CHINA OILFIELD SERVICES(601808)：UPGRADE TO BUY AS MAJOR CONCERN ADDRESSED AND VALUATIONS LOOK ATTRACTIVE-格隆汇

机构：中银国际
研究员：Lawrence LAU/Rainey DAI

The earnings of COSL grew 19% YoY to RMB1,592m in 1H24, basically in line given the abnormally high tax rate. All four segments showed improved profits. We expect its earnings to grow 23% HoH in 2H24 on seasonality. More importantly, two of the previously suspended jack- ups have secured new jobs and the other two are likely to get new jobs soon. We expect its growth to accelerate to over 20% YoY in next two years. The price of its H shares had dropped as much as 34% after the rig suspension and we found them attractive again given the strong growth ahead. Upgrade to BUY with target price at HK$9.62.
Key Factors for Rating
Its 1H24 effective tax rate was 29%, much higher than the 21.8% in 1H23. It was because it paid additional RMB157m tax required by Mexican tax authority and it wrote back the deferred tax credit previously booked for the four rigs suspended by Saudi Aramco (ARAMCO AB/SAR27.75, NR). Its pre-tax earnings actually grew 29% YoY, roughly in line with our forecast of 30% growth.
All its four segments posted higher earnings. In particular, the operating profit of its drilling segment grew 18% YoY on higher average day rates (up 7% YoY for jack-ups and 9% YoY for semi-subs). The operating profit of its well services segment surged 33% YoY on increased work volume and it put more of its R&D efforts into commercial applications.
We expect its earnings to surge 23% HoH in 2H24. The company usually sees much higher revenue and hence earnings in 2H of a year owing to seasonality.
As for the four previously suspended jack-ups, Zhenhai 6 has started to work for its key client in offshore China. COSL Seeker has won a drilling contract for three years and will start working towards end-2024. Both of them got higher day rates than before. The other two have participated in a recent tender and should be able to land new jobs soon. Hence, this overhang has basically been removed.
Key Risks for Rating
Slower-than-expected growth.
Lack of further progress in developing overseas markets.
Valuation
We raise our target price for its H shares from HK$9.53 to HK$9.62 given the recent appreciation of RMB against HKD. Our target valuation remains 0.95x 2024E P/B.
We lower our target price for its A shares from RMB19.94 to RMB18.52. We still set our target price based on its 3-month average A-H premium (now at 140%).
Rapid Growth in Overseas Revenue
COSL’s overseas revenue surged 41% YoY to RMB5.55bn in 1H24. Overseas market accounted for 24.6% of its total revenue in 1H24, up from 20.9% in 1H23. All four segments saw higher overseas revenue.
Changes in Earnings Forecasts
We trim our 2024 earnings forecast by 3% mainly to reflect the higher-than-expected tax rate in 1H24. For 2025 and 2026, we raise our earnings forecasts by 7% and 10% respectively, mainly to reflect the increase in average day rates for its semi- subs. It will have four semi-subs working in the North Sea next year and the day rates all exceed US$300k/day.
Under our new forecasts, we are looking at 26% YoY growth for 2025 and 21% YoY growth in 2026, up from 18% YoY growth in 2024.