SPT Energy Group reported 1H18 revenue of Rmb535.3m （+18% YoY; vs our forecast: Rmb510m） andnet profit of Rmb19.7m （vs our forecast: Rmb1-2m）。 We attribute the better-than-expected bottomlineexpansion to its asset-light strategy and efficient cost control against the backdrop of strong oilprice recovery. Given superior operational efficiency and solid orders on hand, we are positive on thecompany achieving our full-year forecast. As such, we maintain our EPS forecasts of Rmb0.06 in 18E,Rmb0.13 in 19E （+117% YoY）， and Rmb0.17 in 20E （+31% YoY）。 Our target price is unchanged atHK$1.64 （22x 18E PE）。 With 209% upside, we maintain our BUY rating.
Robust improvement. Given strong oil recovery, the drilling segment revenue increased by 50.6%YoY while the completion segment revenue increased by 79.1% YoY respectively, leading a 18% YoYgrowth in total revenue in 1H18. Efficient cost management controlled the sum of raw material costand remuneration expenses as at 58% of total revenue, compared to 65% for 1H17.
Asset-light strategy paying off. Thanks to company’s asset-light strategy, capex budget is strictlycontrolled while some in-use assets are fully depreciated, leading to a larger-than-expected 14% YoYand 96% YoY decrease in D&A and impairment expense respectively in 1H18. As such, operatingmargin turned around and reached Rmb41.3mn （1H17: Rmb8.9mn loss）。 The operating marginincreased by 4ppts from 2017 full-year level to 8%. Debt-to-asset ratio further decreased from 50.8%as of the end-2017 to 46.6%, which drove up the net margin from 0.5% for 2017 to 4% for 1H18.
Given strict capex budget control, we believe the enhanced operating leverage will continue to boostthe company performance in 2H18 against the backdrop of flourishing order inflow.
Substantial order on hand. After deducting the Rmb5.35mn completed order in 1H18, the companyhas order in hand valued at Rmb121mn, most of which will be completed in 2H18. According to ourscenario analysis, if the company reached 8% net margin while 90% of the order in-hand is completed,the net profit will reach Rmb126mn for 18E. The substantial order in-hand drove up the demand forraw materials. The cash prepayment for suppliers led to Rmb50.4mn increase in inventory from end-2017, which is in line with Rmb67.5mn cash outflow from operations.
Financial benefits. The firm established a joint venture with state-owned Xinjiang Energy Group. Webelieve a gradual decrease in borrowing cost is possible against the backdrop of SOE endorsement.
The borrowing cost of SOEs in renminbi can be as low as 4.5%, vs 6% for SPT Energy. According to ourestimates, a 1ppt decrease in the firm’s average interest rate would increase our 18E and 19E EPSforecasts by 2.5% and 1.3%, respectively, strengthening the company’s financial position.
Maintain BUY. We maintain our EPS forecasts of Rmb0.06 in 18E, Rmb0.13 in 19E （+117% YoY）， andRmb0.17 in 20E （+31% YoY）。 Our target price is unchanged at HK$1.64 （22x 18E PE）。 With 209% upside,we maintain our BUY rating.