2018H1's homing net profit increased sharply by 492% compared with the same period last year. In the first half of 2018, the company achieved operating income of 2.148 billion yuan, + 1747% compared with the same period last year, and net profit of 241 million yuan, + 492% compared with the same period last year. The substantial increase in the company's performance is mainly due to a sharp increase in international oil prices in the first half of the year, and a sharp increase in oil and gas production in the company's US oilfields compared with the same period last year.

Oil and gas production in the first half of the year was 6.53 million barrels of oil equivalent, a sharp increase of 63 per cent over the same period last year. From 2015 to 2017, the company completed the acquisition of two oilfield assets in the Permian Basin of the United States, totaling 500 million barrels of 2P reserves. 2018H1, due to a year-on-year increase of 141 production wells in Howard and Borden oilfields, the company's oil and gas production has increased rapidly compared with the same period last year, with a total oil and gas production of 6.53 million barrels of oil equivalent, + 63 per cent year-on-year. Of this total, oil output was 5.66 million barrels, + 58.24% year-on-year, and natural gas production was 872200 barrels of oil equivalent, + 106.52% year-on-year. If calculated according to the output in the first half of the year, for every US $1 / barrel increase in oil prices, the company's annual EPS will increase by 0.01yuan.

The supply and demand of the international crude oil market improved in the first half of the year, and geopolitics pushed up oil prices. 2018H1, global crude oil supply and demand continued to improve, OECD inventory fell to the five-year average level. On this basis, international crude oil prices rose sharply under the influence of the resumption of US sanctions against Iran and the decline in Venezuelan crude oil production. In the first half of the year, the average spot price of WTI was 65 US dollars per barrel, up 16 US dollars per barrel from the same period last year (+ 32 per cent).

Hedging business affects the performance of the company. According to the bank loan requirements, the amount of hedging of the company during the loan period shall not be less than 50 per cent of the proven crude oil reserves in production (PDP). In the first half of the year, the company added 4.85 million barrels of hedging and delivered 3.37 million barrels due, resulting in realized hedging gains and losses of-34.78 million US dollars (deducting operating income) and unrealized hedging gains and losses of-20.59 million US dollars (including fair value change gains and losses). As of June 30, 2018, the company has 8.09 million barrels of hedging business.

Asset impairment and financial expenses are a drag on performance. In the first half of the year, the company set aside 194 million yuan for asset impairment. Among them, the impairment provision of 100 million yuan is provided for the 600 million yuan investment of Heshengyuan Company, 40 million yuan for the 200 million investment of East Asia trust products, and 51 million yuan for the 170 million yuan investment of Changsha Zexi. In addition, the company's financial expenses in the first half of the year totaled 250 million yuan, an increase of 240 million yuan over the same period last year, mainly due to the increase in penalty interest (US $20.9117 million) and one-time amortization of bond issuance expenses (US $15.9544 million) arising from the repayment of previous loans by American Sun Company.

Profit forecast and investment rating. We estimate that the return net profit of the company from 2018 to 2020 is 490 million yuan, 650 million yuan and 830 million yuan respectively, the EPS is 0.07,0.10,0.12 yuan respectively, and the BPS is 2.07yuan in 2018. With reference to the valuation level of comparable companies, and combining the two valuation methods of PE and PB, we give the reasonable value range of trendy energy to 2.45-3.11 yuan, corresponding to 35-44 times PE,1.2-1.5 times PB in 2018, with a rating of "better than the market".

Risk hint: crude oil prices fluctuate sharply, and the company's oil and gas production growth is not as expected.