Hilong Holding reported 1H18 revenue of Rmb1.5bn （+20% YoY; vs our forecast: Rmb2.7bn） and netprofit of Rmb70.8m （+8% YoY; vs our forecast: Rmb65m）。 With selling, general, and administrativeexpenses down 13.8% YoY, operating margin rose 5ppts YoY in 1H18. Despite 42% YoY growth infinancial expenses, mainly due to a Rmb29m forex loss on dollar-denominated loans, net marginremained flat at 5%. Given robust performance, we maintain our diluted EPS forecasts of Rmb0.10 in18E （+43% YoY）， Rmb0.14 in 19E （+40% YoY）， and Rmb0.18 in 20E （+29% YoY）。 We revise down ourtarget price from HK$1.36 to HK$1.06 （8.0x 18E PE） amid weak market sentiment. With 19.1% upside,we maintain our Outperform recommendation.
Solid performance. Thanks to the company’s commitment to product mix improvement, thepercentage of higher-margin non-API drill pipes increases by 4ppts YoY to 12% in 1H18, driving up thegross margin of oilfield service segment by 6ppts to 37%. As for the coating materials and servicessegment, over 100% YoY growth of high-margin OCTG products and CRA service revenue expandedthe gross margin by 8ppts to 35%. Driven by 112% YoY increase in EPC project revenue, the revenueof oilfield service segment increased 23% YoY, contributing 32.2% of 1H18 gross profit.
Promising order inflow. Hilong acquired a coating contract valued at Rmb173m with gross marginhigher than segment average （29%）， which accounts for 69% of the coating revenue as for 2017. Thecontract is expected to start booking revenue in 2H18. As for the offshore segment, Hilong hassecured the service order in 4Q2018 with its Malaysia business partner, which enhances the visibilityof segment growth in 18E.
Strong balance sheet. Compared to 2017 level, the inventory days remain flat at 164 days in 1H18.
Thanks to effective internal policies amid market recovery, the receivable days decreased from 238days to 217 days. The payable days decreased from 119 days to 118 days. The current ratio increasedfrom 2.16 in 2H17 to 2.43 in 1H18.
Forex loss. Hilong has significant exposure to Russia market which accounts for 17% of total revenuein 2017, as well as large exposure to US dollar given considerable overseas operations. Thedepreciation of Ruble brought the company Rmb11.4m operating forex loss in 1H18. If we take intoaccount the interest loss due to forex changes, the total forex loss reached Rmb40.3m in 1H18,accounting for 56.9% of 1H18 net profit.
Maintain Outperform. Given robust performance, we maintain our diluted EPS forecasts of Rmb0.10in 18E （+43% YoY）， Rmb0.14 in 19E （+40% YoY）， and Rmb0.18 in 20E （+29% YoY）。 We revise down ourtarget price from HK$1.36 to HK$1.06 （8.0x 18E PE） amid weak market sentiment. With 19.1% upside,we maintain our Outperform recommendation.