20141208-元大证券_香港_-China__Energy_Equipment___Services_25页_845kb

China: Energy Equipment & Services Summary

Core Content

This report provides an analysis of the Chinese energy equipment and services sector, focusing on the impact of the anti-graft campaign within the China National Petroleum Corporation (CNPC) and the potential for recovery in the oil and gas exploration and production (E&P) activities. The report also evaluates the stock performance and financial outlook of several listed companies in the sector, including Hilong.

Main Recommendations

• Top Recommendations:

  • SELL: Honghua
  • HOLD-UPF: Anton Oilfield, Hilong, Petro-King
  • HOLD-OPF: Sinopec Yizheng - H, SPT Energy
  • HOLD-UPF: COSL - H

• Upgrades:

  • Anton, Hilong, and Petro-King are upgraded from SELL to HOLD-UPF due to the expectation of increased tendering from CNPC in 4Q15 as the anti-graft campaign nears its end.

• Target Price Adjustments:

  • Anton Oilfield: Target price upgraded from HK$1.4 to HK$1.6 (14% increase).

Industry Outlook

• The arrest of Mr. Zhou Yongkang, a former chairman of CNPC, signals the end of the anti-graft campaign and suggests that CNPC's upstream investment may return to normal in 4Q15.
• This could lead to faster oil and gas E&P activity in China, which may benefit equipment and service companies with leading-edge technology.
• The industry has been adversely impacted since 2H13 due to the anti-graft campaign and local management reshuffles.
• Despite the potential for recovery, the report suggests it is too early to become positive on the sector due to several factors:
  • Significant downside potential on consensus estimates for covered companies (excluding Sinopec-Yizheng).
  • Oil prices are expected to remain under pressure until production is cut.
  • The size of incremental orders from CNPC is still uncertain due to ongoing restructuring.

Financial Highlights (Hilong)

• Market Cap: US$433.3 million (as of Dec 5, 2014).
• Share Price: HK$1.98 (as of Dec 5, 2014).
• Target Price: HK$1.9 (4% downside).
• EPS Growth:
  • 2014F: 0.21 RMB
  • 2015F: 0.207 RMB
  • 2016F: 0.207 RMB
  • 2017F: 0.208 RMB
• P/E Ratio (2015F): 7.3x
• P/B Ratio (2015F): 0.8x
• Dividend Yield: 4.0%
• ROE: 10.8% (2015F)

Valuation Analysis

• SOTP Valuation:
  • Total Equity Value: HK$2,628 million
  • Target Price: HK$1.9
  • EV/EBITDA Multiple: 5.7x
  • EBITDA CAGR (2014-2016F): 10%
• Financial Metrics:
  • Sales: Expected to grow steadily with a 2014F YoY increase of 12%.
  • Operating Profit: Expected to decline slightly in 2014F but stabilize in 2015F.
  • Net Profit: Expected to remain relatively flat in 2015F and 2016F.
  • EBITDA: Expected to increase significantly in 2015F and 2016F.
• Key Risks:
  • Execution issues for Hilong's new pipe-laying business.
  • Uncertainty regarding CNPC's tendering activity and the size of new orders.

Peer Comparison

• HK Listed Peers:

  • Sinopec Yizheng - H: HOLD-OPF, P/E 7.3x, P/B 0.92x
  • COSL - H: HOLD-UPF, P/E 6.6x, P/B 1.09x
  • Anton Oilfield: HOLD-UPF, P/E 49.8x, P/B 0.92x
  • Petro-King: HOLD-UPF, P/E 13.0x, P/B 0.69x
  • Hilong: HOLD-UPF, P/E 7.4x, P/B 0.85x
  • Honghua: SELL, P/E 13.0x, P/B 0.57x

• China Listed Peers:

  • Sinopec Yizheng - A: HOLD-OPF, P/E 23.9x, P/B 1.09x
  • CSOL - A: SELL, P/E 11.4x, P/B 1.27x

• Global Listed Peers:

  • Schlumberger: P/E 15.6x, P/B 1.39x
  • Halliburton: P/E 10.0x, P/B 0.96x
  • Baker Hughes: P/E 14.4x, P/B 1.35x
  • Weatherford: P/E 12.2x, P/B 1.06x
  • Transocean: P/E 3.9x, P/B 1.39x
  • Ensoco: P/E 5.2x, P/B 0.96x
  • Diamond Offshore Drilling: P/E 9.5x, P/B 0.97x
  • Noble Corp: P/E 5.5x, P/B 1.06x
  • Rowan: P/E 9.7x, P/B 0.97x
  • Seadrill: P/E 4.4x, P/B 0.97x
  • Atwood Oceanics: P/E 6.3x, P/B 0.97x

Key Information

• Share Price Performance:

  • Hilong's share price has corrected sharply (down 69% YTD in 2014), but the report suggests that many negative factors have been priced in.
  • The report highlights that the long-term industry outlook is improving due to the potential for increased CNPC tendering.

• Market Cap & Financials:

  • Hilong's market cap is US$433.3 million.
  • The company's financials show a stabilizing trend in operating profit and net profit from 2015F onwards.

• Valuation Metrics:

  • Hilong's P/E and P/B ratios are below the global and China peers, suggesting a fair valuation after the share price correction.
  • The SOTP-based target price of HK$1.9 is considered a fair valuation based on the company's financials.

Conclusion

The report indicates a cautious but positive outlook for the energy equipment and services sector in China, particularly for companies like Hilong that are expected to benefit from the resumption of CNPC's tendering activities. However, the overall sector is still viewed as too early for positive sentiment due to ongoing challenges and uncertainties. Investors are advised to remain cautious and monitor the company's execution capabilities and order wins closely.