Jutao Offshore Oil Services ("Jutao" or "the company") announced the placement of 5000 shares at a discount of 8.95 per cent to Friday's closing price. We believe that this placement has been expected by the market since April, and the successful placement will remove the potential disadvantages in the short term. Maintain "buy".

Placing 5000 shares Jutao issued 5000 million shares through Xiangxing Investment Co., Ltd., which is wholly owned by Mr. Wang Lishan, Chairman and Executive Director of Jutao. After the completion of the "old-to-new" placement, Mr. Wang's stake in Jutao will drop from 61.32% to 56.92%.

The net capital raised of HK $8400 per share is set at HK $1.73 per share, a discount of 8.95 per cent to Friday's closing price of HK $1.90. After deducting related expenses and fees, the net income from the rights issue is approximately HK $84 million. As far as we know, the placement was 3 times oversubscribed and completed within 2 hours, reflecting the market's optimism about the future potential of the Group.

The proceeds from the fund-raising are very likely to be used to expand the production capacity of undersea equipment. We believe that the HK $84 million from this rights issue will mainly be used for working capital and the expansion of the facilities of its Zhuhai plant. We estimate that the Group will eventually build two additional factories, docks and slides. The proceeds raised should not be sufficient for the group to acquire a majority stake in the associated company Penglai Jutao, but the group has the opportunity to acquire companies or technologies that complement its existing business.

We still calculated 2013 earnings per share based on the group's total share capital of 700 million shares. After the completion of the placement, the actual total issued share capital is 697 million shares. Therefore, we maintain our target price of HK $2.40 per share, which is equivalent to 15 times forward earnings and maintain a "buy".