SINO GAS & ENERGY HOLDINGS LTD

RESEARCH NOTE

Sino Gas delivers once again Reserves upgrade

Sino Gas & Energy (SEH) has announced a significant increase in 2P reserves to a gross 327bcf from 22bcf following the release of the updated 2013 Independent Resource Report from RISC. Importantly gross project reserves and resources have increased by 56% from 3.7tcf to 5.7tcf due to increased Contingent and Prospective Resources, exceeding our expectations. The announcement demonstrates the increased commerciality and progressive de-risking of SEHs projects. Following this upgrade we have increased our price target to $0.45ps from $0.31ps maintaining the BUY rating. Upgraded Reserves & Resource potential +56% Total Resources: SEH has announced increased certified gross 2P reserves to 327bcf (+1386%), 2.2tcf 2C Resources (+24%) and 3.1tcf Prospective Resources (+71%). Overall SEH has announced an increase of 56% from 3.7tcf to 5.6tcf in overall resources (net 1.6tcf SEH). This is significant further step in de-risking these projects and we envisage additional reserves/resources growth through the conversion of Resources to Reserves and further exploration from the full funded 25 well drilling campaign over the next 12mths as SEH moves the projects to full field development in 2014/15. 25 well/fully funded development program in 2013: This announcement is only the beginning of a year of catalysts for SEH. Over the next 12 months SEH has an active fully funded development program underway including additional seismic, 25 wells and production tests, all targeting Chinese Reserve Reports (CRR)/Overall Development Plan (ODP) in H2 2013. Fully funded to development/Strong Chinese Partner in MIE: SEH is fully carried on its share of the development programme following the farm-out of 51% of its Chinese projects for US$100m to MIE Holdings in mid 2012.These funds will be sufficient to fund SEHs capex programme to 2014, taking the projects to CRR and ODP. SEH has high retained interests and 50% of its acreage remains unexplored: SEH has high retained interests of 32%/24% for the Linxing and Sanjiaobei PSCs which provides material upside as the projects move into the full field development phase. Importantly 50% of its acreage is unexplored. We re-iterate our Buy rating and have increased our price target to $0.45ps from $0.31ps due to the increased resource potential on the projects reflecting the upgraded reserves report. Our buy rating is predicated on near term development of gross 5.7tcf resources, attractive well economics, high retained interests, projects located close to nearby infrastructure and proposed reform of Chinese gas prices. Key Catalysts: 25 well programme Q3 2013, Chinese CRR & ODP in 2H 2013, Chinese Gas prices reform in 2H 2013. Key Risks: Development risk, sovereign and gas price risk.

21 March 2013 12mth Rating

Price Target Price 12m Total Return RIC: SEH.AX Shares o/s Free Float Market Cap. Net Debt (Cash) Net Debt/Equity 3m Av. D. Tover 52wk High/Low A$ A$ %

BUY
0.165 0.45 171.3

BBG: SEH AU m 1238.6 % 73.6 A$m 204.4 A$m 31.1 % 0 0.13 A$m A$ 0.17/0.06

Valuation:
Methodology Value per share A$ NPV 0.53

Analyst: Phone: Email:

Alexis Clark, CFA (+61 3) 9224 4448 aclark@psl.com.au

12 Month Share Price Performance

$0.18 $0.16 $0.14
Share Price ($)

Year End Dec 31 Reported NPAT ($m) Recurrent NPAT ($m) Recurrent EPS (cents) EPS Growth (%) PER (x) PEG EBITDA ($m) EV/EBITDA (x) Free Cashflow FCFPS (cents) PFCF (x) DPS (cents) Yield (%) Franking (%)

2010A (4.4) (0.5) (0.6) na (27.6) na 0.4 267.2 (6.6) (0.9) (18.4) 0.0 0.0 0.0

2011A (3.9) (4.0) (0.4) na (43.1) na (3.7) (45.8) (10.9) (1.1) (15.7) 0.0 0.0 0.0

2012F (3.9) (4.3) (0.4) na (43.2) na (4.3) (41.4) (10.8) (1.0) (17.2) 0.0 0.0 0.0

2013F (1.2) (1.2) (0.1) na (168.2) na (1.0) (200.5) (0.6) (0.0) (355.9) 0.0 0.0 0.0

2014F 10.2 10.2 0.8 na 20.7 na 14.3 15.9 (29.6) (2.3) (7.1) 0.0 0.0 0.0

18 16

14
Volume (million)
1

$0.12 $0.10 $0.08 $0.06 $0.04 $0.02 $0.00 12 Months

12 10

8
6 4

2
0

Performance %
Absolute Rel. S&P/ASX 300

1mth
42.6 46.8

3mth
51.6 54.9

12mth
148.7 186.2

RESEARCH NOTE PATERSONS SECURITIES LIMITED All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof.

21 March 2013

Sino Gas & Energy Holdings Ltd

Reserve/Resource Upgrade significant increase

SEH has announced increased certified gross 2P reserves to 327bcf (+1386%), 2.2tcf 2C Resources (+24%) and 3.1tcf Prospective Resources (+71%) following the updated Independent Assessment from RISC. This is a significant increase and the announcement and this update has been prepared on the basis of the 12 wells drilled in 2012 and 370km of additional seismic data on the Sanjiaobei and Linxing PSCs.
demonstrates the increased commerciality and progressive de-risking of SEHs projects which we believe the market does not yet fully appreciate. The last update from RISC was in January 2012

Overall, SEH has announced an increase of 56% from 3.7tcf to 5.6tcf in total resources. We were expecting an increase in the 2P reserves as this was largely infill drilling on SEHs PSCs, however the size of the increase was greater than expected. The increase in Contingent & Prospective resources significantly exceeded our expectations and is due to the additional seismic work completed in 2012 on previously unexplored acreage. New SEH management have delivered in a short space of time with a farm-down ensuring the projects are fully funded and now, a significant increase in reserves and resource potential on the blocks. Key points on the announcement are as follows: Total un-risked mid-case reserves & resources has increased 56% to 5.7 Tcf, net SEH share at 1.6 tcf 1386% increase in gross 2P Reserves to 327bcf (from 22bcf) with net SEH share at 93 bcf 24% increase in total project 2C Contingent Resources to 2.2 tcf (from 1.7tcf) (net SEH 653bcf) 71% increase in total project Prospective Resources to 3.2 tcf (from 1.8tcf)(net SEH 885bcf) Net mid-case project NPV for SEH as determined by RISC has increased 66% from US$1.1bn to US$1.9bn with a risked valuation of US$1.5bn. The higher valuation is due to the larger resource base, refinements to SEHs development models and strengthening gas price forecasts in China. We value the projects at approximately $740m so there is significant upside to our conservative valuation.
Figure 1: Updated RISC Reserve & Resource Report

Source: SEH Announcements

RESEARCH NOTE PATERSONS SECURITIES LIMITED

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof.

21 March 2013

Sino Gas & Energy Holdings Ltd

25 well/fully funded work program in 2013

SEH has an active near-term work program on its Chinese projects in 2013. In a recent operational update SEH highlighted the program underway includes 2D seismic, up to 25 wells, production tests and targeting pilot gas projects and Chinese Overall development plan and Reserve Reports in 2013 on both projects. SEH will have 10 rigs operational on the PSCs in Q2 2013 and up to 25 wells completed by the end of Q3 2013. Importantly the resource estimate announced today only relates to 50% of the acreage as 50% remains unexplored so significant upside potential remains on the blocks. Across the PSCs a number of wells have been drilled and intercepted between 9-17 pay intervals in each well wells will now be dewatered, perforated and fracced in the forthcoming months. SEH will then conduct flow tests to incorporate the results in the Chinese Reserve Report process. This process is akin to moving the projects to Final Investment Decision. In addition to this SEH will be drilling up to 4 exploration wells by mid 2013. First gas from pilot projects is targeted for 2H 2013 with commercial production targeted for 2014 on both projects.

Key Catalysts
Catalyst Sanjiaobei & Linxing West drill programme Linxing East - Chinese CRR & Pilot Production Sanjiaobei - Chinese CRR Pilot Gas projects Reform to Chinese Gas prices. Timing Q2 2013 Q3 2013 Q4 2013 2H 2013 2H 2013/H1 2014

Key Risks
Production rates: SEH is targeting significant production growth and any delays to development drilling and low well flow rates would impact our forecasts. Funding risks: Post the MIE farm down SEH is fully funded for the appraisal programme to reach Chinese Reserve Report and Overall Development Plan submission. SEH will however need to raise funding for full field development of the projects from 2014 onwards. By 2014, SEH should have significant 2P reserves booked and reserve based lending facilities should be available to finance this stage of the project. There are already a number of ASX listed E&P companies operating in China who have reserve based lending facilities in place, secured against 2P reserves. Development risks: As with any resource development project there is the risk that the development does not proceed according to plan. Timing, capital costs, reserve risks and access to infrastructure can negatively impact earnings and valuation. Sovereign Risk: There is the risk of altered terms on the PSC from the Chinese government, although there is a long standing and established practice of the Chinese government honouring the terms of PSCs. Recent confirmation of transfer of ownership interest in the Sanjiaobei PSC by the Chinese government recognising the transfer from Chevron to Sino and their PSC partners was a positive development and goes someway to mitigating this risk. Standard oil & gas industry risks: Commodity prices, exchange rates, exploration, development and production operating risks. SEH has no gas price or exchange rate hedging in place.

RESEARCH NOTE PATERSONS SECURITIES LIMITED

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof.

21 March 2013

Sino Gas & Energy Holdings Ltd

High Demand and China needs the gas

Significant population/extensive infrastructure build out
Sino Gass acreage is located in Shanxi Province highlighted in Figure 2. The province has a population of 33 million and includes 11 cities and 119 counties and districts. The capital of the province is Taiyuan with a population of 4.2m and there are 8 cities in the province with a population over 3m people. The population and demand for energy in the Shanxi Province where Sino's acreage is located is significant. Urbanisation is an unstoppable trend and the infrastructure build out is significant. There are multiple apartment towers of 40 story plus and numerous bridges and roads under construction. As a result of this growth and the high usage of coal, air quality is low in the province. Chinas 12th five year plan focuses on energy efficiency and the use of cleaner energy sources such as natural gas as the fuel of choice for power generation, bus and truck fleets and for powering the boiler network which provides heat for the cities. This is a concerted and serious government effort.

Pipeline infrastructure in-place

Figure 3 detailed below outlines the location of SEHs acreage in the Ordos Basin in China as highlighted in yellow (Sanjiaobei and Linxing PSCs). The figure also shows other operators producing in the region and the significant pipeline infrastructure crossing the Sino block and linking into large population centres.The Chinese government has been aggressively investing in pipeline infrastructure over the last 10 yrs which has opened up the transportation of Chinas natural gas supplies in order to transport inland domestic gas to the coastal cities and opened a new stage in the evolution of Chinas natural gas market, from that of a local business to a nationwide business.
Figure 2: China Ordos Basin SEH Acreage Figure 3: Shanxi Province

Source: China Websites

Source: SEH Presentations

Chinese gas price reform and government initiatives

In late 2011 the Chinese government announced the commencement of reforms to Chinese gas prices so that they are subject to market based pricing based on a reference basket of imported fuel oil and LPG. Whilst still early days, this is a positive step in linking domestic and import prices with the potential of gas prices reaching US$10mcf/d vs current US$7mcf/d. This reform has commenced in two provinces at this stage and is expected to be rolled out to other provinces in the near term. China is the most important country shaping the future of global energy markets and its existing energy demand and its potential for economic growth means that its policy choices will dramatically affect global gas demand. Chinas 12th five year plan for the period 2011-2015, focuses on energy efficiency and use of cleaner energy sources such as natural gas setting a target for natural gas of 8.3% of the primary energy mix by 2015 from 3.8% in 2008. Generating production from all sources of domestic unconventional gas is a critical part of this plan. Sinos PSCs are specifically designated to be fast tracked by the Chinese authorities.

RESEARCH NOTE PATERSONS SECURITIES LIMITED

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof.

21 March 2013

Sino Gas & Energy Holdings Ltd

Valuation $0.53cps/Price Target $0.45

We re-iterate our Buy rating and have increased our price target to $0.45ps from $0.31ps as we have increased the resource potential on the projects to reflect the upgraded reserves report. Our risked DCF valuation and price target on SEH is $0.53cps, which represents significant upside to the current share price. Our base case valuation incorporates full field production for the contingent resources at the Chinese projects, with the majority of the value contained in SEHs Contingent Resource potential which we have heavily risked. We have set our price target at 85% of the risked valuation to reflect the risks inherent in a small cap stocks and liquidity. Our valuation is summarised below:
Figure 4: Base Case Valuation

Valuation Linxing PSC - 2P & 2C Sanjiaobei PSC - 2P & 2C Prospective Resource Upside C ash C orporate Debt Unpaid capital Total @ 10% Discount Rate Price Target
Source: Patersons Estimates

A$m 442 211 93 19 (45) (50) 3 673 85%

A$/sh 0.35 0.17 0.07 0.01 (0.04) (0.04) 0.00 0.53 0.45

Reserves & Contingent Resources: Our valuation is based on a DCF of full field development of the 2P Reserves and 2C Resources risked at 40%. We have risked these valuations to take into account the inherent uncertainties such as production timing and capex delays and over runs. Assumes recoverable 2C resources & 3P reserves of 2.9 tcf gross (0.9 tcf net SEH) in the Linxing and Sanjiaobei PSC fields. Individual well economics are attractive with the following key assumptions used: Average cost per well estimated to be US$2.1m (including drilling, fraccing and tie-in). Production life: Individual wells modelled at EUR of 2bcf per well and decline rate of 12% p.a. 30+yr production with steady state production of 200mscf/d (average both projects). Gas price: US$7.0/mcf (subject to local Chinese gas price regulations) and Lifting costs: US$2/mcf Prospective resources: We have used an Expected Monetary Value approach to value the prospective resources, which is an industry standard methodology. This methodology involves calculating a theoretical success value, weighting it by the assessed probability of success and subtracting well costs. All wells should have a positive EMV or they should not be drilled. We have risked this valuation at 15%. Assumes recoverable net 3C resources of 3.2tcf gross (0.9tcf net SEH) in the Linxing and Sanjiaobei PSC fields. Other: The NPV of corporate overhead, cash and net debt are added to the valuation. We have valued SEH on a fully diluted basis, assuming the current shares on issue of 1.23bn shares plus the exercise of 38m options resulting in fully diluted shares on issue of 1.27bn shares. We have removed the assumption of a further equity raising to fund the capex program following the MIE farm-in and assumed a $50m reserve based lending facility to fund SEHs share of development capex on the projects. We believe these assumptions are reasonable as we have attributed a conservative success rate to SEHs significant resource potential (i.e. we have heavily discounted SEHs resources implying further upside to our conservative forecasts in the event of successful development.) The increasing likelihood of the successful development of these projects and a re-rating of SEH is likely in our view. The potential upside valuation case, based on de-risking the Contingent and Prospective resources results in valuation of $1.71ps for SEH.

RESEARCH NOTE PATERSONS SECURITIES LIMITED

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof.

21 March 2013

Sino Gas & Energy Holdings Ltd

Sino Gas & Energy Holdings Limited Valuation Linxing PSC - 2P & 2C Sanjiaobei PSC - 2P & 2C Prospective Resource Upside Cash Corporate Debt Unpaid capital Total @ 10% Discount Rate Price Target Price Target Sensitivity Gas Price Sensitivity (A$/sh) Exchange Rate Sensitivity (A$/sh) Valuation Summary of Operating Assets

$0.17 A$m 442 211 93 19 (45) (50) 3 673 85% -10% 0.46 0.57 0% 0.53 0.53 A$/sh 0.35 0.17 0.07 0.01 (0.04) (0.04) 0.00 0.53 0.45 +10% 0.60 0.49 Commodity Assumptions US$/A$ RMB:US$ Crude Oil - WTI (USD/bbl) Sales Gas Price - USD Production Summary Linxing PSC Sanjiaobei PSC Total (bcf) Linxing PSC Sanjiaobei PSC Total (mmscf/d) 2010A 0.93 6.60 79.74 6.86 2010A 0.00 0.00 0.00 0.00 0.00 0.00

Year End December 31 2011A 2012F 2013F 1.03 1.03 1.01 6.45 6.08 6.00 93.08 94.46 97.62 7.10 7.75 8.06 2011A 0.00 0.00 0.00 0.00 0.00 0.00 2012F 0.00 0.00 0.00 0.00 0.00 0.00 2013F 0.14 0.33 0.46 0.38 0.89 1.27

Sanjiaobei PSC - 2P & 2C

Prospective Resource Upside Cash

Linxing PSC 2P & 2C

Production Summary

Profit & Loss (A$m) Sales Revenue Other Income Operating Costs Exploration Exp. Rolayties Corporate/Admin EBITDA Depn & Amort EBIT Interest Operating Profit Abnormals Pre-Tax Tax expense Minorites Other NPAT Normalised NPAT

2010A 0.0 2.0 0.0 0.0 0.0 1.6 0.4 0.0 0.4 0.9 (0.5) (3.9) 0.0 0.0 0.0 (4.4) (0.5) 2010A (0.5) 0.9 5.4 0.0 (1.7) (6.6) 0.0 0.0 (6.6) 0.0 23.6 (13.6) (0.1) 3.3 (0.8) 8.3 8.3 2010A 8.3 37.4 0.0 6.3 31.1

2011A 0.0 (0.5) 0.0 0.0 0.0 3.1 (3.7) 0.1 (3.7) 0.3 (4.0) (0.1) 0.0 0.0 0.0 (4.0) (4.0) 2011A (4.0) 0.3 8.4 0.1 1.1 (10.9) 0.0 0.0 (10.9) 0.0 7.0 0.0 (0.0) (4.0) 0.0 4.3 4.3 2011A 4.3 44.4 0.0 8.9 35.5

2012F 0.0 0.2 0.0 0.0 0.0 4.5 (4.3) 0.0 (4.3) 0.0 (4.3) (0.4) 0.0 0.0 0.0 (4.7) (4.7) 2012F (4.7) 0.0 (0.2) 0.0 (1.8) (6.3) 0.0 0.0 (6.3) 0.0 2.4 0.0 7.1 3.1 (0.0) 7.4 7.4 2012F 7.4 52.0 0.0 13.6 38.4

2013F 3.7 0.6 0.5 0.0 0.0 4.8 (1.0) 0.2 (1.1) 0.0 (1.1) 0.0 0.1 0.0 0.0 (1.2) (1.2) 2013F (1.4) 0.1 0.1 0.2 0.0 (1.2) (0.5) 0.0 (0.7) 0.0 10.0 0.0 0.0 9.3 0.0 16.7 14.0 2013F 14.0 57.9 0.0 13.6 44.3

3.00

10.00 8.00 6.00 4.00 2.00 0.00 2010A 2011A 2012F 2013F Sales Gas Price - USD Linxing PSC

Production (bcf)

2.50 2.00 1.50 1.00 0.50 0.00 Sanjiaobei PSC

Reserves & Resources Reserves - as at Mar 2013 Net Reserves 1P 2P 3P 2C Contingent Resource P50 Prospective Resource Directors Name Gavin Harper Robert Bearden Bernie Ridgeway Peter Mills Colin Heseltine

Oil/Cond (mmbbl) 0 0 0 0.0 0.0

Gas (bcf) 32 94 199 653 885

Total (mboe) 5.3 15.7 33.2 108.8 147.5

Cash Flow (A$m) Adjusted Net Profit + Interest/Tax/Expl Exp - Interest/Tax/Expl Inc + Depn/Amort +/- Other Operating Cashflow - Capex (+asset sales) - Working Capital Increase Free Cashflow - Dividends (ords & pref) + Equity raised + Debt drawdown (repaid) + Other Net Change in Cash Exchange rate effects Cash at End Period Net Cash/(Debt) Balance Sheet (A$m) Cash Total Assets Total Debt Total Liabilities Shareholders Funds Ratios Net Debt/Equity (%) Interest Cover (x) Return on Equity (%) Substantial Shareholders Imdex Ltd SHL Pty Ltd

Position Executive Chairman Managing Director & CEO Non-Executive Director Non-Executive Director Non-Executive Director

na na na

na na na

na na na Shares (m) 251.9 77.2

na na na % 20.3 6.2

RESEARCH NOTE PATERSONS SECURITIES LIMITED

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof.

21 March 2013

Sino Gas & Energy Holdings Ltd

Recommendation History
$0.18 $0.16 $0.14
Share Price ($)

18 16 14
Volume (million)

$0.12 $0.10 $0.08 $0.06

12 B 10 SB SB SB SB 8 6 4 2 0
12 Months

$0.04 $0.02 $0.00

Date 21 Mar 12 04 Jun 12 27 Jun 12 24 Sep 12

Type Research Note Event Impact Email Research Note Event Impact Email Current Share Price

Target Price Share Price Recommendation 0.25 0.25 0.31 0.31 0.31 0.08 0.07 0.08 0.06 0.07 0.16 B SB SB SB SB

Return -10.3% 7.1% -20.0% 16.7% 128.6%

30 Oct 12 Event Impact Email

Stock recommendations: Investment ratings are a function of Patersons expectation of total return (forecast price appreciation plus dividend yield) within the next 12 months. The investment ratings are Buy (expected total return of 10% or more), Hold (-10% to +10% total return) and Sell (> 10% negative total return). In addition we have a Speculative Buy rating covering higher risk stocks that may not be of investment grade due to low market capitalisation, high debt levels, or significant risks in the business model. Investment ratings are determined at the time of initiation of coverage, or a change in target price. At other times the expected total return may fall outside of these ranges because of price movements and/or volatility. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management. This Document is not to be passed on to any third party without our prior written consent.

RESEARCH NOTE PATERSONS SECURITIES LIMITED

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof.

21 March 2013

Sino Gas & Energy Holdings Ltd

RESEARCH NOTE PATERSONS SECURITIES LIMITED

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof.