudently elected to curtail the level of spending, with the 2016 budget expected to be U$30-60m (gross). While this comes with a heavy impact on pilot production, this will help preserve SEH's liquidity position (U$63m in cash and $40m in undrawn debt). Importantly, the lower end of this budget allows SGE to complete remaining exploration work to support Linxing CRR and ensure adequate well-head deliverability for Linxing CGS to ramp up to 17mmcf/d by year end.

While the challenges surrounding gas payments and changes to revenue sharing terms during the pilot phase remain material, ultimately we believe the worst-case scenario is a deferral of development across Sanjiaobei until ODP can be secured in 2017, which only impacts NAV by a fraction of share price movement witnessed post the announcement (which now sees SEH trading at a cash backing)."