Company profile
TSC Group is a supplier of products and services to the global onshore and offshore drilling industry. Its shares are listed on the main board of the Hong Kong Stock Exchange (206.HK). The three letters of TSC have two meanings: the first tier, Total Solutions Company, is a turnkey solution company; the second-tier meaning includes the company's core values, Teamwork (Team Spirit), Sharing (Sharing), and Acceptance (Acceptance). TSC Group has three core divisions: Exploration Business Turnkey Division, Material Division, and Engineering Services Division. Providing various innovative drilling machine turnkey solutions to global customers is the core of the company's business value.
Investment Overview
TSC Group has two core business divisions: Capital Equipment and General Contracting Division and MRO (Drilling Machine Maintenance, Maintenance and Operation) division. The latter is also divided into two divisions: MRO Materials and MRO Services. In 2012, the revenue share of the company's capital equipment and general contracting, MRO services, and MRO materials business was 71.7%, 16.8%, and 11.5%. Capital equipment and general contracting are the core business of TSC Group, and it is also where the company will grow in the future.
There has been limited growth in TSC Group's performance over the past five years. As can be seen, the company's revenue from 2009 to 2011 was basically below 150 million US dollars (currency, same below), but revenue only rose to 184 million dollars in 2012, surpassing 160 million in 2008. The compound growth rate for the past five years was only 3.5%. Furthermore, the five-year compound growth rates of capital equipment and general contracting, MRO services, and MRO materials were divided into 8.4%, 16%, and 122%, and the general key delivery business began in 2011 and was integrated.
The shift of offshore projects from overseas markets to domestic manufacturing is an industry trend. Currently, 63% of TSC Group's revenue comes from overseas, and domestic demand accounts for 37%. Singapore, North America, and Europe are the main sources of the company's overseas customers.
In the past five years, TSC's gross margin level has remained at 31% — 40%, reflecting the higher profit level of high-end manufacturing, which is close to the industry level. However, its EBITDA profit ratio remained at 9%-13%, and the net profit margin remained between 2.5%-6%. This reflects the small scale of the company's business, and the proportion of sales and management expenses is too high.
Overall, TSC Group's performance over the past five years has been mediocre and lacking in highlights. The reason for this situation is that in addition to the impact on the external environment, the special nature of the offshore industry makes the cycle of business integration, R&D, and market development longer, and there is a lot of uncertainty in the order-to-delivery process, and the fluctuation of orders also affects revenue confirmation.
In the first half of 2013, TSC's operating revenue increased 29% to $85 million, operating profit increased 126% to $7 million, and net profit increased 820% to $4.5 million. During the period, gross margin was 34.2%, down from the same period in 2012, mainly due to an increase in capital equipment and wage costs for the General Contracting Division. Despite a decline in gross margin, sales and management costs were less variable, and the 29% increase in revenue directly contributed to a significant increase in operating profit and tax revenue. As can be seen from this point, the increase in future orders and the shortening of delivery times have had a significant effect on driving the company's performance to increase significantly
Over the past few years, TSC's asset and liability statement style has been slightly conservative, with less financial leverage, and basically at net cash levels. There was a marked increase in corporate debt levels in the first half of 2013. In the future, as orders rise and business scale increases, it is expected that the size of TSC's debt will continue to increase. With the rise in financial leverage, the company's future increase in production capacity and order growth will drive a significant increase in the company's performance. It is expected that the profit and loss statement will grow by leaps and bounds in the next two years.
TSC Group is an excellent enterprise in the Chinese offshore industry. The company is in technical facts
Strength, development strategy, and corporate governance all show considerable competitiveness. Currently, TSC Group is in the technology and market development stage, and a lot of financial data is unsatisfactory in the short term. However, from the changes that have occurred in the company, we can see that TSC Group is about to enter a new level of rapid growth.
We anticipate that TSC Group's international orders will have a substantial breakthrough in the next three years, and a significant increase in performance and market share can be anticipated. Although the company's stock price is still quite volatile, in the medium to long term, TSC is a value investment target with a lower risk factor. We gave TSC Group a “buy” rating, with a target price of HK$3.6 for 12 months, equivalent to 15.8 times the expected price-earnings ratio for 2014.
