Core NP for FY 16 down by 314% yoy; but 2H was seasonally betterHilong posted FY16 net profit （NP） of RMB125m, or EPS of RMB0.07/sh, downc.23% yoy, marginally beating our EPS est of RMB0.06/share. NP declined onweaker top line （down 22% yoy）， on lower sales contribution from Hilong-106and a lower workload in OFS, offset by robust Russian expansion in drill pipe &weaker drill pipe pricing. Core NP was down by 314% yoy to a loss ofRMB138m in FY16. Hilong reached near breakeven in 2H, on higher sales andOPM after two consecutive half-yearly losses. Mgt declared a final dividend ofHKD0.01/sh. We see WC as still stretched with AR days rising to 369 （vs. 274in '15） and net gearing at 60% （vs. 57% in FY15）。 Hold on balanced risk/reward.
　　Resilient and growing through overseas route but OES still challengingIn FY16, overall GPM/OPM was quite robust at 35%/14% （vs. 33%/10% inFY15） on lower sales from low margin OES segment and cost cutting drive.
　　Here are the key take-aways, segment wise:
　　In the Oilfield service （OFS） segment, the GPM came in stronger at 42% in2016 （vs. 38% in FY15） despite headwinds on the lower number of rigs up forrenewal, high-end rig base, and diversified customer base. In 2017, we seeimprovement in utilization （80% to 85%） and sales growth on more rigadditions.
　　In Offshore engineering service （OES）， due to underutilization of Hilong-106,revenue was down by 88% yoy. It recorded a GP of RMB9m （c.27% GPM） in2H. However, we see mild recovery in 2017, underpinned by new contracts inIndonesia from TIMAS and P.T. Saipem.
　　In Oilfield equipment manufacturing, the drill pipe volume grew by 40% yoy inFY16 on the back of market expansion in Russia, but pricing remainedsubdued （down 13% yoy）。 Domestically, volume was soft on lower spendingby Chinese oil companies. The recent contract wins for the supply of 17.9ktons （c. 63% of 2016 volume） of drill pipe to Rosneft and 7.5k tons of drill pipe（c.26% of FY16 drill pipe volume） and related products to Eriell GroupInternational would be a great boost for its overseas expansion strategy.
　　Line Pipe Technology segment largely benefitted from domestic projects suchas West-East Gas Pipe Lines I, II and III Project and Maoming project forSinopec, with revenue/GP growth of 26%/28% yoy in FY16.
　　Outlook: fundamentally strong, OES is still struggling, reiterate HoldHilong is the most defensive among its peers owing to its well-diversifiedbusiness model. Despite the challenging oil environment, Hilong maintainedsolid margin on business diversification, large customer base and strategicregional presence. We believe with recovery in oil market, Hilong is well poisedto gain from its presence in the Middle East, Russia and Central Asia.
　　However, we see the OES segment remains risky, as Hilong has guided forlower revenues at RMB200-250m in 2017 （vs. RMB590m in 2015）。 We tweakour assumptions and earnings estimates with the FY16 results. Our new targetprice of HKD2.06 is based on 0.90x FY18E PB at 8.1% of ROE with implied PEof c.11.5x, in-line with mid/small cap US OFS companies. Risk: more thanexpected change in upstream capex and loss/win of major contracts.