Oilfield Services & Equipment Sector

Transcription

1 11/13 1/14 3/14 5/14 7/14 9/14 Equity Research Energy Nov 11, 214 Oilfield Services & Equipment Sector Neutral (Maintained) Weak sentiment to last longer than expected Shrinking margin and higher depreciation hurting earnings OFSE plays tumbled ~3% during Sep-Oct amid concerns about a weak earnings outlook due to a drop in outsourcing from national oil companies (NOCs) as well as project delays. We have received updates from the OFSE companies under our coverage and lowered our earnings forecasts accordingly. Our forecasts for OFSE names indicate an overall weaker EBIT margin for on intense competition in the domestic market. Companies that have been running aggressive capex plans during should see a more severe earnings drop due to escalating depreciation charges (like Anton and Petro-king). Wallace Cheng SFC CE No. AKX251 wallacecheng@gfgroup.com.hk GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Downside risk for 214 earnings forecasts remains It is inevitable that there will be a setback in earnings growth at OFSE companies this year. Our forecasts should reflect the most feasible amount of revenue that each company will book during 214. Following Anton, we believe Petro-king is also likely to post a profit warning given our expectation for a 49% YoY decline in net profit. Stripping out one-off items, Hilong s core net profit in 214 should be 5% lower than in 213. Overall, we do not see much upside risk for 214 earnings forecasts due to a limited operation period. In contrast, we believe there is more downside risk as we cannot rule out the risk that NOCs will delay remaining contracts. Our earnings forecasts are lower than consensus Overall, our forecasts for our five OFSE names are more conservative than consensus, especially for Anton and Petro-king. We believe the difference is due to: 1) our expectation for a weaker margin recovery in 2H14; 2) our more conservative outlook for 2H14 revenue booking. 215 revenue visibility is poor at the moment given the lack of information on future NOC biddings. We are cautious on margins despite the outlook for more biddings. Sector performance MSCI-China OFSE Sector Hilong is our top pick We only recommend seeking trading opportunities in OFSE names for the remaining two months of the year given expected weak sentiment and uncertainty in 215 orders. Hilong is our top pick during this time. We expect the company to post better 2H14 drill pipe orders on strong replacement demand, while its lack of exposure to the Chinese oilfield servicing market means we are not too concerned about the outlook for its earnings. Trading at 7.3x/6.x 215/16 P/E, it is still undemanding. We suggest caution on Anton and Petro-king, for which we believe this is more downside risk in earnings consensus for 214/15. 5 Sector share prices 1M % Chg YTD % Chg Anton (29.8) (65.) Hilong (15.8) (59.) PetroKing.9 (43.9) SPT (12.6) (47.5) Honghua (12.9) (42.9) Average (14.) (51.7) Peer comparison Ticker Company Price Rating Target price E 215E 214E 214E (HK$) (HK$) P/E P/E P/E ROE (%) P/B 1623 HK Hilong 2.78 Buy HK SPT 2.39 Buy HK Anton 1.52 Underperform HK PetroKing 2.29 Hold HK Honghua 1.52 Hold Average Sources: Bloomberg, GF Securities

2 Jan/14 Feb/14 Mar/14 Apr/14 May/14 Jun/14 Jul/14 Aug/14 Sep/14 Oct/14 Sector report Nov 11, 214 Figure 1: Year-to-date sector performance 14 Sector Avg. MSCI China SPT Anton PetroKing Hilong Honghua Sources: Bloomberg, GF Securities Figure 2: Our forecasts vs consensus Revenue Net profit Currency 214E 215E 216E 214E 215E 216E Consensus SPT Rmb m 2,941 3,665 4, Anton Rmb m 2,685 3,17 3, Hilong Rmb m 2,783 3,316 3, Honghua Rmb m 9,319 1,637 12, PetroKing HK$ m 1,64 1,262 1, Our forecast SPT Rmb m 2,791 3,291 3, Anton Rmb m 2,545 3,176 3, Hilong Rmb m 2,749 3,267 3, Honghua Rmb m 9,43 1,476 11, PetroKing HK$ m 1,5 1,222 1, Derivation SPT -5% -1% -13% -1% -22% -22% Anton -5% % -1% -53% -47% -48% Hilong -1% -1% 4% 1% -6% -1% Honghua 1% -2% -7% -8% -11% -14% PetroKing -6% -3% -5% -28% -18% -11% Sources: Bloomberg, GF Securities Page 2

3 Sector report Nov 11, 214 Figure 3: 214 Revenue growth comparison 2 Figure 4: 214 Net profit growth comparison (25) (.9) (48.2) (5).5 (5.2) (5) (75) (83.5) (1) SPT Anton Hilong Honghua PetroKing (1) SPT Anton Hilong Honghua PetroKing Sources: Company data, GF Securities (*) PetroKing s numbers are in HK$ Figure 5: EBIT margin comparison Figure 6: 214 free cashflow comparison SPT Anton Hilong Honghua PetroKing E 215E 216E 1 (1) (2) (3) (4) (5) (6) (7) (8) (9) (1,) 5 14 (349) (373) (968) SPT Anton Hilong Honghua PetroKing Sources: Company data, GF Securities (*) PetroKing s numbers are in HK$ Figure 7: ROE comparison 2 16 SPT Hilong PetroKing Anton Honghua E 215E 216E Sources: Company data, GF Securities Page 3

4 Sector report Nov 11, 214 Figure 8: Peer comparisons Revenue growth (%) Currency E 215E 216E SPT Rmb m Anton Rmb m Hilong Rmb m Honghua Rmb m PetroKing HK$ m 581. (27.) (5.2) Average Net profit growth (%) Currency E 215E 216E SPT Rmb m Anton Rmb m (83.5) Hilong Rmb m 14.2 (.1) Honghua Rmb m (.8) (.9) PetroKing HK$ m (48.2) Average EBIT Margin (%) E 215E 216E SPT Anton Hilong Honghua PetroKing Average Free cash flow Currency E 215E 216E SPT Rmb m (176) Anton Rmb m 117 (438) (349) (288) (37) Hilong Rmb m (24) (285) (968) (13) 82 Honghua Rmb m (598) (1,51) PetroKing HK$ m (28) (617) (373) (74) (18) Net gearing (%) E 215E 216E SPT NC NC NC NC NC Anton NC Hilong Honghua PetroKing 2.6 NC ROE (%) E 215E 216E SPT Anton Hilong Honghua PetroKing Average Sources: Bloomberg, GF Securities Page 4

5 Equity Research Energy Nov 11, 214 Hilong (1623 HK) Buy (Maintained) Target price: HK$3.25 Wallace Cheng SFC CE No. AKX GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Positive findings should alleviate market concerns; time to Buy Better sales orders for drill pipes Positive findings from our recent update from Hilong should clear some concerns on the stock. First, Hilong has received strong orders for drill pipes totaling 2kt in 2H14, with overseas orders for the product slightly higher than those from the domestic market. This is actually better than our original forecast of only 18kt. Non-API standard pipes are expected to remain at 3% of total sales volume. Management believes replacement demand for drill pipes remains intact due to their short life span. As a result, drill pipes sales should be less vulnerable amid a weak crude price. We therefore believe the market has been too concerned about a potential slump in drill pipe sales for Hilong. Concern about Hilong s oilfield services overdone There is also concern about PetroChina s and Sinopec s plan in domestic oilfield servicing, namely, improving efficiency, trimming outsourcing and taking a bigger market share. We believe this is also a major reason for Hilong s recent sell-off, yet this is unjustified. Hilong has no contract with PetroChina or Sinopec, or within China. The recent drilling contract from Petromanas/Shell in Albania demonstrated Hilong s strength in the overseas market. We still forecast 11% YoY growth in Hilong s oil servicing segment in 214 and 215. Recovery in line pipe technology segment The company s line pipe technology segment is also showing more signs of recovery, driven by: 1) strong demand from the domestic market following the slowdown in 1H14; 2) the overall utilization rate improvement in OCTG coating in 2H14 after the technology upgrade in 1H14, as well as its new plant commencing operation and seeing smooth progress. Looking ahead to , construction of West-to-East pipeline Phase 3 and the Russia-China pipeline are likely to support volume growth in line pipe coating. However, we tune down our revenue forecast for CRA + CWC to Rmb1m (from Rmb12m) due to slower order growth in CWC. Stock performance Apr-11 Apr-12 Apr-13 Apr-14 Key data HK$ Nov 1 close (HK$) 2.78 Shares in issue (m) 1,63 Major shareholder Zhang Jun (62%) Market cap (HK$ bn) 4.5 3M avg. vol. (m) W high/low (HK$) 7.1 / 2.38 First offshore contract still not yet finalized There has been a long wait for Hilong s first offshore pipe-laying contract to be signed. Management explained that the delay was mainly due to extra time spent on the legal issues of the contract. It also revealed that the first contract is likely to have a value of Rmb2m and a 5-day working period. In light of the delay, we have trimmed our revenue forecast for its offshore segment from Rmb92m/36m to Rmb31m/211m in 214/15. Good Buying opportunity We cut our 214/15/16 net profit forecasts by 7%/11%/9% to factor in the previously mentioned forecast changes. Our revenue growth forecasts for 214/15 are now 12%/19% YoY. We forecast a rise in core earnings of 4%/14% in 214/15 to Rmb436m/495m. The recent sell-off has put Hilong at an attractive valuation of 8.3x/7.3x 214/15E P/E. We believe most of the negatives should now be factored in and that there is now a good opportunity to accumulate. In view of the recent de-rating of the whole sector, we have changed our valuation benchmark to 8.5x forward P/E, -.5 SD compared to its historical average. We lower our target price to HK$3.25 (from HK$5.26), but maintain our Buy rating. Stock valuation Turnover (Rmb m) Net profit (Rmb m) EPS (Rmb) EPS YoY (%) P/E BPS (Rmb) P/B ROE (%) 212 2, , E 2, E 3, E 3, Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

6 Company report Nov 11, 214 Figure 1: Financial statements Income Statement Balance Sheet Year end Dec (RMB m) E 215E 216E Year end Dec (RMB m) E 215E 216E Oilfield equip manufacturing 1, ,32 1,42 1,577 Cash and cash equivalents Line pipe tech and sevices Inventories ,35 Oilfield services ,15 1,234 Trade and other receivables 1,385 1,534 1,732 2,41 2,359 Offshore services Other current assets Turnover 2,264 2,452 2,749 3,267 3,81 Total current assets 2,458 2,794 3,154 3,549 3,785 YoY (%) Property, plant & equipment 1,254 1,614 2,858 3,121 3,49 Cost of sales (1,369) (1,464) (1,711) (2,21) (2,347) Lease prepayments Gross profit ,37 1,246 1,463 Intangible assets YoY (%) Other non-current assets Total non-current assets 1,582 2,13 3,258 3,521 3,81 Other income and expenses (15) (98) Selling and distribution costs (117) (16) (119) (141) (165) Total assets 4,4 4,87 6,411 7,71 7,595 Administrative expenses (286) (28) (313) (373) (434) Operating profit Short-term borrowings YoY (%) Trade and other payables Other current liabilities Net finance costs (72) (63) (17) (113) (14) Total current liabilities 1,291 1,324 1,211 1,469 1,541 Share of profit of asso. & jce Pre-tax profit Long-term borrowings ,857 1,857 1,87 Growth (%) Other non-current liabilities Total non-current liabilities ,961 1,961 1,911 Income tax expense (45) (72) (45) (13) (126) After tax profit Total liabilities 1,735 1,934 3,172 3,429 3,451 YoY (%) Share capital Minority interest (16) (26) (33) (37) (45) Reserves 1,984 2,513 2,846 3,211 3,668 Net profit Equity attri. to shareholders 2,118 2,655 2,988 3,353 3,81 YoY (%) Minority interests EPS(RMB) Total equity 2,35 2,874 3,239 3,641 4,144 YoY (%) BPS (RMB) YoY (%) Cash Flow Statement Financial Ratio Year end Dec (Rmb m) E 215E 216E E 215E 216E Pre-tax profit Gross margin (%) Tax paid (39) (15) (36) (82) (11) EBIT margin (%) Dep'n and amortization Net margin (%) Change in working capital (186) (3) (21) (31) (34) ROA (%) Others (1) (1) (1) ROE (%) Operating cash flow Net gearing (%) Interest coverage (x) CAPEX (377) (459) (1,48) (45) (5) Current ratio Others 81 (42) Investing cash flow (296) (51) (1,48) (45) (5) Change in borrowings ,197 1 (15) Dividend paid (89) (99) (13) (13) (147) Others (39) (1) Financing cash flow ,94 (3) (297) FX change (9) Net change in cash 78 (13) 126 (42) (215) Sources: Company data, GF Securities Page 6

7 Equity Research Energy Nov 11, 214 SPT Energy (1251 HK) Buy (Maintained) Target price: HK$2.87 Wallace Cheng SFC CE No. AKX GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong A tough battle to maintain growth Short-term troubles Our latest update from management gave us a clearer view on the challenging environment for non-soe oilfield servicing (OFS) companies. Outsourcing to private players is shrinking and companies are finding it tough to obtain new servicing contracts. Nevertheless, management believes PetroChina and Sinopec, who have stated aggressive plans to improve operating efficiency and enlarge market share in China, also face difficulties in cutting off private companies in a short period. Resources are unlikely to be able to be reallocated within NOCs. Moreover, leading private OFS companies such as SPT have sound track records in terms of operation and niche technologies in specific areas. Conservatively estimate 1% YoY growth for 214 bottom line We estimate SPT currently has a total contract value of Rmb2.8bn signed for whole-year 214. Under normal circumstances, SPT has typically completed all signed contracts (plus some new contracts) each year in 4Q. That means in normal years, an estimated Rmb2.9-3.bn is reasonable for SPT. However, given the current abnormal situation, we have conservatively revised down our 214/15 revenue forecasts from Rmb3.bn/3.8bn to Rmb2.8bn/3.1bn, and lowered our 214/15 net profit forecasts by 9%/32%. Our bear case scenario assumes 5% of total contracts are delayed in 214 and just Rmb3.bn revenue in 215, resulting in net profit 7.3%/7.2% lower than our base case net profit for 214/15. Our bull case revenue is +3%/+15% higher than our base case for 214/15 while earnings are 4%/21% above our base earnings for 214/15. TP cut to HK$2.87 We have applied different P/E multiples to derive fair values for each case: 1) 8.6x 215E P/E for our bear case, which is historical average forward P/E minus 1 SD; 2) 11x 215E P/E for our base case, which is historical average forward P/E minus.5 SD; 3) 13.8x 215E P/E for our bull case, which is historical average forward P/E. We have not applied the trough P/E multiple of ~5x P/E to our bear case as SPT s track record of stable earnings growths since listing in Dec 211 deserves a slight premium. We cut our target price to HK$2.87 (from HK$5.34). We maintain our Buy rating on SPT. Stock performance Key data HK$ Dec-11 Jul-12 Feb-13 Sep-13 Apr-14 Nov 1 close (HK$) 2.39 Shares in issue (m) 1,617 Major shareholder Wang Guoqiang (47%) Market cap (HK$ bn) 3.9 3M avg. vol. (m) W high/low (HK$) 5.91 /2/37 Seek trading opportunities before uncertainty is removed Given the current sentiment in the oil servicing sector and uncertainty in the industry, we understand that investors do not have a strong appetite for private oil servicing companies, even with strong earnings track records and management guidelines. The ~4% slump in SPT s share price since Sep was the result of earnings forecast cuts for 214/15, and magnified by the sector derating triggered by the deteriorated outlook for private oil servicing companies and the slump in the crude price. We believe crude oil price rebound could be a catalyst for private OFS plays before uncertainty in the industry landscape for private OFS companies is removed. We suggest investors look for trading opportunities only with SPT, especially when its share price comes close to our bear case fair value of HK$2.8. Stock valuation Turnover Net profit EPS EPS YoY P/E BPS P/B Yield ROE (Rmb m) (Rmb m) (Rmb) (%) (Rmb) (%) (%) 212 1, , E 2, E 3, E 3, Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

8 12/11 2/12 4/12 6/12 8/12 1/12 12/12 2/13 4/13 6/13 8/13 1/13 12/13 2/14 4/14 6/14 8/14 1/14 12/11 2/12 4/12 6/12 8/12 1/12 12/12 2/13 4/13 6/13 8/13 1/13 12/13 2/14 4/14 6/14 8/14 1/14 Company report Nov 11, 214 Figure 1: HoH breakdown by segment (Rmb m) 1H12 2H12 1H13 2H13 1H14 2H14E Revenue Drilling Well completion Reservoir Total revenue 59 1, ,533 1,57 1,734 EBITDA Drilling Well completion Reservoir Total EBITDA EBITDA margin by segment Drilling 25.9% 3.1% 26.1% 25.8% 25.% 25.% Well completion 25.6% 28.% 27.1% 24.6% 26.% 25.8% Reservoir 35.7% 33.1% 31.2% 3.4% 29.3% 29.% Overall EBITDA margin 29.6% 3.5% 27.9% 27.1% 26.6% 26.5% Sources: Company data, GF Securities Figure 2: Scenario analysis FY-end Dec 214E 215E 214E 215E 214E 215E Turnover (Rmb m) 2,651 2,968 2,791 3,124 2,875 3,592 Chg (%) Net profit (Rmb m) Chg (%) EPS (Rmb) Chg (%) P/E Multiple applied Target price Sources: GF Securities Bear case Base case Bull case Figure 3: Forward P/E band Figure 4: Forward P/B band SD +1SD SD +1SD Mean 2. Mean SD -2SD SD -2SD Sources: Bloomberg, GF Securities Page 8

9 Company report Nov 11, 214 Figure 5: Financial statements Income Statement Balance Sheet Year end Dec (HK$ m) E 215E 216E Year end Dec (HK$ m) E 215E 216E Drilling ,62 1,154 1,368 Cash and cash equivalents Well completion ,17 Inventories Reservoir Services ,196 Trade and other receivables 1,118 1,362 1,592 1,782 2,13 Total Revenue 1,822 2,43 2,791 3,124 3,734 Restricted cash YoY (%) Total current assets 2,16 2,58 2,99 3,361 3,851 Drilling Property, plant and Well completion Land use right Reservoir Services Prepaid lease payments Total segment EBITDA Other non-current assets YoY (%) Total non-current assets Dep & Amort. (57) (71) (86) (124) (141) Total assets 2,495 3,52 3,699 4,146 4,695 EBITDA Short-term borrowings Corporate overhead & others (131) (174) (232) (225) (262) Trade and other payables ,148 1,275 1,53 Operating profit Other current liabilities YoY (%) Total current liabilities 715 1,114 1,523 1,73 1,923 Net finance costs (23) (25) (31) (3) (26) Long-term borrowings Pre-tax profit Other non-current liabilities YoY (%) Total non-current liabilities Income tax expense (84) (81) (82) (91) (11) Total liabilities 867 1,221 1,635 1,815 2,35 After tax profit Share capital Minority interest (7) (8) (8) (9) (11) Reserves 1,581 1,783 2,8 2,266 2,584 Net profit Equity attri. to shareholders 1,582 1,784 2,9 2,267 2,585 YoY (%) Minority interests Total equity 1,628 1,831 2,64 2,331 2,66 Cash Flow Statement Financial Ratio Year end Dec (HK$ m) E 215E 216E E 215E 216E Pre-tax profit EBITDA margin (%) Tax paid (98) (7) (71) (78) (95) EBIT margin (%) Dep'n and amortization Net margin (%) Change in working capital (389) (195) (17) (134) (235) ROA (%) Others 33 6 ROE (%) Operating cash flow (58) Net gearing (%) NC NC NC NC NC Interest coverage (x) Capital expenditure (118) (134) (25) (2) (2) Current ratio Others (25) (19) Cash from investing (143) (155) (25) (2) (2) Proceed from share issuance 447 Change in borrowings 13 (49) (5) Dividend paid (13) (61) (77) (77) (85) Others 23 Cash from financing 559 (116) 47 (37) (135) FX change (1) (5) Net change in cash 357 (23) Sources: Company data, GF Securities Page 9

10 Equity Research Energy Nov 11, 214 Honghua Group (196 HK) Hold (Initiation) Target price: HK$1.64 Wallace Cheng SFC CE No. AKX GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Execution uncertainties remain; initiate at Hold Breakthrough in offshore segment in 214, but uncertainty remains 214 was a year of breakthrough for Honghua s offshore segment as the company received its first offshore rig order from Orion in Aug. Together with orders for offshore drilling packages and oil/chemical tankers, a total of US$576m in revenue is set to be booked in from Despite the great start in 214, a long production cycle (24 months+) and an expected shallow learning curve in offshore equipment/machinery lead us to be conservative on Honghua s offshore development. We expect its offshore segment to contribute just <5% of total revenue in 215/16. Mixed views on other segments We conservatively forecast land rigs will see moderate sales volume growth of 2-3 units in 215/16 as upstream players may be more conservative with capex following the recent slump in crude oil prices, and given our expectation on Honghua for modest order growth from shale gas development in China. However, we forecast better revenue growth (+42% YoY) in its parts and components segment in 214 as Honghua started to increase trading sales. Yet, the thin margin in trading sales is likely to limit margin improvement in this segment. Meanwhile, its oil servicing segment was hampered by a low utilization rate in China, resulting in a gross loss of Rmb3m in 1H14. We expect a recovery from 2H14 onwards on a better utilization rate, but do not see the segment s gross margin returning to the >2% level seen in 213. Net profit to remain flat in 214 We estimate net profit will decline by 1% YoY in 214 on a weaker gross margin of 22.6% vs 23.7% in 213 and higher opex. We expect stable overall gross margins in 215/16, so our forecasted 9%/12% net profit growth will be mainly driven by revenue growth. We also believe capex is likely to peak in 214 as Honghua has completed most of the infrastructure in its offshore segment. We expect net gearing will drop from 34% to 22% during Stock performance 5. HK$ Nov-9 Nov-11 Nov-13 Initiate at Hold We derive our target price of HK$1.64/share based on a blend of fair values: 1) 7.5x 215E P/E; 2).75x 215E P/B, representing a low-cycle valuation of historical average forward P/E and P/B minus.5sd. Honghua s current valuation is relatively low compared to its valuation range over the past three years. Our major concerns for Honghua in next two years are: 1) execution in its offshore segment following two years of rapid development; 2) whether we will see a recovery in its oil service segment; 3) its ability to capture more land rig contracts from emerging markets such as Russia and the Middle East. We believe our target price is justified based on the aforementioned concerns, and we initiate our coverage with a Hold rating. Downside risks 1) slower-than-expected land rig sales volume; 2) lower margins in its land rig and oil servicing segments due to intense competition; 3) lower-than-expected revenue recognition in its offshore segment. Key data Nov 1 close (HK$) 1.52 Shares in issue (m) 3,241 Major shareholder Zhang Mi (48.2%) Market cap (HK$ bn) 4.9 3M avg. vol. (m) W high/low (HK$) 3.2 /1.43 Stock valuation Turnover Net profit EPS EPS YoY P/E BPS P/B ROE (Rmb m) (Rmb m) (Rmb) (%) (Rmb) (%) 212 5, , E 9, E 1, E 11, Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

11 Company report Nov 11, 214 Figure 1: Offshore segment revenue and gross profit (Rmb m) Figure 2: Offshore segment revenue mix 1% Oil/chemical Tankers TIGER 3 & 4 Semi-sub drilling rig (Orion) Others 8% 54% 31% 4% 6% 4% 2% % 38% 13% 3% 8% 25% 31% 3% 214E 215E 216E Sources: Honghua, GF Securities Figure 3: Lang rig sales volume (units) Figure 4: Land rig ASP (Rmb m/unit) Digitally-controlled Rig Conventional Rigs Digitally-controlled Rig Conventional Rigs E 215E 216E E 215E 216E Sources: Honghua, GF Securities Figure 5: Overall gross profit and gross margin (Rmb m)/(%) Figure 6: Overall revenue and net profit (Rmb m) 3, 2,5 2, 34.5% Gross profit Gross margin 22.3% 23.7% 22.6% 22.3% 35% 3% 25% 12, 1, 8, Revenue 8,47 Net profit 1,476 9,43 11,37 1,5 1, 1,747 1,95 2,128 2,336 2,535 2% 15% 1% 6, 4, 5,68 5 5% 2, E 215E 216E % E 215E 216E Sources: Honghua, GF Securities Page 11

12 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 12/1 4/11 8/11 12/11 4/12 8/12 12/12 4/13 8/13 12/13 4/14 8/14 Company report Nov 11, 214 Figure 11: Forward P/E band Figure 12: Forward P/B band SD SD 12 +1SD SD 8 Mean 1. Mean 4-1SD.5-1 SD -2SD. -2 SD Sources: Bloomberg, GF Securities Figure 13: Financial statements Income Statement Balance Sheet Year end Dec (HK$ m) E 215E 216E Year end Dec (HK$ m) E 215E 216E Land drilling rigs 3,751 5,665 6,281 6,642 6,978 Cash and cash equivalents 984 1,275 1,444 1,1 1,169 Rigs parts and componetns 989 1,777 2,525 2,963 3,41 Inventories 2,731 2,81 3,189 3,569 3,873 O&G engineering services Trade and other receivables 2,16 3,961 4,637 5,166 5,67 Offshore modules and parts Other current assets 797 1,643 1,651 1,657 1,662 Turnover 5,68 8,47 9,43 1,476 11,37 Total current assets 6,618 9,681 1,921 11,492 12,311 YoY (%) Property, plant & equipment 1,142 2,148 2,56 2,657 2,739 COGS (3,321) (6,142) (7,275) (8,141) (8,836) Land use right Gross profit 1,747 1,95 2,128 2,336 2,535 Intangible assets YoY (%) Other non-current assets 1,581 1,825 1,817 1,89 1,81 Total non-current assets 3,228 4,548 4,911 4,959 4,992 Other revenue Other net income/(loss) 2 7 (25) Total assets 9,846 14,229 15,832 16,451 17,33 Selling expenses (554) (524) (75) (744) (87) General and administrative (527) (596) (658) (733) (796) Short-term borrowings 1,246 3,274 2,544 2,289 2,129 Other operating expenses (6) (121) Trade and other payables 3,112 4,241 5,82 5,687 6,173 EBIT ,71 Other current liabilities Total current liabilities 4,517 7,762 7,99 8,299 8,661 Net finance costs 29 (139) (144) (195) (184) Share of profit from jce/asso. 8 (8) (8) (8) (8) Long-term borrowings 738 1,458 2,496 2,244 2,194 Pre-tax profit Other non-current liabilities Total non-current liabilities 74 1,59 2,547 2,295 2,245 Income tax expense (168) (126) (142) (158) (171) After tax profit Total liabilities 5,257 9,27 1,456 1,594 1,95 Minority interest (12) (38) (37) (41) (46) Share capital Net profit Reserves 4,156 4,463 4,843 5,282 5,777 YoY (%) Equity attri. to shareholders 4,456 4,763 5,144 5,583 6,78 Minority interests Total equity 4,589 4,959 5,377 5,857 6,398 Cash Flow Statement Financial Ratio Year end Dec (HK$ m) E 215E 216E E 215E 216E Pre-tax profit Gross margin (%) Tax paid (14) (165) (114) (142) (154) EBIT margin (%) Dep'n and amortization Net margin (%) Change in working capital (1,222) (1,295) (222) (287) (246) ROA (%) Others (4) ROE (%) Cash from operations (58) (324) Net gearing (%) Interest coverage (x) Capital expenditure (9) (1,177) (75) (5) (5) Current ratio Others (127) (513) Cash from investing (217) (169) (75) (5) (5) Change in borrowings 1,13 2, (56) (211) Dividend paid (15) (15) (152) (151) (167) Others (143) (285) Cash from financing (657) (377) FX change 2 (9) Net change in cash (345) 69 Sources: Company data, GF Securities Page 12

13 Equity Research Energy Nov 11, 214 Petro-king (2178 HK) Hold (Initiation) Target price: HK$2.27 Wallace Cheng SFC CE No. AKX GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Stock performance HK$. Mar-13 Aug-13 Jan-14 Jun-14 Struggling for a recovery; initiate at Hold Slight recovery in 3Q14 after huge setback in 1H14 Petro-king was hit severely in 214, largely due to the slowdown in the domestic oilfield services market in 214. Revenue from northern China and north-west China dropped 42%/38% YoY in 1H14 due to the slowdown in demand in Ordos and a drop in ASP/well. In addition, revenue from PDVSA, Venezuela s national oil company, shrank by a significant 72% YoY in 1H14 on slow receivables collection. Coupled with higher labor costs and depreciation, Petro-king saw an 81% YoY drop in 1H14 net profit. There was a slight recovery in the domestic market in 3Q14 in terms of the number of jobs completed. Also, drilling services in Iraq started to make a contribution during the period. We estimate the number of jobs completed in 4Q14 will be similar to 3Q14, yet revenue/well in the domestic market is expected to remain on a downtrend on a HoH basis. Uncertainties remains for PDVSA Collection of receivables from PDVSA remains a major concern after receivables from PDVSA led to a sharp increase in turnover days to 32 days by the end of 213. Repayment progress is still slow, amounting to HK$11m at end-3q14 compared to the estimated HK$4m outstanding receivables. Receivables issues have also significantly affected Petro-king s revenue as a screen pipe order of around HK$1m from PDVSA was postponed during 1H14. Our understanding is that Petro-king will ship this order only when more receivables are collected. Net profit hit in 214 We estimate net profit will drop by 49% in 214 to HK$12m due to the slowdown in the domestic market and more stringent control of its business with PDVSA. We forecast revenue to drop slightly by 5% YoY, and expect EBIT margin to shrink to 14.9% in 214 from 24.5% in 213 dragged down by higher depreciation costs amid low utilization in its oil servicing segments. We forecast 51%/28% net profit growth in 215/16 on the back of the better outlook for revenue growth from Iraq, as well as an increase in production enhancement demand from Sichuan. Initiate at Hold Petro-king s share price has been resilient since Sep, compared to the average 3-4% share price slump for peers. Our 214/15 revenue and net profit forecasts are 7.3%/4.2% and 32.1%/2.3% lower than consensus. The difference is mainly due to our more conservative estimate for the recovery in domestic operations during 2H14. Trading at 16.1x/1.x 215E P/E & P/B, we believe downside risk in earnings has not been fully factored in. We apply a lower benchmark for historical average forward P/E and P/B compared to peers, i.e. historical mean -1.5 SD, to reflect the greater downside risk for earnings. Our target price of HK$2.27 is derived from a blend of 17x 215E P/E and.97x 215E P/B. We initiate our coverage of Petro-king with a Hold rating. Key data Nov 1 close (HK$) 2.29 Shares in issue (m) 1,8 Major shareholder Lee & Leung Family (31.5%) Market cap (HK$ bn) 2.5 3M avg. vol. (m) W high/low (HK$) 5.2 / 2.7 Stock valuation Turnover Net profit EPS EPS YoY P/E BPS P/B ROE (HK$ m) (HK$ m) (HK$) (%) (HK$) (%) 212 1, , E 1, E 1, E 1, Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

14 Company report Nov 11, 214 Figure 1: Revenue mix Figure 2: Segmental EBIT margin trend 1,6 1,4 1,2 1, 8 Oilfield project services Consultancy services Tools and equipment 1% 8% 6% Oilfield project services Consultancy services Tools and equipment 6 4% 4 2 2% E 215E 216E % E 215E 216E Sources: Company data Figure 3: Sales breakdown of oilfield project service segment (HK$) 1, Drilling Well completion Production enhancement Figure 4: Revenue and gross profit for its solar farm segment (HK$ m) 2, 1,5 1, 1,453 Revenue 1,6 Net profit 1,5 1,222 1, E 215E 216E E 215E 216E Sources: Company data, GF Securities Figure 5: Cash Conversion cycle (days) Figure 6: Capex (HK$ m) E 215E 216E (1) (1) 3 (141) (141) (2) (2) (3) (4) (5) (6) E 215E 216E (7) (65) Sources: Company data, GF Securities Page 14

15 3/13 5/13 7/13 9/13 11/13 1/14 3/14 5/14 7/14 9/14 3/13 5/13 7/13 9/13 11/13 1/14 3/14 5/14 7/14 9/14 Company report Nov 11, 214 Figure 7: Forward P/E band Figure 8: Forward P/B band SD SD SD SD 3. Mean 1.6 Mean SD SD SD Sources: Bloomberg, GF Securities Figure 9: Financial statements Income Statement Balance Sheet Year end Dec (HK$ m) E 215E 216E Year end Dec (HK$ m) E 215E 216E Oilfield project services ,34 Cash and cash equivalents Consultancy services Inventories Tools and equipment Trade and other receivables 756 1,151 1,73 1,228 1,55 Discontinued operations 395 Restricted cash Turnover 1,453 1,6 1,5 1,222 1,499 Total current assets 1,91 1,955 1,727 2,12 2,335 YoY% Property, plant & equipment ,42 1,69 Oilfield project services Intangible assets Consultancy services Other non-current assets Tools and equipment Total non-current assets ,54 1,638 1,663 Discontinued operations 21 Net unallocated expense (258) (26) (243) (269) (33) Short-term borrowings EBIT Trade and other payables YoY% Other current liabilities Total current liabilities ,4 1,163 Net finance costs (7) () (15) (25) (28) Share of profit of jce/asso () Long-term borrowings Disposal gain 48 Other non-current liabilities Pre-tax profit Total non-current liabilities Income tax expense (46) (49) (25) (38) (49) Share capital 672 1,635 1,635 1,635 1,635 Minority interest (6) (14) (8) (12) (15) Reserves Net profit Equity attri. to shareholders 1,53 2,191 2,239 2,378 2,551 YoY (%) Minority interests Total equity 1,91 2,226 2,282 2,432 2,62 Cash Flow Statement Financial Ratio Year end Dec (HK$ m) E 215E 216E E 215E 216E Pre-tax profit EBITDA margin (%) Tax paid (35) (57) (23) (35) (44) EBIT margin (%) Dep'n and amortization Net margin (%) Change in working capital (46) (584) 125 (19) (29) ROA (%) Others (29) (3) ROE (%) Cash from operations 131 (357) Net gearing (%) 2.6 NC Interest coverage (x) Capital expenditure (141) (141) (65) (2) (1) Current ratio Others (18) (119) Cash from investing (159) (26) (65) (2) (1) Proceed from share issuance 963 Change in borrowings Dividend paid (12) (53) (15) (23) Others (3) (58) Cash from financing FX change () Net change in cash (16) 11 9 Sources: Company data, GF Securities Page 15

16 Equity Research Energy Nov 11, 214 Anton Oilfield Services (3337 HK) Underperform (Maintained) Target price: HK$1.52 Wallace Cheng SFC CE No. AKX GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Stock performance HK$ Oct-9 Oct-1 Oct-11 Oct-12 Oct-13 Production module should support revenue growth in 215 Update on production module Anton announced progress on its newly launched production module and backlog for this new business: 1) an entry permit was granted for three workover rigs in South Xinjiang on Oct 31, following the first entry permit gained for one workover rig in Apr this year; 2.) an Rmb114m workover service contract was won in bidding from a client in East Xinjiang with 15 sets of workover equipment to be provided by the client and managed by Anton. Working nature and revenue estimates for the production module: 1) Production Operation Service: a light-asset service based on a long-term oilfield production service contract. Major servicing area: Middle East and African markets. Apart from the Rmb14m (out of the Rmb27m total backlog) expected to be executable in 215, we also added in ~Rmb4m in revenue from ad hoc working contracts. 2. Workover service: covers business of well workover, profile correction and water control. Major servicing area: North-west China. Current backlog in 215 amounts to Rmb15m, including the Rmb114m contract in East Xinjiang. 3. Reservoir production technical service: aims to increase recovery rate, dynamic monitoring and evaluation of reservoirs, etc. Management expects the initial setting to be complete in 215. We expect Anton to book less than Rmb1m revenue from this service in 215. Positive on revenue growth amid some concerns on margin We view this move as neutral to positive for Anton. We believe Anton s production module development should bring stability to revenue growth, given its focus on long-term production service contracts and regular repairs. We believe national oil companies still need help from private companies, especially their niche in certain services and project management, in order to improve project efficiency. However, our concerns surrounding Anton s production module are mainly connected to: 1) gross margin of workover services, as we expect this to be lower than the average for the downhole operation segment; 2) overall labor cost control, as the company expects to add 6 engineers in the next three years. Slight increase in earnings forecasts; maintain Underperform We lift our 214/15/16 net profit forecasts by 2%/9%/9% to factor in our adjustment in revenue mix and the higher contribution from the production module services. We stick to our low-cycle valuation benchmark of 1.1x P/B and lift our target price to HK$1.52 (from HK$1.46). We maintain our Underperform rating. Key data Nov 1 close (HK$) 1.52 Shares in issue (m) 2,194 Major shareholder Luo Lin (32.97%) Market cap (HK$ bn) 3.3 3M avg. vol. (m) W high/low (HK$) 6.2 / 1.5 Stock valuation Turnover (HK$ m) Net profit (HK$ m) EPS (HK$) EPS YoY (%) P/E BPS (HK$) P/B ROE (%) 212 2, , E 2, E 3, E 3, Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

17 Company report Nov 11, 214 Figure 2: Financial statements Income Statement Balance Sheet Year end Dec (HK$ m) E 215E 216E Year end Dec (HK$ m) E 215E 216E Down-hole operation 857 1,82 1,34 1,316 1,538 Cash and cash equivalents 523 1,77 1, Well completion Inventories Drilling technology Trade and other receivables 1,188 1,524 1,482 1,86 2,35 Tubular services Restricted cash Total Revenue 2,5 2,534 2,545 3,176 3,667 Total current assets 2,214 3,867 3,197 3,14 3,47 YoY (%) Property, plant & equipment 955 1,62 2,159 2,5 2,7 Down-hole operation Land use right Well completion Intangible assets Drilling technology Other non-current assets Tubular services Total non-current assets 1,379 2,11 2,638 2,965 3,155 Total segment EBITDA 83 1, ,187 1,357 YoY (%) Total assets 3,593 5,968 5,835 6,69 6,562 Dep & Amort. (89) (123) (192) (259) (3) Short-term borrowings Corporate overhead & others (343) (377) (535) (63) (66) Trade and other payables 948 1,153 1,262 1,637 1,931 Operating profit Other current liabilities YoY (%) Total current liabilities 1,29 1,68 1,528 1,942 2,282 Net finance costs (31) (73) (151) (141) (143) Long-term bond 299 1,983 1,983 1,684 1,684 Share of profit of jce/asso (1) (5) 2 5 Other non-current liabilities Pre-tax profit Total non-current liabilities 33 1,984 1,984 1,686 1,686 YoY (%) Total liabilities 1,512 3,593 3,513 3,627 3,968 Income tax expense (5) (87) (36) (46) (65) After tax profit Share capital Reserves 1,771 2,8 2,24 2,136 2,278 Minority interest (15) (21) (3) (7) (1) Equity attri. to shareholders 1,972 2,283 2,227 2,339 2,481 Net profit Minority interests YoY (%) Total equity 2,81 2,375 2,323 2,442 2,594 EPS(RMB) BPS (RMB) YoY (%) YoY (%) Cash Flow Statement Financial Ratio Year end Dec (HK$ m) E 215E 216E E 215E 216E Pre-tax profit EBITDA margin (%) Tax paid (49) (71) (3) (38) (53) EBIT margin (%) Dep'n and amortization Net margin (%) Change in working capital (138) (27) 114 (18) (53) ROA (%) Others (2) (5) ROE (%) Cash from operations Net gearing (%) NC Interest coverage (x) Capital expenditure (232) (817) (75) (6) (5) Current ratio Others (41) 8 Cash from investing (273) (89) (75) (6) (5) Proceed from LT bond 299 1,683 Change in borrowings (276) 124 (196) (269) 35 Dividend paid (47) (113) (12) (2) (41) Others 13 1 Cash from financing (11) 1,695 (316) (289) (7) FX change (4) (18) Net change in cash 61 1,246 (665) (577) (44) Sources: Company data, GF Securities Page 17

18 Company report Nov 11, 214 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 1% Neutral Expected sector relative performance ranges between -1% and 1% Cautious Sector expected to underperform benchmark by more than 1% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies did not have any investment banking relationships with the companies mentioned in this research report in the past 12 months. (3) All of the views expressed in this research report accurately reflect the independent views of the analyst(s). Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the companies mentioned in this report, or has any financial interests in or holds any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). 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