SPT Energy Group reported 2018 full-year revenue of Rmb1.4bn （+27% YoY） and net profit ofRmb81.8m （+1,376% YoY）， in line with our expectations. We attribute the sound performance to itsasset-light strategy and efficient cost controls against a backdrop of strong oil price recovery. Giventhe government’s call to increase oil and gas production, we are positive about the company’s 19Eperformance. As such, we raise our EPS forecasts from Rmb0.08 to Rmb0.09 in 19E （+81% YoY），maintain our EPS forecasts of Rmb0.15 in 20E （+67% YoY） and forecast Rmb0.21 （+40% YoY） in 21E.We raise our target price from HK$0.96 to HK$1.02 （10x 19E PE） and with 65% upside, we maintainour BUY rating.
Robust improvement. Given the strong oil price recovery, the drilling segment revenue increasedby 68.7% YoY, while completion segment revenue increased by 86.8% YoY, leading to 26.9% YoYgrowth in 2018 revenue. Efficient cost management helped to mitigate raw material costs andremuneration expenses, which fell from 55% of total revenue in 1H17 to 48% for 2018.
Asset-light strategy pays off. Thanks to company’s asset-light strategy, Capex is strictly controlledwhile some in-use assets are fully depreciated, leading to a 22% YoY decrease in D&A in 2018. Assuch, operating profit increased 171% YoY to Rmb126.9m. Operating margin increased by 5ppts YoYto 9%. Debt-to-asset ratio further decreased from 50.8% as of the end-2017 to 49.13%, which droveup net margin from 0.5% in 2017 to 5.7% in 2018. Given strict Capex controls, we believe theenhanced operating leverage will continue to help the company’s performance in 2019 against thebackdrop of a robust order inflows.
Domestic opportunities. The government has urged domestic gas producers to increase gas-relatedCapex to meet the country’s surging demand. Given promising reserves and favourable geologicalconditions, we believe Tarim, Changqing, and southwestern fields will be the key investment areas.We note a rise in rental prices for key oilfield equipment, such as drilling rigs and fracturing pumps,as well as large-scale recruitments in related fields in late 2018, which bodes well for a significantincrease in Capex. We expect SPT Energy to be the major beneficiary of the potential gas-relatedCapex growth, due to its strong business exposure.
Maintain BUY. Given the government’s call to increase oil and gas production, we are positive onthe company’s 19E performance. As such, we raise our EPS forecasts from Rmb0.08 to Rmb0.09 in19E （+81% YoY）， maintain our EPS forecasts of Rmb0.15 in 20E （+67% YoY） and forecast Rmb0.21（+40% YoY） in 21E. We raise our target price from HK$0.96 to HK$1.02 （10x 19E PE） and with 65%upside, we maintain our BUY rating.