1H17 results miss expectations
　　Hilong Holding announced its 1H17 results: revenue wasRmb1.3bn (+36% YoY) and net profit was Rmb65mn (-2% YoY)or Rmb0.04/share. Recurrent net profit before FX gains wasRmb56mn (+85% YoY) from the prior low base. Net operatingcash outflow was Rmb7.3mn, improving from 1H16’s Rmb100mnnet outflow. Hilong had a net inflow of Rmb239mn OCF in 2H16.
　　EBIT margin from oilfield equipment segment fell 30ppt YoY to11%, the lowest since 2H15. Overseas drill pipe sales volume+91% YoY to 26,000 tonnes, but average realized price -6% YoYdue to higher proportion of low margin API pipes in sales mix;sales to domestic market -56%/-14% YoY in volume/price.
　　Trends to watch
　　Volume recovered, but margin still uncertain.
　　Management expects drill pipe sales volume to further recover in2H17, and the share of higher margin pipes should increase. Untilnow, however, high margin pipes only account for <10% of itsorder backlog.
　　Large new orders with unknown margin for offshoreengineering segment. Hilong’s US$28mn new orders fromSoutheast Asia may boost revenue for offshore engineeringsegment next year, but its margin remains unclear.
　　Earnings forecast
　　We lower our 2017/18 EPS forecasts by 36%/30% fromRmb0.12/0.13 to Rmb0.08/0.09.
　　Valuation and recommendation
　　The stock is trading at 0.5x P/B. We maintain our HOLDrating, but lower our target price by 35.0% to HK$1.30,implying 0.6x P/B & 15.04% upside room.
　　Risks
　　Oil price volatility; margin declines.