Action
Upgrade to BUY. Maintain 2017 EPS forecast, but raise 2018e EPS by6% to Rmb0.10 and introduce 2019e at Rmb0.15. Raise target priceby 38% to HK$1.80 （0.8x P/B）。
What’s changed?
Order recovery from all segments suggests >20% top line CAGR over2016–19. Hilong’s current order backlog of drilling pipes has beenable to support almost full utilization of its 45,000t capacity throughend-1H18. Its breakthrough in winning a >US$25mn sub-contractfrom Petronas will ensure the full operation of Hilong’s offshoreengineering segment. Management expects the workload for its pipetech segment will also be sufficient for fully capacity utilization,thanks to the reacceleration of China’s gas pipeline construction andenhanced maintanance efforts. Capacity expansion in drilling pipeand coating will continue in key regional markets, such as Russia andthe US, where Hilong has improved its brand awareness and marketshare over the last few years.
Margin improvement to appear gradually. We expect margin pick upmay first appear from the drilling pipe segment, with an increasingproportion of higher margin non-API pipe sales in overseas markets,such as Russia. Signs of margin improvement from oilfield servicesand offshore engineering may appear later in 2H18 or 1H19.
How do we differ from the market? We expect the workloadrecovery for China’s oilfield services & equipment providers mayaccelerate over 2018–19. Its revenue may hit a historic high over thenext two years, though the absolute amount of profits may takelonger to reach new highs.
Potential catalysts: Increases in oil and gas prices; rise in E&P capexfrom Chinese oil majors; accelerating gas pipeline construction.
Financials and valuation
Upgrade to BUY. Maintain 2017e EPS but raise 2018e by 6% toRmb0.10 and introduce 2019e at Rmb0.15. Raise TP by 38% toHK$1.80 （0.8x P/B）， implying 44% upside.
Risks
Oil price volatility, FX risks, lower-than-expected E&P capex.