The company's performance is in line with our expectations
The company announced its 2019 results, with an annual income of 1.9 billion yuan, an increase of 32% over the same period last year, and a net profit of 200 million yuan, a substantial increase of 143% over the same period last year, in line with our expectations.
In 2019, the cash flow of the company's operating activities exceeded 300 million yuan, mainly due to the increase in industry capital expenditure under the domestic strategy of increasing reserves and production, the growth of the company's profits, and the accelerated payment of state-owned oil and gas companies to private enterprises as instructed.
We expect the company to have the most robust leverage of all the small oil service companies we cover, reaching a net cash level of 210 million yuan in 2019, while most other small oil service companies have a net debt-to-equity ratio of more than 50 percent. We believe that this will help the company to better deal with risks under the current situation of large macro-uncertainties.
The company explained that the decline in EBITDA profit margins in the completion sector in 2019 was mainly due to an increase in the proportion of shale gas fracturing with relatively low profit margins, and expected future profit margins to remain at current levels.
Trend of development
About 90% of the domestic business is related to natural gas, while overseas operations are mainly workover and reservoir operations, with a strong anti-risk ability of low oil prices. General investors are more concerned about the impact of the current low oil price environment on the execution of existing orders and the signing of new contracts in the future. The company pointed out at the performance conference that 90% of the company's domestic business is related to the natural gas industry, which may not be the main area for upstream oil and gas companies to cut capital expenditure. On the other hand, overseas business is mainly related to Party A's operating costs rather than capital expenditure, such as workover and reservoir services, and is less affected by oil prices. Therefore, we believe that the company has a strong comprehensive anti-risk ability in the current environment of low oil prices.
Operations are not affected by the epidemic and oil prices, and there are plenty of orders on hand. The company said that since the main domestic operating site is in Xinjiang, its operations and order execution have not been affected by the epidemic. As of March 20, 2020, the company's on-hand orders reached 1.9 billion yuan (61% for the domestic market), providing a guarantee for revenue and profits in 2020.
The exchange risk of overseas business can be controlled. Kazakhstan is the company's main overseas operations, but the current share of revenue has fallen from about 40% of the last oil price decline cycle to 18% in 2019, and the company is actively taking measures such as foreign exchange locking to reduce exchange risk. In other overseas regions, the company is mainly settled in US dollars.
Profit forecast and valuation
Taking into account the uncertainties caused by the epidemic and oil prices, we cut the company's profit by 27% to 200 million yuan in 2020, while introducing a profit of 240 million yuan in 2021. We believe that the company's short-term performance is under pressure, but its balance sheet is more robust than its peers, raising the company's valuation to 7.5 times 2020 price-to-earnings ratio and maintaining the target price of HK $1. The current share price corresponds to 2.6 times 2020 price-to-earnings ratio.
Risk.
Low oil prices lasted longer than expected and new orders were lower than expected.