Performance review

2018 performance is in line with expectations

Huayou Energy's revenue in 2018 was 1.472 billion yuan, an increase of 34% over the same period last year, which is lower than our forecast of more than 50% growth. The net profit after tax was 82 million yuan, which exceeded our expectations, mainly due to the return of higher-than-expected profit margins and lower tax rates. The further improvement in free cash flow compared with the same period last year was mainly due to robust operating cash flow and lower capital expenditure. The turnover days of accounts receivable were 218 days, a decrease of 15 days compared with the same period last year. The net asset-liability ratio was 23.8%, down 5 percentage points from the same period last year. As of March 15, 2019, orders-on-hand were worth 1.815 billion yuan, up 40 per cent from a year earlier.

Trend of development

Following the high growth in 2018, the domestic market is expected to accelerate growth in 2019. Domestic revenue contributed 63% in 2018, the highest level since the company went public. Given the strong demand from domestic oil and gas producers, especially in Xinjiang and Sichuan, we expect this figure to rise further.

Daily drilling / fracturing rates are being restored. The company says contract prices for a number of domestic projects have increased in 2018, and expects industry-wide daily rates to increase by 510% in the next 12 months. This is mainly due to the tight supply of domestic services and the increased utilization of equipment.

A new round of capital expenditure expansion. In order to obtain more high-quality orders, the company is considering spending 100 to 150 million yuan on high-end equipment in the near future. Therefore, we expect the company to usher in a new round of capital expenditure expansion after several years of capital expenditure contraction.

Profit forecast

Taking into account the lower revenue growth forecast, we lowered our 2019 profit forecast by 33% to 155 million yuan, and introduced a 2020 profit forecast of 181 million yuan.

Valuation and suggestion

We cut the company's target price by 35% to HK $0.85, corresponding to 8 times 2019 price-to-earnings ratio, which is 37% upside from the current share price. The current share price corresponds to 6 times 2019 p / e. We still believe that among the private oil field service companies, China Oil Energy is the biggest beneficiary of the domestic upsurge of increasing reserves and production.

Risk.

Oil price fluctuations; foreign exchange risk; bad debts of accounts receivable; capital expenditure is lower than expected.