20181211-中国银河国际证券-惠生工程-02236.HK-A_late_oil_CAPEX_cycle_name_with_order_backlog_to_support_growth._2页_496kb

Wison Engineering Services Co. Ltd. (2236.HK) Summary

Core Content

Company Overview

• Wison Engineering Services Co. Ltd. (2236.HK) is the largest private petrochemical engineering, procurement, and construction (EPC) services provider in China.
• Listed on the Hong Kong Exchange (HKEX) in December 2012.
• Focuses on industries such as oil refining, petrochemicals, and coal-to-chemicals.
• Key clients include companies from China, Saudi Arabia, Venezuela, and the United Arab Emirates.
• Closest competitor is Sinopec Engineering (2386.HK), with which it shares a similar focus on hydrocarbon projects.

Main Points

Cyclicality and Market Position

• Wison Engineering is considered a late oil CAPEX cycle beneficiary, with lower cyclicality compared to upstream oil services companies.
• Downstream engineering companies benefit from:
  • Vertical integration of oil companies
  • Environmental protection controls driving technology upgrades
  • Increasing investment in coal-to-chemical projects
• The resilient performance of PetroChina and Sinopec's chemical divisions in Q3 2018 is positive for downstream engineering firms like Wison Engineering.

R&D and Digital Transformation

• The company emphasizes proprietary technology, such as Ethylene cracking furnaces and light olefin separation technology (used in MTO process).
• Actively implementing digitalization of EPC processes through cloud computing.
• Enhances management capacity in modeling, simulation, and construction.
• Offers real-time project tracking for all participants (internal and external), improving communication and feedback.
• The cloud platform is currently for internal use but aims to be open to all participants in the future.

Order Intake and Project Pipeline

• Strong order intake in 2018, with new contract value reaching RMB4,700m at the end of Q3 2018.
• Expected to reach a very high level in Q4 2018.
• Order backlog has remained stable at 2.2x to 3.5x of sales.
• Projects typically take 3-4 years to complete, so the 2018 backlog will drive growth in 2019 and 2020.
• Order backlog increased from RMB10.7bn in 2016 to RMB11.2bn by the end of June 2018.
• Gross profit margins vary from 5% to 30%, depending on project nature, local competition, and supply chain conditions.

Competitive Landscape

• Major competitors are Korean and Chinese construction companies.
• Chinese EPC companies, including Wison, have an advantage in large-scale projects due to design and manufacturing capabilities.
• Can offer financing solutions, enhancing competitiveness.
• Uses modules manufactured in China and installed overseas.
• RMB depreciation may further improve the company's competitiveness.

Key Financials (in RMB m)

Metric	2014	2015	2016	2017
Revenue	6,992.1	5,413.5	3,041.9	4,124.8
Gross Profit	792.2	816.9	931.2	861.2
Gross Margin %	11.3	15.1	30.6	20.9
Net Profit	179.0	205.1	15.2	138.3
Net Margin %	2.6	3.8	0.5	3.4
EPS (Basic)	0.04	0.05	0.00	0.03
ROE (%)	11.6	11.4	0.8	6.7
PER (x)	21.41	17.75	258.99	26.20
PBR (x)	1.51	1.75	1.81	1.54
Capex (m)	-5.8	-4.1	-3.2	-14.4
Free Cash Flow (m)	771.7	982.8	-1,088.3	554.8
Net Cash/(Net Debt)	2.3	1,023.4	274.3	602.8

Analyst View

• The market may have concerns about Wison Engineering, especially due to issues from 2013-2017, but the company is recovering and has secured orders from both local and global clients.
• The 2018 new contracts were in early stages and not reflected in P&L, while contracts from 2015 and 2016 were nearing completion.
• Expected significant performance recovery in 2019 and beyond due to the 2018 order backlog.
• Market sentiment is weak, and the market is taking a wait-and-see approach, but the downstream engineering segment is more stable than the upstream oil services segment.
• Recent share consolidation may present an investment opportunity for downstream engineering firms like Wison Engineering.

Catalysts

• News flow on contracts secured
• 2018 final results announcement
• Movement in oil prices

Analyst Certification

• The analyst certifies that all views expressed reflect his or her personal views and that no part of his or her compensation is related to the specific views in the report.
• No trading or dealing in the securities covered in the report within 30 days prior to the report date, and no such activity planned for three business days after.
• No direct or indirect financial interest in the companies discussed.

Equity Ratings

• BUY: Share price will increase by >20% within 12 months.
• SELL: Share price will decrease by >20% within 12 months.
• HOLD: No clear catalyst, and downgraded from BUY pending clearer signals.

Disclaimer

• This report is not directed at, or intended for distribution to, any person or entity in a jurisdiction where it would be illegal or unlicensed.
• No representation or warranty is made regarding the accuracy or completeness of the information.
• The report is not an offer to buy or sell any securities.
• Past performance is not indicative of future results.

Copyright

• No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited.