SPT Energy announced a plan to allot 307m shares to six investors, representing 20.0% of the firm’sshare capital, at a price of HK$0.78. Despite the dilution effect on earnings, we are positive on thefirm’s growth outlook on the back of recovering oil prices and government efforts to increase gasstorage capacity. We revise up our revenue forecasts but maintain our diluted EPS forecasts atRmb0.06 in 18E and Rmb0.12 in 19E （+100% YoY）， and revise up our forecast from Rmb0.15 toRmb0.16 in 20E （+6.7% YoY）。 We raise our target price from HK$1.41 to HK$1.49, representing 20.0x18E PE and 10.0x 19E PE. With 80.5% upside, we maintain our BUY rating for the company.
Increasing liquidity. Maximum net proceeds from the placement are expected at HK$232m（Rmb187m）， representing 1.3x the firm’s cash on hand as of end-2017. The placement not onlysatisfies increasing short-term project financing needs for advance payments against the backdrop ofimproving order inflow, but also lays a solid financial foundation for business expansion amid theindustry upcycle, further opening up growth potential.
Increasing on-hand orders. Brent futures topped US$75/bbl for the first time since 2014 in April 2018,as Organization of Petroleum Exporting Countries （OPEC） members adhered to a tight supply schedule,further propped by increasing concerns about geopolitical risks in Middle East. We note SPT Energy’ssignificant order flow improvement against the recovery in upstream capex sparked by higher oilprices. SPT won US$30m （Rmb195m） well-completion tenders in April 2018, two times the in-handwell-completion orders on hand as of March 2018. Total in-hand orders sit at Rmb1.5bn at present（122% YoY） and we expect this to increase further.
Potential order inflow. Widespread gas shortages in the 2017 winter heating season underlined theseverity of limited gas storage capacity. Backed by government support, PetroChina （857:HK – N-R） isinvesting Rmb21bn-plus to build eight gas storage tanks in Sichuan Province in coming years. We viewSPT Energy as a key beneficiary of the government-backed investment as storage tank constructionrequires high-end gas well completion and cementation technology, in which SPT Energy is expert.
According to company management, several service contracts are under negotiation and are expectedto book Rmb200m-300m revenue in 19E.
Maintain BUY. Despite the dilution effect, we are positive on the firm’s growth outlook on the back ofrecovering oil prices and the government effort to increase gas storage capacity. We revise up ourforecast revenue from Rmb1.57bn to Rmb1.60bn in 18E, and from Rmb2.07bn to Rmb2.28bn in 19E,but maintain our diluted EPS forecasts at Rmb0.06 in 18E and Rmb0.12 in 19E （+100% YoY）， and reviseup our forecast from Rmb0.15 to Rmb0.16 in 20E （+6.7% YoY）。 We raise our target price from HK$1.41to HK$1.49, representing 20.0x 18E PE and 10.0x 19E PE. With 80.5% upside, we maintain our BUYrating for the company.