20150812-高盛-Weaker_drilling_on_low_E_P_capex_not_yet_priced_in__down_to_Sell_14页_519kb

Summary of Document Analysis

Core Content

This document provides an analysis of China Oilfield Services (COSL-H), which has been downgraded to Sell from Neutral by Goldman Sachs. The downgrade is based on a negative outlook for the oil services industry, driven by low E&P capex, rig oversupply, and lower utilization rates, which significantly impact COSL's drilling segment (accounting for 75% of EBITDA). The report also highlights the downside potential for the stock and key risks that could further affect its performance.

Main Points

• Downgrade to Sell: The downgrade is due to the belief that the negative impact of low E&P capex and rigs oversupply is greater than previously estimated, and the weak outlook is not yet reflected in the share price.
• Earnings Estimates Cut: FY15E–17E EPS has been reduced by 38%, 54%, and 53% respectively, and the revised estimates are 14%–54% below Bloomberg consensus.
• CROCI and ROE Decline: The company's CROCI is expected to fall by 680 basis points, and ROE by 1360 basis points over FY15E–16E, reaching an all-time low.
• Valuation Adjustments: The 12-month price target (TP) for H-shares is revised to HK$7.54, implying a 26% downside from current levels. For A-shares, the TP is Rmb9.12, a 61% downside from the current price.
• Utilization Rates: The report forecasts 70% utilization for semi sub rigs and 80% utilization for jackup rigs for FY16E–17E, much lower than earlier expectations of 94% and 92% respectively.
• Day Rates Decline: Day rates for both semi sub and jackup rigs are expected to decline by 25%/10% and 22%/7% in FY15E–16E, respectively.
• Operating Cash Flow and Dividend Policy: While operating cash flow is expected to cover capital expenditures, the company may need to increase leverage to fund its dividend policy, which is currently 25%–30% of net income.
• Net Debt/EBITDA Increase: The net debt/EBITDA ratio is projected to rise from 1.8x in 2014 to 3.5x in 2016E, reflecting increased financial leverage.
• Dividend Yield Decline: The dividend yield is expected to fall to 1.4% in FY16E–17E.
• Valuation Methodology: The valuation is based on an average EV/EBITDA multiple of 7.7x, and the report also notes a P/B multiple of 0.8x in 2016, which is historically low.
• Key Risks: The main risks include severe delays in new rig deliveries, higher midterm capex guidance by CNOOC, and oil price spikes, which could further pressure the company.

Key Information

• Current Price: HK$10.18 for H-shares and Rmb23.40 for A-shares.
• 12-Month TP: HK$7.54 for H-shares and Rmb9.12 for A-shares.
• Market Cap: HK$48,574.8 million / US$6,259.5 million.
• EPS Trends:
  • FY15E: 0.58 Rmb
  • FY16E: 0.42 Rmb
  • FY17E: 0.46 Rmb
• Utilization Rates:
  • Semi sub: 70% (FY16E–17E)
  • Jackup: 80% (FY16E–17E)
• Day Rates:
  • Semi sub: 25% / 10% decline in FY15E–16E
  • Jackup: 22% / 7% decline in FY15E–16E
• Net Income:
  • FY15E: 2,754 Rmb million
  • FY16E: 2,006 Rmb million
  • FY17E: 2,200 Rmb million
• ROE:
  • FY15E: 5.9%
  • FY16E: 4.2%
  • FY17E: 4.5%
• CROCI:
  • FY15E: 6.9%
  • FY16E: 6.0%
  • FY17E: 6.0%
• Dividend Payout Ratio:
  • FY15E: 25.0%
  • FY16E: 25.0%
  • FY17E: 0.0%
• Dividend Yield:
  • FY15E: 1.7%
  • FY16E: 1.3%
  • FY17E: 0.0%
• EV/EBITDA:
  • FY15E: 8.4x
  • FY16E: 9.3x
  • FY17E: 8.8x
• P/B:
  • FY15E: 0.8x
  • FY16E: 0.8x
  • FY17E: 0.8x
• Net Debt/EBITDA:
  • FY15E: 3.5x
  • FY16E: 3.5x

Investment Implications

• The downgrade reflects a more pessimistic outlook for the oil services sector, particularly in the China offshore market.
• The report suggests that consensus expectations are overly optimistic and not accounting for the higher costs of idle rigs and lower utilization.
• Operating cash flow is expected to cover capex, but dividend payouts may require increased leverage.
• The EV/EBITDA and P/B multiples suggest the stock is undervalued, but the downside potential is significant.
• The dividend yield is expected to decline, which may affect investor sentiment.

Summary of Key Financial Metrics

Metric	FY15E	FY16E	FY17E
EPS (Rmb)	0.58	0.42	0.46
Net Income (Rmb million)	2,754	2,006	2,200
ROE (%)	5.9	4.2	4.5
CROCI (%)	6.9	6.0	6.0
Dividend Yield (%)	1.7	1.3	0.0
Net Debt/EBITDA	3.5x	3.5x	-
P/E (X)	14.4	19.7	18.0
P/B (X)	0.8	0.8	0.8
EV/EBITDA (X)	8.4	9.3	8.8

Conclusion

Goldman Sachs has downgraded COSL-H to Sell, citing lower utilization rates, higher idle rig costs, and a negative outlook for the oil services industry. The revised earnings and valuation metrics indicate a significant downside for the stock, with the price target for H-shares at HK$7.54 (26% below current) and A-shares at Rmb9.12 (61% below current). The report highlights risks including delayed rig delivery, increased capex, and oil price volatility, all of which could further pressure the company's performance.