OCF bottoming out, results miss expectations
Hilong Holding announced FY17 results: revenue was Rmb2,669mn,up 38% YoY. NPAT was Rmb119mn, down 4% YoY, or Rmb0.07/shr.
Recurring net profit was Rmb104mn, up 134% YoY, but below ourforecast. 2H17 revenue was up 12% HoH to Rmb1,413mn but NPATwas down 18% HoH to Rmb54mn. The decrease was mainly due tolower gross margins. FY DPS was HK$0.01, a 1% yield based on thecurrent stock price.
Trends to watch
An encouraging sign, we saw OCF ex-interest paid bottomed in 1H17around Rmb120mn and picked up to Rmb136mn in 2H17.
Order backlog suggests faster revenue growth in 2018/19. Two rigsin Oman entered into drilling service contracts in January. We expectthese high quality contracts to drive segment recovery. Order backlogfor the offshore engineering segment will be sufficient for fullcapacity utilization through August 2018, possibly generating revenueof Rmb200–300mn （vs. Rmb143mn in 2017）。 Drill pipe manufacturingmay maintain an operating rate >110% in 2018, and the increasingproportion of higher margin non-API pipe sales may boost growth.
Higher capex budget. Management expects capex in 2018 may rise toRmb450mn （vs. Rmb233mn in 2017）。 Budget may mainly be used forstart-ups of two rigs in Oman and OCTG coating capacity expansion inthe US market.
Gearing under control. Management expects no major financingactivity this year and is confident it can keep gearing below 40%.
Earnings forecast
Based on 2H17 realized margins, we adjusted our assumptions andlower our 2018e EPS by 12% to Rmb0.09 but maintain 2019e EPSunchanged at Rmb0.15.
Valuation and recommendation
We maintain our TP of HK$1.80 （0.7x P/B）， implying 48% upside.
Maintain BUY.
Risks
Oil price volatility, FX risks, lower-than-expected E&P capex.