More new orders than expected
Hilong Holding announced 2016 results: revenue was Rmb1.9bn,down 22% YoY; recurrent net profit was Rmb44mn afterexcluding a Rmb80mn FX and disposal gain, down 23% YoY, orRmb0.03 per share. Net debt at end-2016 up 13% to Rmb2.1bnand net gearing ratio up 7ppt to 64%. FY16 OCF down 71% toRmb139mn and capex down 12% to Rmb269mn. Free cashturned from a net inflow of Rmb178mn in 2015 into a net outflowof Rmb167mn.
Trends to watch
Stronger demand for drill pipes.
New jobs for offshore engineering.
Inevitable gross margin pressure.
Earnings forecast
We maintain our 2017 EPS forecast and put 2018 at Rmb0.13.
Valuation and recommendation
Our last TP of HK$0.95 published in early 2016 was based on0.4x P/B given a gloomy sector outlook and prevailing valuationat that time. We now raise our TP to HK$2.00 following theongoing sector-wide rerating to 1x P/B or even above.
Risks
Oil price volatility, contract delay, cost inflation, FX risks.