20180626-申万宏源研究_香港_-海隆控股-01623.HK-继往开来_23页_1014kb

Hilong Holding (1623:HK) - Outperform Initiation of Coverage

Company Overview

Hilong Holding is a Chinese private oil & gas company that specializes in high-end oilfield equipment manufacturing and integrated petroleum and natural gas services. It was founded in 2001 and listed on the Hong Kong stock exchange in 2011. The company operates four core business lines: oilfield equipment manufacturing, coating materials and services, oilfield services, and offshore engineering services.

Financial Summary and Valuation (2016-2020E)

Key Drivers of Growth

Oil Price Support

• After two years of decline, global oil prices, particularly Brent crude, rebounded to $60/bbl in late 2017 and reached $80/bbl by early 2018, marking a significant recovery.
• This price recovery is expected to support capital expenditure (Capex) by oil companies, which in turn drives demand for oilfield equipment and services.
• OPEC's supply discipline and geopolitical tensions have helped maintain this upward trend in oil prices.

Strong Drill Pipe Demand

• Spears & Associates forecasts global drill pipe demand to grow by 20.8% YoY in 2018, reaching 320,000 tonnes, and to expand at a CAGR of 11.5% over the next four years.
• Hilong reached full capacity in 2017 (60,000 tonnes) and is expected to maintain 100% capacity utilization through 2020 due to strong demand.
• Oilfield equipment sales are projected to reach Rmb14 billion in 2018, Rmb15 billion in 2019, and Rmb16 billion in 2020, with a CAGR of 6.5% from 2017 to 2020.

Product Mix Improvement

• Hilong is increasing its proportion of high-margin non-API drill pipes, driven by the rapid development of the non-conventional oil and gas sector (e.g., shale gas).
• A 1% increase in non-API sales led to a 0.1% increase in gross margin in 2017.
• Gross margin for the oilfield equipment manufacturing segment is forecasted to rise from 32.2% in 2017 to 33% in 2018E, 34% in 2019E, and 35% in 2020E.

Oilfield Services Segment

• The oilfield services revenue showed weak negative correlation with oil prices (correlation: -0.49, $R^2: 24.5%$) due to long-term contracts with major oil companies like Royal Dutch Shell.
• Revenue for this segment is expected to reach Rmb1.1 billion in 2018E, Rmb1.4 billion in 2019E, and Rmb1.7 billion in 2020E, with a CAGR of 23.9% from 2017 to 2020.
• This segment is viewed as a key growth driver, benefiting from stable Capex levels and long-term contracts.

Market Position

• Hilong is a major player in the global drill pipe market, holding 32% of global sales in 2016.
• It dominates the Chinese OCTG coating market with a 47% market share, supported by strong technical capabilities.
• The company holds the Fearnley Procter NS-1 certification, a mark of quality in the industry.

Scenario Analysis

• The bull case assumes strong oil prices above $70/bbl, leading to significant Capex growth and higher gross profit growth.
• The base case is considered more likely, with oil prices between $56/bbl and $70/bbl, and a steady Capex growth of 8-11% YoY.
• The bear case is less likely due to no signs of economic slowdown or significant supply increases.

Conclusion

• Hilong Holding is positioned to benefit from the sustainable oil price recovery and the global Capex rebound.
• The company's product mix improvement, strong market position, and long-term contracts contribute to its growth potential.
• The target price is set at HK$1.36, representing 11x 2018E PE and 8.4x 2019E PE, with 14.3% upside from the current price.
• The report initiates coverage with an Outperform rating, citing strong fundamentals and positive outlook for the company's future performance.