Core NPAT down 129% y/y; no dividend this time
Hilong posted 1H16 results after the market close on 26 August, with NPAT ofRMB67m, or EPS of RMB0.04/share, down c.38% y/y, marginally beating ourestimate of RMB 0.03, but tracking 52% of our FY16E EPS. The profitabilitydecline was attributed primarily to a weaker top line (down 29% y/y), drivenprimarily by the idle pipe-laying vessel of Oilfield Engineering Service (OES) anda lower workload in Oilfield Services (OFS), due to relocation of the rigs, offsetby higher drill pipe sales in the Russian market. Excluding FX gains and othersubsidies, core NPAT fell 129% y/y, to a RMB35m loss (vs. 2H15 -RMB57m).No interim dividend was declared by management.
A mixed bag: OES still challenging; drill pipes did well; WC/gearing stretched
The 1H16 GPM/OPM were stable, at 35%/14% (vs. 33%/15% in 1H15), on acost-saving drive, coupled with a lower contribution from low-margin OES.OFS’s revenues fell 22% y/y, primarily on a lower utilisation of rigs, due torelocation, while, surprisingly, the GPM remained at 42% (vs. 36% in 1H15),indicating no major cuts in ASPs. OES revenues fell 109% y/y, and posted a-29% GPM (vs. 25% in 1H15), on much lower utilisation of Hilong 106. Oilfieldequipment manufacturing revenues rose 19% y/y, on strong drill pipe demandin Russia (internationally, sales volume rose 150% y/y), offset by weakerdomestic sales on spending cuts by Chinese E&Ps. The ASPs of drill pipesremain subdued in both the overseas and domestic markets. Line PipeTechnology’s revenue climbed 33% y/y, on a higher contribution from CWCand OCTG materials. We see WC as still stretched, with AR days rising to 320,vs. 275 in FY15. In 1H16, net gearing increased to c.65%, vs. 59% in FY15.
Outlook: fundamentally strong, but OES is a key challenge for the company
Hilong is the most defensive among its peers owing to its well-diversifiedbusiness model. Its OFS business (c.37% of revs) is relatively immune againstmacro headwinds such as declining day rates, utilisation and capital spendingas: (a) most of the contracts are longer-term (3 to 4 years) and negotiated in ahigh oil price environment; (b) it is operating in geographies where productioncuts are lower; (c) the business is expanding with the likely addition of twonew rigs in ME in 2017 and one new rig becoming operational in Albania in1H16. We are also witnessing volume growth in its drill pipe business as itsfacility is being transferred to Russia to achieve market proximity, which couldresult in lower costs. The OES segment remains risky, as Hilong has guided forlower revenues at RMB100-200m in 2016 (vs.RMB 590m in 2015).
Valuation and risks
Our target price is based on 0.4x FY17E P/B at 6.4% of ROE, in line with USOFS companies of a similar size. Our multiple is at a c.50% discount to SSC.We believe a discount of c.50% is warranted given its smaller scale and non-SOE nature. Risks: lower/higher-than-expected E&P spending, OES contracts.
Hilong will host an analyst briefing on 29 Aug in the Island Shangri-La Hotel,Hong Kong, at 10am. We may revisit our estimates and valuation after theanalyst briefings.