20170308-招商证券_香港_-海隆控股-01623.HK-Robust_growth_supported_by_overseas_expansion_25页_2mb_2mb

Summary of Hilong Holding (1623 HK) Report

Core Content

Hilong Holding is a leading drill pipe producer with significant growth prospects driven by its overseas expansion, particularly in the Russian market. The report outlines the company's strong performance and future potential, highlighting the following key areas:

• Drill Pipe Sales Growth: Hilong is expected to achieve a 44% YoY increase in 2017E drill pipe sales to 40.8kt, following a 38.7% YoY rise in 2016E. This growth is attributed to successful market expansion in Russia, improving global drilling activities due to oil price recovery, and a robust order book of 37kt as of end of February 2017E.
• Russian Market Breakthrough: The relocation of a production facility to Russia in 2H15 played a crucial role in boosting sales. Hilong secured a major contract with Rosneft Oil in November 2016 to supply 17,914 tonnes of drill pipes and related products in 2017E, expected to be sourced from both Shanghai and Yekaterinburg plants.
• Offshore Engineering Services Recovery: The offshore engineering services segment is expected to recover significantly, with revenue projected at RMB221mn in 2017E and RMB442mn in 2018E, up from RMB88mn in 2016E. This is supported by new contracts in Indonesia and potential domestic market recovery.
• Earnings Growth: Net profit is expected to surge 150% YoY to RMB312mn in 2017E, driven by a 54% YoY increase in gross profit and operating leverage. In 2018E, net profit is forecast to grow 24% YoY, resulting in a 76% CAGR in earnings from 2016E to 2018E.
• Valuation and Investment Outlook: Hilong is currently trading at a 2017E P/E of 8.8x and P/B of 0.8x, significantly below its historical averages. The target price is set at HK$2.7, implying a 1.2x P/B multiple, which is considered attractive.

Key Financial Highlights (2014–2018E)

Main Points

• Growth Drivers: The company's robust growth is supported by overseas expansion, particularly in Russia, and the recovery of global oil prices.
• Market Expansion: Hilong's successful market expansion in Russia is highlighted as a key factor in its sales growth, with the relocation of a production facility and new contracts with major clients like Rosneft Oil.
• Segment Performance:
  • Drill Pipe Sales: Expected to grow significantly in 2017E and 2018E, with a focus on exports.
  • Oilfield Services: Expected to regain growth momentum, with a diversified service portfolio and a strong customer base.
  • Offshore Engineering Services: Already bottomed out in 2016, with new contracts in Indonesia and potential domestic recovery.
• Valuation: The current valuation is seen as attractive, with a 2017E P/E of 8.8x and P/B of 0.8x, below historical averages.
• Investment Outlook: The report initiates with a BUY rating and a target price of HK$2.7, which is 48% above the current price of HK$1.83.

Key Information

• Orders on Hand: As of end of February 2017E, Hilong had 37kt of orders, including 25kt from Russia, 4kt from Central Asia, 2kt from North America, 1kt from China, and 5kt of non-API drill pipes.
• Pricing Power: Hilong's strong position in the drill pipe and OCTG coating services market supports its high margin levels.
• Competitive Edge: Hilong 106, a subsea pipe-lay barge, is noted for its technical capabilities and competitiveness in both Chinese and international markets.
• Investment in Vessels: The acquisition of Hilong 106 in 2014 was the largest investment since listing, enhancing the company's offshore engineering capabilities.
• Market Share: Hilong holds a 40% market share in China and 17% globally in terms of drill pipe sales in 2015.

Investment Rating

• Rating: BUY
• Target Price: HK$2.7
• Potential Upside: +48% from current price (HK$1.83)

Conclusion

Hilong Holding is positioned for robust growth, driven by its successful expansion into the Russian market and the recovery of global oil prices. The company's diverse service offerings, strong customer base, and strategic investments position it well for future performance. Despite challenges in the domestic market, the company is expected to benefit from increasing demand in offshore engineering and oilfield services, supported by new contracts and operational improvements. The current valuation is considered attractive, and the investment outlook is positive with a BUY rating and a target price of HK$2.7.