The 1H20 performance reached the median range of the company's guidelines
On August 25, the company announced 1H20 results: 1H20 revenue fell 19% year on year to 610 million yuan, and the net profit of the mother fell 72% year on year to 21.35 million yuan, reaching the median range of the company's forecast guidelines. After adding back the impairment of financial and contract assets of $6.14 million and exchange losses of $3.8 million, after deducting non-profits, the year-on-year decline was 55% to $31.34 million.
The decline in company revenue is mainly being dragged down by overseas markets. Domestic stability is relatively more stable, which is in line with our expectations. Domestic revenue in 1H20 fell only 7% year on year, while overseas market revenue fell 40% year on year. The decline in domestic revenue was mainly affected by the sharp decline in the company's drilling sector revenue. The company said it was mainly affected by the decline in drilling business in the Sichuan and Chongqing markets.
The company's 1H20 EBITDA profit margin fell 3.2 percentage points year over year to 23%. By sector, the profit margin of 1H20 EBITDA in the drilling sector fell 9.6 percentage points to 13% year-on-year. The biggest decline was in line with our previous expectations. The company said that this sector is an asset-intensive sector. 1H20 was pressured by upstream price cuts, and the average operating rate was affected by the epidemic, which led to a decline in the sector's profit margin. We expect that this year the drilling fluid rate may be reduced by 20% year over year, and the total drilling contract will be reduced by about 15%, which is a big drop.
As of mid-August this year, the company's on-hand orders were 2.4 billion yuan, down 5% from the previous year. Domestic market orders fell only slightly by 1% year on year, and overseas orders fell 12% year on year.
Development trends
Affected by the slowdown in investment in some blocks in the short term, the long-term boom in unconventional gas mining is still in place. The company's 1H20 operation volume declined in Sichuan and Chongqing, causing some investors to worry that domestic shale gas development would be affected by oil prices. We believe that the company's 1H20 decline in operation volume in Sichuan and Chongqing is not that oil prices are inhibiting shale gas development, but rather that the largest shale gas block in Sichuan and Chongqing, the Changning block, completed production design targets ahead of schedule this year, suspended drilling investment, and lowered the operating demand of the entire Sichuan and Chongqing market. However, other companies, such as the Sichuan Shale Gas Exploration and Development Company, are still picking up speed; the company also signed unconventional gas operation contracts totaling hundreds of millions of yuan for Guizhou shale gas and Huainan coalbed bed methane after 1H20. Therefore, we believe that the long-term boom in unconventional natural gas extraction such as shale gas is still in place.
2H20 profit margins continue to be under pressure. We expect the company's 2H20 profit margin to continue to be under pressure. On the one hand, the price reduction cycle of domestic upstream companies may continue throughout the year, and on the other hand, the company's labor costs may increase by 25 million yuan month-on-month (recruiting more than 700 people for new projects in June).
2H20 may continue to accrue impairment receivables, and cash flow is under pressure. The company's 1H20 receivables and impairment was 6.1 million yuan, and the cash outflow from operating activities increased year-on-year. We expect that the payment situation of upstream companies will not improve significantly in 2H20. We do not rule out the possibility that 2H20 companies will continue to charge impairment.
Profit forecasting and valuation
Considering that the improvement of the overseas epidemic fell short of our expectations and that the company's 2H20 profit margin may continue to be under pressure, we lowered the company's 2020/21 profit 65%/51% to 0.7/120 million yuan, and at the same time lowered the company's valuation by 6% to 7 times the 2020 price-earnings ratio. Simultaneously lowered the company's target price by 70% to HK$0.3, corresponding to 21% room for growth, and maintained outperform the industry rating. The current stock price is trading 5.7 times the 2020 price-earnings ratio.
risks
The decline in revenue and the squeezing of profit margins exceeded expectations.
