The current situation of the company
On the evening of July 22, Andong Oilfield Services released 2Q20 operation and 3Q20 outlook and held an analyst conference call on July 23. 2Q20's newly signed orders totaled 820 million yuan, a year-on-year drop of 30%, including 42% in China, 25% in Iraq and 92% in other overseas markets. As of 2Q20, the company's on-hand orders fell 10% year-on-year to 4.8 billion yuan.
We believe that the decline in newly signed orders in China has further increased, which is lower than we expected. The company said that it was mainly due to the decline in domestic shale gas drilling demand and the beginning of price cuts by homeowners. Iraq's new orders increased significantly, mainly due to last year's low base, while other overseas markets fell the most, in line with our expectations.
We estimate that the company's 2Q20 revenue fell 22% year-on-year to 780 million yuan, an increase of 18% month-on-month.
Among them, 2Q20 revenue in the Chinese market decreased by 13% compared with the same period last year, but increased by 41% month-on-month. We believe that the month-on-month increase is mainly affected by the rebound in operations after the epidemic, while the decline in year-on-year is also affected by the postponement of some shale gas drilling contracts and price cuts by owners. 2Q20 revenue in Iraq and overseas markets decreased by 25% and 43% respectively compared with the same period last year. We believe that the overseas epidemic has mainly affected the relocation of personnel and the development of business activities.
Comment
2Q20's monthly cash flow is positive, but 1H20 is still negative. The company said that thanks to the acceleration of owner payments, 2Q20's monthly free cash flow is positive, but 1H20 overall free cash flow is still negative. Looking ahead to 2H20, the company expects Iraq to relax entry restrictions by the end of July, business in Iraq is expected to advance, and 2H20 is still striving to achieve positive free cash flow.
Multi-channel preparation of bond repayment funds. The company still has $193 million of bonds maturing at the end of this year, and the company says it has made preparations in advance from various channels such as paper funds, bank unused credit, and transit fund programs, and is confident of repaying the bonds by the end of the year.
Considering the operating pressure throughout the year, the company cut its revenue and profit guidance. Considering that domestic oil and gas producers have reduced contract prices, we believe that 2H20's operating data and financial performance may still be under some pressure. At the same time, we do not rule out the potential risks that repeated overseas outbreaks bring to the company's overseas operations. The company lowered its 2020 revenue guidance to flat year-on-year growth from 30% at the start of the year, while guiding a year-on-year decline in net profit.
Valuation proposal
Considering that the newly signed orders in China are less than we expected, and the business environment of 2H20 is still facing certain challenges, we reduce the company's 21-year net profit from 72% to 0.26 billion yuan. At the same time, considering that the company's recent earnings may be highly volatile, we switch the company's valuation to the price-to-book ratio, giving the company 0.55 times 2020 market-to-book ratio, lowering the target price by 40% to HK $0.60, corresponding to 30% upside space. Keep the rating of the outperforming industry unchanged. The company's current share price trades at 0.4 times 2020 market-to-market ratio.
Risk
Oil prices fluctuated sharply, and newly signed orders and orders were not carried out as expected.