Company Report - niuniuwang.cn · Company Report China Merchants ... among the street as we believe current valuation does not ... oil price compared to offshore drillers given relative

Monday, October 17, 2016

Company Report China Merchants Securities (HK) Co., Ltd.

Hong Kong Equity Research

Please see penultimate page for additional important disclosures. China Merchants Securities (CMS) is a foreign broker-dealer unregistered in the USA. CMS research is prepared by research analysts who are not registered in the USA. CMS research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer. 1

Sinopec Oilfield Services (1033 HK) Record loss in 3Q16E, but the worst is over ■ We expect improved 4Q16E results given generally higher portion of payment settlements in 4Q and recent moderate recovery in oil price after record losses of RMB4.4bn in 3Q16E ■ Management is incentivized to improve results given the share options’ requirement of 6% CAGR in total profit in 2015-19E. We expect 56% CAGR in total profit before tax in 2015-18E ■ Upgraded to BUY from NEUTRAL with a revised TP of HK$1.9 on improved earnings outlook underpinned by recovery in oil price Profit warning with estimated 3Q16E loss of RMB4.4bn SSC released a profit warning indicating estimated net loss of RMB8.9bn in 9M16 with quarterly net loss enlarging from RMB2.8bn in 2Q16 to a record RMB4.4bn in 3Q16E, according to PRC accounting standards, due to continuing cut in the upstream capex as oil price maintaining at low level. Though the moderate 2-14% HoH decline in workload plan for key business segments in 2H16E, the record losses in 3Q16E came far worse than our expectation (previous 2016E loss projection of RMB5.6bn). Meanwhile we believe the worst is over given higher portion of payment settlements in 4Q and recent moderate recovery in oil price. Management incentivized to seek turnaround in 2017E SSC disclosed its A-share option scheme with the first batch of options of 50.85mn shares with an exercise price of RMB5.64/share. Meanwhile, key conditions for the exercise of share options would include performance indicators, such as CAGR of total profit in 2015-19E no less than 6% which we believe would incentivize management to achieve better results by launching stricter cost control, improving efficiency and exploring overseas market proactively. Better fundamentals but trading below its peers We revised 2016E loss projection to RMB8,668mn after taking into account the worse-than-expected 3Q16E results. Meanwhile, we expect a 2017E turnaround given possible rebound in upstream capex amid recovery in oil price, better cost control and increased earnings contribution from engineering construction upon launch of construction of Xin-Yue-Zhe gas pipeline. On the other hand, consensus is still looking for 2017E net loss of RMB408mn versus our net profit projection of RMB451mn. We lifted our TP from HK$1.4 to HK$1.9 which is based on upward revised 1.4x 2017E P/B to reflect recent re-rating of global land drillers (1.4x sector average). We are the first to turn into bullish on SSC among the street as we believe current valuation does not reflect the recent rerating on land drillers which are more sensitive to the recovery in oil price compared to offshore drillers given relative competitive all-in cost for onshore oil and gas production.

Financials RMB mn 2014 2015 2016E 2017E 2018E

Revenue 78,993 60,349 43,465 52,127 60,248

Growth (%) -12.0% -23.6% -28.0% 19.9% 15.6%

Net profit 2,417 (12) (8,668) 451 1,327

Growth (%) 65.0% n/a n/a n/a 194.4%

EPS (RMB) 0.16 (0.00) (0.61) 0.03 0.09

DPS (RMB) 0.00 0.00 0.00 0.00 0.00

P/E (x) 8.4 n/a n/a 41.9 14.2

P/B (x) 0.9 0.8 1.2 1.1 1.1

ROE (%) 9.8% -0.1% -42.7% 2.8% 7.8%

Sources: Company data, CMS (HK) estimates

Anna YU

+852 3189 6395

Hebe ZHOU

+852 3189 6117

[email protected] [email protected]

WHAT’S NEW

Rating/TP/estimate upgraded

BUY

Previous

NEUTRAL

Price HK$1.57

12-month Target Price (Potential up/downside)

HK$1.9 (+21%)

Previous HK$1.4

Price Performance

Source: Bigdata

% 1m 6m 12m

1033 HK 2.6 (12.3) (40.1) HSI 0.2 8.9 3.5

Industry: Oil and Gas

Hang Seng Index 23233

HSCEI 9804

Key Data

52-week range (HK$) 1.39-2.72

Market cap (HK$ mn) 3297

Avg. daily volume (mn) 7.64

BVPS (HK$) 1.68

Shareholding Structure Sinopec Group 76.6%

CITIC 8.59%

No. of shares outstanding (mn) 2100 Free float 14.81%

Related Research

1. Sinopec Oilfield Services (1033 HK) –Workload to face further

downside pressure in 2H16E (NEUTRAL) 2016/09/02

2. Sinopec Oilfield Services (1033 HK) –Deteriorated 2Q16E results

despite recovery in oil prices (NEUTRAL) 2016/07/13

3. Sinopec Oilfield Services (1033 HK) –Weakened 1Q16 results in

line (NEUTRAL) 2016/05/03

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To access our research reports on the Bloomberg terminal, type CMHK <GO> 2

Focus charts Figure 1: Quarterly results (PRC accounting standards)

Figure 2: Earnings and ROE

Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates

Figure 3: Expect oil price to average at higher US$52/bbl in 4Q16E

Figure 4: Our 2016E/17E oil project projection is US$2-5/bbl higher than EIA’s forecast

Sources: Bloomberg, CMS (HK) estimates Sources: Bloomberg, EIA, CMS (HK) estimates

Figure 5: Forward P/B chart Figure 6: A/H stock prices premium/(discount)

Sources: Bloomberg, CMS (HK) estimates Sources: Bloomberg, CMS (HK)

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Key beneficiary of possible rebound in upstream capex

As an in-house services company, SSC’s revenue is highly correlated to Sinopec’s upstream capex. Amid plunge in oil price Sinopec plan to cut upstream capex by a further 12.4% YoY to RMB47.9bn in 2016E after 31.8% YoY slash in 2015. Sinopec is the most aggressive oil and gas producer to initiate the capex cut among three oil majors in China with 2016 planned capex 46% below the peak in 2014 versus 34-37% capex cut in 2014-16E for its industry peers. Meanwhile we believe that Sinopec’s upstream capex is the most sensitive to oil price rebound given low base effect in 2016E.

We expect a moderate 10-15% YoY recovery in upstream capex in 2017E underpinned recovery in oil price which we estimate at US$55/bbl in 2017E, up US$10/bbl from 2016E and above breakeven price of US$40-48/bbl for domestic oil producers. We believe that SSC is the key beneficiary from the possible upstream capex rebound given its 96% market share in drilling segment within Sinopec Group.

Following the upstream capex trend, we expect SSC to register 10-20% YoY rebound in workload for key business segments in 2017E after a massive 30-66% YoY drop in 2016E.

Figure 7: Upstream capex of three oil majors

Source: Companies

Figure 8: SSC’s revenue breakdown by client (2015) Figure 9: SSC’s revenue versus Sinopec’s upstream capex

Source: Company, CMS (HK) Source: Companies, CMS (HK) estimates

Sinope Group 63.0%

Saudi Aribian Oil Company

5.2%

PetroChina Group 5.2%

Kuwait Oil Company

3.3%

CNOOC 3%

Others 21%

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Figure 10: Expect oil price to average at higher US$52/bbl in 4Q16E

Figure 11: Our 2016E/17E oil project projection is US$2-5/bbl higher than EIA’s forecast

Sources: Bloomberg, CMS (HK) estimates Sources: Bloomberg, EIA, CMS (HK) estimates

Figure 12: Key workload by segment

2014 2015 2016E 2017E 2018E

Geophysics (collected data)

2D seismic km 34,942 43,728 15,053 16,558 18,214

3D seismic km2 19,545 14,541 14,811 17,773 19,551

YoY growth

2D seismic % -29% 25% -66% 10% 10%

3D seismic % 9% -26% 2% 20% 10%

Drilling Engineering (drilling footage ) km 11,660 8,100 4,940 5,434 5,977

YoY growth % -11% -31% -39% 10% 10%

Logging and Mud Logging (logging footage)

Logging km 387,920 233,600 142,250 170,700 187,770

Mud logging km 12,800 9,050 4,670 5,604 6,164

YoY growth

Logging % -13% -40% -39% 20% 10%

Mud logging % -9% -29% -48% 20% 10%

Downhole Operation (completed wells) Wells 7,345 5,409 3,808 4,189 4,608

YoY growth % -5% -26% -30% 10% 10%

Engineering Construction (completed contract value) RMB bn 19.5 14.6 12.7 15.2 17.8

YoY growth % -21% -25% -13% 20% 17%

Source: Company, CMS (HK) estimates

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Xin-Yue-Zhe gas pipeline construction – possible to launch in 2017E

We believe the construction of Xinjiang CTG pipeline (Xin-Yue-Zhe gas pipeline) is the key growth driver for SSC in the long run. This pipeline project is Sinopec’s largest project in terms of capex and its total investment is estimated at RMB130bn. Sinopec already got NDRC approval for the project in October 2015. However due to plunge in oil price, the economic return for CTG projects have diminished which triggered the significant delay in construction of CTG projects and related pipelines.

Meanwhile the new pricing mechanism of gas pipeline transmission tariff issued by NDRC in October 2016 specified that the transmission tariff would be determined based on cost-plus principle with permitted investment return of 8% when capacity utilization no less than 75%. We expect impacts on individual pipeline company would be diversified with higher return projects to face downward adjustments for transmission fee while lower return projects to benefit from the permitted return in the long run. For example, the annualized ROA of Sinopec’s Sichuan-to East China Gas Pipeline came in at 12.1% based on 1H16 results, which has exceeded the permitted return. We believe that the speeding up of construction of new gas pipeline would help lower ROA of pipeline assets within Sinopec Group and reduce the risks to cut transmission tariff.

SSC should be a key beneficiary of the construction project given its expertise in the long-distance pipe construction. It successfully constructed or participated in the construction of a series of domestic and overseas large pipe projects including the Sinopec Sichuan-East China gas transmission pipeline, the CNPC gas transmission from West to East China project pipeline 1 and 2, the China-Myanmar oil and gas pipelines, the Brazil GASENE natural gas pipelines, and the Algeria water pipelines.

We estimate the Xin-Yue-Zhe gas pipeline engineering project could bring additional revenue/net profit of RMB26bn/1.6bn in 2017E-20E, accounting for 22% of total profit during the period. Our key assumptions include: 1) project investment of RMB130bn, of which engineering construction capex of RMB52bn; 2) 50% of tenders won by SSC; and 3) a net margin of 6%.

Figure 13: Sinopec’s CTG pipeline projects

Unit Xin-Yue-Zhe gas pipeline Xin-Lu gas pipeline

NDRC approval Preliminary approval (July2013) n/a

Total length Km 8,372 4,463

Trunk line 1 1

Branch lines 6 2

Capacity bcm/y 30 30

Total investment RMB bn 130 86

Covered provinces Xinjiang, Gansu, Ningxia, Shaanxi, Henan,

Shandong, Hubei, Hunan, Jiangxi, Zhejiang, Fujian, Guangdong, Guangxi

Xinjiang, Gansu, Ningxia, Shaanxi, Henan, Shandong, Hebei

Source: Compnay, CMS (HK)

Shale gas risk compensation on the way but no details yet

SSC got one-off risk compensation upon the completion of Phase I of the Fuling Shale Gas project in 4Q15, which help the significant turnaround in the quarter results (net profit of RMB2.1bn in 4Q15 versus net loss of RMB2.1bn in 9M15). Though Management refused to disclose the specific number for the risk compensation received due to confidential agreement with Sinopec, we believe that risk compensation is the key factor for the dramatic turnaround.

According to the development schedule a total of 317 wells would be drilled in Fuling shale gas basin in 2015-17E with production capacity lifting from 5bcm/y in 2015 to 10bcm/y in 2017E. We estimate the shale gas capex at RMB9/6bn in 2016E/17E assuming a total of 107/75 wells to be drilled during the period. We believe that risk compensation is likely upon the completion of Phase II of the Fuling Shale Gas project. However due to lack of details regarding to the compensation mechanism, we do not include any shale gas risk compensation in our earnings projection in 2017E. Any additional compensation would mean upwards risks to our earnings projection.



Figure 14: Development plan of Fuling Shale Gas project

Figure 15: Production capacity of Fuling Shale Gas project

Source: Company , CMS (HK) estimates Source: Company, CMS (HK)

Management incentivized to seek turnaround in 2017E-19E

SSC disclosed the details regarding to the A-share option scheme with first batch of options of 50.85mn shares

(0.42% of total issued A-share capital or 0.36% of total issued share capital) to be granted to 495 key employees

with an exercise price of RMB5.64/share, 43% premium to current A-share price. The share options could be

exercised in three batches in 3rd

, 4th and 5

th year after the grant date. Meanwhile the key conditions for exercise of

share options would include performance indicators, such as EBITDA on net assets (EOE) no less than 32%,

CAGR of total profit in 2015-17E/18E/19E no less than 6% and economic value added (EVA) achieving the

appraised objectives with ΔEVA greater than zero. We believe that the share options would incentivize

management to achieve better results by launching stricter cost control, improving efficiency and actively exploring

overseas market. As for operating costs, we believe there is potential downside for SG&A ratio as it is much higher compared to Sinopec (6.8% in 2015 versus 3.4% for Sinopec). Management plans to achieve RMB1.3bn cost saving in 2016E, of which RMB437mn cost saved in 1H16. We expect management to continue to implement stricter cost control in next few years with SG&A ratio down to 7% in 2018E.

Figure 16: Cost reduction plan Figure 17: SG&A expenses and ratio

Category 2016 Annual target

Completed in 1H16

Administrative expense 200 70

Labor cost 500 136

Procurement cost 250 155

Maintenance cost 100 29

Renting and services cost 210 126

Financial expense 40 -80

Total 1,300 437

Source: Company, CMS (HK) Source: Company ; CMS (HK) estimates

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Figure 18: Proposed share option scheme

Stage Timing Arrangement Conditions for Exercise of Share Options Exercise Ratio Cap

Grant Date To be determined by the Board upon fulfillment of the grant conditions under the Scheme

1st Exercise Period

Commencing on the first trading day after the expiration of 24 months from the Grant Date and ending on the last trading day of 36 months from the Grant Date

In 2017, EOE shall not be less than 32%, the compound growth rate of total profit for 2017 shall not be less than 6% (based on the Company’s total profit for 2015), and the above two indicators shall not be lower than the 75% level of peer benchmark enterprises, the performance of the indicator for economic value added in 2017 has achieved the appraisal objective issued by China Petrochemical Corporation, with EVA greater than zero.

30%

2nd Exercise Period


In 2018, EOE shall not be less than 32%, the compound growth rate of net profit for 2018 shall not be less than 6% (based on the Company’s total profit for 2015), and the above two indicators shall not be lower than the 75% level of peer benchmark enterprises, the performance of the indicator for economic value added in 2018 has achieved the appraisal objective issued by China Petrochemical Corporation, with EVA greater than zero.

30%

3rd Exercise Period


In 2019, EOE shall not be less than 32%, the compound growth rate of total profit for 2019 shall not be less than 6% (based on the Company’s total profit for 2015), and the above two indicators shall not be lower than the 75% level of peer benchmark enterprises, the performance of the indicator for economic value added in 2019 has achieved the appraisal objective issued by China Petrochemical Corporation, with EVA greater than zero.

40%

Source: Company

Figure 19: Allocation of proposed share options

Name/Item Position

Number of share options to be granted

Percentage of number of share options to be

granted

Percentage of total share

capital

Directors and senior management

Sun Qingde Director, General Manager, Deputy Secretary of CPC Committee 210,000 0.41% 0.0014%

Zhou Shiliang Director, Secretary of CPC Committee, Deputy General Manager 210,000 0.41% 0.0014%

Zhang Yongjie Deputy General Manager 190,000 0.37% 0.0013%

Wang Chunjiang Deputy Secretary of CPC Committee, Chairman of Labour Union 190,000 0.37% 0.0013%

Lu Baoping Deputy General Manager 190,000 0.37% 0.0013%

Liu Rushan Deputy General Manager 190,000 0.37% 0.0013%

Wang Hongchen Chief Accountant 180,000 0.35% 0.0013%

Zhang Jinhong Deputy General Manager 180,000 0.35% 0.0013%

Huang Songwei Deputy General Manager 180,000 0.35% 0.0013%

Li Honghai Secretary to the Board 140,000 0.28% 0.0009%

Sub-total 10 1,860,000 3.63% 0.0132%

Key business and management personnel of other core positions

Sub-total 485 48,990,000 96.37% 0.3464%

Total 495 50,850,000 100% 0.3596%

Source: Company



Record 3Q16E loss, but the worst is over

SSC released a profit warning indicating estimated net loss of RMB8.9bn in 9M16 with quarterly net loss enlarging from RMB2.8bn in 2Q16 to a record RMB4.4bn in 3Q16E, according to PRC accounting standards, due to continuing cut in the upstream capex as oil price maintaining at low level. Despite the moderate 2-14% HoH decline in workload plan for key business segments in 2H16E, the record losses in 3Q16E came far worse than our expectation (previous 2016E loss projection of RMB5.6bn). Meanwhile we believe the worst is over given higher portion of payment settlements in 4Q and recent moderate recovery in oil price.

We revised 2016E loss projection to RMB8,668mn in 2016E after taking into account the worse-than-expected 3Q16E results. Meanwhile, we expect a turnaround in 2017E given possible rebound in upstream capex amid recovery in oil price, better cost control and increased earnings contribution from engineering construction upon launch of construction of Xin-Yue-Zhe gas pipeline.

Meanwhile we expect gradually improvement in the balance sheet underpinned by earnings turnaround. We estimate net gearing down to 105% by 2018E from the peak of 118% in 2016E.

Figure 20: Quarterly results (PRC accounting standards)

Figure 21: Earnings and ROE

Source: Company, CMS (HK) estimates Source: Company, CMS (HK) estimates

Figure 22: Earnings revision

New Old Change

2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E

(RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (%) (%) (%)

Revenue 43,465 52,127 60,248 45,237 52,283 63,458 -4% 0% -5%

Geophysics 3,769 4,395 5,077 3,769 4,145 4,788 0% 6% 6%

Drilling Engineering 18,952 21,889 25,282 18,952 21,889 25,282 0% 0% 0%

Logging and Mud Logging 1,059 1,653 1,909 1,362 1,573 1,817 -22% 5% 5%

Special Down-hole Operations 3,428 4,902 5,662 4,897 5,387 6,222 -30% -9% -9%

Engineering Construction 14,983 18,014 21,044 14,983 18,014 24,074 0% 0% -13%

Corporate 1,274 1,274 1,274 1,274 1,274 1,274 0% 0% 0%

Gross profit (4,371) 5,062 6,517 (1,797) 3,043 5,600 143% 66% 16%

Geophysics (864) 375 537 (515) (147) 50 68% -355% 965%

Drilling Engineering (2,969) 1,865 2,545 (2,005) 829 1,930 48% 125% 32%

Logging and Mud Logging (560) 292 385 (81) 123 227 589% 136% 70%

Special Down-hole Operations (862) 764 933 (80) 367 623 981% 108% 50%

Engineering Construction 1,071 1,901 2,256 1,071 2,006 2,909 0% -5% -22%

Corporate (186) (135) (140) (186) (135) (140) 0% 0% 0%

Net profit (8,668) 451 1,327 (5,594) (1,374) 540 55% -133% 146%

EPS (RMB) (0.61) 0.03 0.09 (0.40) (0.10) 0.04 55% -133% 146%

ppts chg ppts chg ppts chg

EBIT margin (%) (10.1) 9.7 10.8 (4.0) 5.8 8.8 (6.1) 3.9 2.0

Net profit margin (%) (22.9) 8.5 10.6 (13.7) (3.6) 1.1 (9.3) 12.1 9.5

Source: CMS (HK) estimates

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Valuation

Global land drillers experienced a significant re-rating recently amid increasing exploration activities on the back of

oil price rebound. We estimate Brent oil price to average at higher US$52/bbl in 4Q16E and US$55/bbl in 2017E.

We expect a moderate 10-15% YoY recovery in domestic upstream capex in 2017E underpinned recovery in oil

price.

Global land drillers are trading at 2017E P/B of 1.4x, up 27% from the valuation in mid-September as onshore oil

and gas production is more sensitive to oil price recovery given their relative competitive production cost compare to

offshore driller. Meanwhile the valuation for global offshore drillers remain sluggish which are trading at 2017E P/B

of 0.3x, almost same compared to the valuation in mid-September.

SSC is trading at 2017E P/B of 1.1x, 21% below its global peers versus par in mid-September, which we believe is

attractive given improved earnings outlook underpinned by possible rebound in upstream capex amid recovery in oil

price, better cost control incentivized by grant of share options and increased earnings contribution from engineering

construction upon launch of construction of Xin-Yue-Zhe gas pipeline.

We lifted our TP from HK$1.4 to HK$1.9, based on 2017E P/B of 1.4x, the average of global land drillers. Despite

significant losses in 2016E, SSC’s earnings outlook is much encouraging compare to its global peers which are

expected to report second consecutive year of losses in 2017E. Meanwhile we expect its net gearing to peak in

2016E and gradually come down underpinned by improvement in fundamentals.

We upgraded SSC from NEUTRAL to BUY. We are the first to turn into bullish on SSC among the street as we

believe current consensus does not reflect the recent rerating on global land driller which are more sensitive to the

recovery in oil price compared to offshore drillers given relative competitive all-in cost for onshore oil and gas

production.

Figure 23: Forward P/B chart Figure 24: A/H stock prices premium/(discount)

Sources: Bloomberg, CMS (HK) estimates Sources: Bloomberg, CMS (HK)

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Figure 25: Income statement by segment

RMB mn 2014 2015 2016E 2017E 2018E

Revenue 78,993 60,349 43,465 52,127 60,248

Geophysics 5,126 5,341 3,769 4,395 5,077

Drilling Engineering 39,278 28,744 18,952 21,889 25,282

Logging and Mud Logging 4,190 2,474 1,059 1,653 1,909

Special Down-hole Operations 8,510 6,928 3,428 4,902 5,662

Engineering Construction 20,144 15,614 14,983 18,014 21,044

Others 1,745 1,248 1,274 1,274 1,274

Operating profit 8,318 5,032 (4,371) 5,062 6,517

Geophysics 682 462 (864) 375 537

Drilling Engineering 5,239 2,419 (2,969) 1,865 2,545

Logging and Mud Logging 897 403 (560) 292 385

Special Down-hole Operations 920 816 (862) 764 933

Engineering Construction 1,139 1,131 1,071 1,901 2,256

Others (559) (200) (186) (135) (140)

Operating expenses (4,998) (4,563) (4,127) (4,461) (4,747)

SG&A (4,589) (4,105) (3,695) (3,910) (4,217)

Financial expenses (770) (655) (730) (850) (828)

Share of results from JVs (4) (12) (12) (12) (12)

Other expenses 365 210 310 310 310

Profit before taxation 3,320 470 (8,498) 601 1,770

Income tax (901) (481) (170) (150) (442)

Profit for the year 2,419 (12) (8,668) 451 1,327

Minority interests (2) 0 0 0 0

Net profit 2,417 (12) (8,668) 451 1,327

EPS (RMB) 0.16 (0.00) (0.61) 0.03 0.09

YoY growth (%) Revenue (12.0) (23.6) (28.0) 19.9 15.6

Geophysics (23.6) 4.2 (29.4) 16.6 15.5

Drilling Engineering (5.6) (26.8) (34.1) 15.5 15.5

Logging and Mud Logging (18.3) (40.9) (57.2) 56.0 15.5

Special Down-hole Operations (10.5) (18.6) (50.5) 43.0 15.5

Engineering Construction (18.3) (22.5) (4.0) 20.2 16.8

Others (17.8) (28.5) 2.2 - -

Operating profit 13.4 (39.5) (186.9) (215.8) 28.7

Geophysics 27.3 (32.3) (287.2) (143.4) 43.2

Drilling Engineering 40.8 (53.8) (222.7) (162.8) 36.5

Logging and Mud Logging (4.3) (55.0) (238.9) (152.1) 32.0

Special Down-hole Operations (6.3) (11.2) (205.6) (188.6) 22.2

Engineering Construction (36.5) (0.7) (5.3) 77.5 18.6

Others (12.3) (64.3) (6.6) (27.7) 3.6

Net profit 65.0 n/a n/a n/a 194.4

EPS 65.0 n/a n/a n/a 194.4

Margin (%) OP margin 10.5 8.3 (10.1) 9.7 10.8

Geophysics 13.3 8.6 (22.9) 8.5 10.6

Drilling Engineering 13.3 8.4 (15.7) 8.5 10.1

Logging and Mud Logging 21.4 16.3 (52.9) 17.6 20.2

Special Down-hole Operations 10.8 11.8 (25.1) 15.6 16.5

Engineering Construction 5.7 7.2 7.1 10.6 10.7

Others (32.0) (16.0) (14.6) (10.6) (11.0)

NP margin 3.1 (0.0) (19.9) 0.9 2.2

Effective tax rate (%) 27.1 102.5 (2.0) 25.0 25.0

Source: Company, CMS (HK) estimates



Figure 26: Valuation table

Bloomberg

Price

Mkt. P/E EV/EBITDA P/B ROE

Code Cap 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E

LC US$ mn x x x x x x % %

China oil and gas

PetroChina 857 HK 5.36 190,253 94.9 18.8 7.4 6.3 0.7 0.7 0.9 3.7

Sinopec 386 HK 5.72 88,968 16.6 12.8 5.3 4.8 0.9 0.8 5.3 6.7

CNOOC* 883 HK 10.44 60,075 n/a 15.1 21.8 10.9 1.1 1.0 0.4 7.0

Average

55.7 15.6 11.5 7.3 0.9 0.9 2.2 5.8

China oil & gas logistics

Kunlun Energy 135 HK 5.96 6,201 10.9 10.3 4.7 4.5 0.9 0.9 8.7 8.7

Sinopec Kantons* 934 HK 3.77 1,208 8.8 8.1 6.2 5.7 0.9 0.8 10.8 10.7

Average 9.9 9.2 5.4 5.1 0.9 0.9 9.7 9.7

China oilfield services

SSC* 1033 HK 1.57 7,531 n/a 41.9 (6.4) 6.3 1.2 1.1 (42.7) 2.8

COSL* 2883 HK 7.77 7,208 n/a n/a 21.5 11.3 0.9 0.9 (22.7) (0.9)

Anton 3337 HK 0.91 260 n/a 98.6 9.8 7.5 0.9 0.9 (2.4) 3.1

SPT 1251 HK 0.65 129 n/a n/a n/a 11.5 0.8 0.8 (14.5) (6.2)

Petro-king 2178 HK 0.48 106 n/a n/a n/a n/a n/a n/a (4.5) 1.2

Hilong 1623 HK 1.71 374 16.9 11.8 8.1 7.5 0.8 0.8 4.8 6.5

Honghua 196 HK 0.66 276 n/a n/a 15.5 12.4 0.4 0.4 (2.7) (0.2)

Average

16.9 50.8 10.7 8.6 0.8 0.8 (12.1) 0.9

Integrated oils Exxon Mobile XOM US 86.54 358,851 39.0 20.0 12.0 8.2 2.1 2.1 5.5 9.8

Chevron CVX US 101.08 190,689 86.4 22.4 10.0 6.5 1.3 1.3 1.1 4.9

Royal Dutch Shell RDSA NA 23.10 211,073 26.2 13.6 8.9 6.1 1.1 1.1 4.4 8.3

TOTAL FP FP 44.13 121,498 14.9 11.6 7.6 5.9 1.2 1.2 8.2 10.5

BP PLC BP LN 489.50 113,044 31.0 15.6 7.3 5.4 1.2 1.2 3.0 8.0

ENI SPA ENI IM 13.42 53,623 n/a 19.8 5.5 3.9 1.0 1.0 0.3 4.8

Average

39.5 17.1 8.6 6.0 1.3 1.3 3.8 7.7

Large-cap service

Schlumberger SLB US 81.32 113,091 72.9 41.9 18.6 15.1 2.7 2.8 3.9 7.0

Halliburton HAL US 46.97 40,446 n/a 54.4 25.0 15.3 4.2 4.3 (1.4) 8.5

Baker Hughes BHI US 51.75 22,144 n/a n/a n/a 17.6 1.6 1.7 (7.0) (0.7)

Weatherford WFT US 5.96 5,341 n/a n/a 34.3 13.5 1.4 1.6 (25.9) (12.2)

Average

72.9 48.1 26.0 15.4 2.5 2.6 (7.6) 0.6

Offshore drillers Transocean RIG US 9.70 3,544 15.2 n/a 6.4 9.2 0.2 0.2 2.3 (1.1)

Atwood Oceanics ATW US 9.10 590 2.0 n/a 3.2 9.4 0.2 0.2 9.8 (1.5)

Seadrill Partners SDLP US 3.68 338 1.1 2.1 4.4 7.0 0.2 0.2 21.7 10.4

Noble Corporation NE US 5.90 1,435 n/a n/a 6.0 10.2 0.2 0.2 (0.1) (3.7)

Rowan Companies RDC US 14.55 1,825 8.8 n/a 4.6 8.2 0.3 0.3 4.4 (1.2)

Diamond Offshore DO US 17.16 2,354 17.6 23.0 7.0 7.4 0.6 0.6 0.1 2.7

Seadrill Limited SDRL US 2.38 1,211 2.0 44.1 6.0 10.3 0.1 0.1 5.6 0.5

Ensco ESV US 8.30 2,501 5.9 60.1 4.8 7.2 0.3 0.3 7.9 0.7

Average

7.5 32.3 5.3 8.6 0.3 0.3 6.5 0.9

Land drillers Patterson-UTI PTEN US 24.09 3,559 n/a n/a 21.3 16.4 1.5 1.8 (14.2) (13.9)

Nabors Industries NBR US 12.87 3,647 n/a n/a 11.4 10.1 1.0 1.1 (9.5) (6.9)

Helmerich & Payne HP US 68.67 7,421 n/a n/a 18.5 19.3 1.6 1.8 (2.2) (3.1)

Precision Drilling PD CN 6.05 1,349 n/a n/a 14.8 11.6 0.9 1.0 (8.9) (7.7)

Average

n/a n/a 16.5 14.4 1.3 1.4 (8.7) (7.9)

Notes: *CMS (HK) estimates

Sources: Bloomberg forecasts, CMS (HK) estimates



Financial Summary

Balance Sheet

RMB million 2014 2015 2016E 2017E 2018E

Current Assets 44,533 48,188 38,597 46,918 50,647

Cash & equivalents 1,202 1,993 542 1,196 278

ST bank deposits 12 18 18 18 18

Note and trade receivables 28,284 27,262 22,753 25,804 33,618

Inventories 1,951 1,979 1,419 1,924 1,893

Other current assets 13,084 16,935 13,865 17,975 14,840

Non-current assets 36,763 37,120 36,692 36,251 35,967

Property, Plant & Eqt. 31,080 31,718 31,321 30,911 30,639

Investments in Asso/JVs 108 216 204 192 181

Intangible assets 41 77 60 42 42

Other non-current assets 5,533 5,108 5,107 5,106 5,105

Total assets 81,296 85,308 75,289 83,169 86,614

Current liabilities 61,938 59,909 58,558 65,987 68,105

ST borrowings 12,016 12,158 18,758 19,388 18,348

Note and trade payables 30,914 30,194 22,650 29,342 30,013

Other liabilities 19,009 17,558 17,151 17,258 19,744

Long term Liabilities 662 761 761 761 761

LT borrowings 568 670 670 670 670

Others 93 91 91 91 91

Total Liabilities 62,600 60,671 59,320 66,749 68,867

Issued capital 12,809 14,143 14,143 14,143 14,143

Reserves 5,888 10,495 1,828 2,279 3,606

Minority interests (1) (1) (1) (1) (1)

Total equity and liabilities 81,296 85,308 75,289 83,169 86,614

Cashflow Statement

RMB million 2014 2015 2016E 2017E 2018E

Operating cashflow 4,501 2,596 (4,321) 4,024 4,415

Profit for the year 1,059 470 (8,498) 601 1,770

Deprec & Amort. 4,382 3,941 3,416 3,578 3,738

Profit of Asso/JVs 4 12 12 12 12

Finance costs 531 268 730 850 828

Working capital chg (1,001) (1,564) 188 (867) (1,490)

Income tax paid (635) (716) (170) (150) (442)

Others 161 185 0 0 0

CF from IA (2,529) (5,003) (2,950) (3,136) (3,435)

Capital expenditure (2,468) (3,745) (3,000) (3,150) (3,465)

Other investments (61) (1,258) 50 14 30

CF from FA (2,465) 3,199 5,819 (233) (1,898)

Borrowings (2,384) (660) 6,600 630 (1,040)

Issue of shares 0 5,953 0 0 0

Dividends (41) 0 0 0 0

Others (40) (2,093) (781) (863) (858)

Net cash flow (492) 791 (1,452) 654 (918)

Beg. Cash 1,694 1,202 1,993 542 1,196

FX changes 0 0 0 0 0

End. Cash 1,202 1,993 542 1,196 278

Profit & Loss Statement RMB million 2014 2015 2016E 2017E 2018E

Revenues 78,993 60,349 43,465 52,127 60,248

Cost of sales (70,675)

(55,317) (47,836) (47,065) (53,731)

SG&A (4,589) (4,105) (3,695) (3,910) (4,217)

Fin. costs (770) (655) (730) (850) (828)

Impairment loss (98) (171) 0 0 0

Investment income 2 1 0 0 0

Profit of JVs (4) (12) (12) (12) (12)

Op Profit 2,859 89 (8,808) 291 1,460

Other income 551 472 400 400 400

Other expenses (90) (92) (90) (90) (90)

PBT 3,320 470 (8,498) 601 1,770

Income taxes (901) (481) (170) (150) (442)

Profit after tax 2,419 (12) (8,668) 451 1,327

Minority interests (2) 0 0 0 0

Net Profit 2,417 (12) (8,668) 451 1,327

EPS (RMB) 0.16 (0.00) (0.61) 0.03 0.09

Financial Ratios

2014 2015 2016E 2017E 2018E

YoY growth rate

Revenue 12.0% -23.6% -28.0% 19.9% 15.6%

Op profit 60.0% -96.9% n/a n/a 401.4%

Net profit 65.0% n/a n/a n/a 194.4%

Profitability

Gross margin 3.6% 0.1% -20.3% 0.6% 2.4%

NP margin 3.1% 0.0% -19.9% 0.9% 2.2%

ROE 9.8% -0.1% -42.7% 2.8% 7.8%

Liquidity

Debt to Asset 15.5% 15.0% 25.8% 24.1% 22.0%

Net Debt to Equity 67.3% 52.1% 121.6% 122.1% 107.2%

Liquid ratio 71.9% 80.4% 65.9% 71.1% 74.4%

Quick ratio 68.7% 77.1% 63.5% 68.2% 71.6%

Operating efficiency

Asset turnover 0.9 0.7 0.5 0.7 0.7

Inventory turnover 27.3 28.2 28.2 28.2 28.2

AR turnover 2.8 2.2 1.7 2.1 2.0

AP turnover 2.3 1.8 1.8 1.8 1.8

Per share ratios (RMB)

EPS 0.16 (0.00) (0.61) 0.03 0.09

CFPS 0.08 0.14 0.04 0.08 0.02

BVPS 1.46 1.74 1.13 1.16 1.25

DPS 0.00 0.00 0.00 0.00 0.00

Valuation ratios

P/E 8.4 n/a n/a 41.9 14.2

P/B 0.9 0.8 1.2 1.1 1.1

EV/EBITDA 3.7 6.3 (6.4) 6.3 4.9

Sources: Company data, CMS (HK) estimates



Investment Ratings

Industry Rating Definition

OVERWEIGHT Expect sector to outperform the market over the next 12 months

NEUTRAL Expect sector to perform in-line with the market over the next 12 months

UNDERWEIGHT Expect sector to underperform the market over the next 12 months

Company Rating Definition

BUY Expect stock to generate 10%+ return over the next 12 months

NEUTRAL Expect stock to generate +10% to -10% over the next 12 months

SELL Expect stock to generate loss of 10%+ over the next 12 months

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