The current situation of the company

On November 24, we investigated Andong Oilfield Services in Beijing and had in-depth exchanges with management.

Comment

At the end of the year, US dollar debt repayment funds were prepared, and short-term risks were basically eliminated. On November 19, 2020, Andong Oil Service issued an announcement announcing that the company had completed all the capital committee preparation for the principal balance and interest of the bonds due in 2020, which had been deposited into the company's offshore US dollar account. The company said it used a credit line of about 350 million yuan to repay US dollar debt, while the unspent credit line still stands at 1 billion yuan. We believe that the company's short-term debt risk is basically relieved.

Domestic workload is stable, 4Q20 is expected to usher in a seasonal payback peak. The company said that since the 2Q20 domestic Party An appeared a round of centralized price reduction, the domestic work has been relatively stable so far. In addition, the 3Q20 epidemic in Xinjiang repeatedly affected Party A's staff to work, resulting in a short-term delay in payback, but did not foresee Party A's subjective delay in payment, and the company expected that 4Q20 would still usher in a seasonal payback peak.

The recovery of overseas markets is still uncertain, the company said, overseas market recovery is still uncertain, some projects affected by the epidemic delayed resumption of work.

The company will continue to focus on cash flow management in 2021, and we expect earnings and cash flow to return to 2019 levels in 2021. The company expects that 2H20 profits and cash flow will improve month-on-month, at the same time, the company will still take the current full-flow management as the main strategic target in 2021. Considering that capital expenditure of oil and gas companies upstream of the company is expected to increase in 2021, we expect the company's profits and cash flow to return to 2019 levels in 2021.

The future development may be mainly in emerging markets, less threatened by new energy, the company believes that Andong oil service's future development market is mainly in emerging markets, such as Central Asia, Africa and other places, so it is relatively less threatened by new energy, 2H20 has entered Nigeria, West Africa and other new markets.

Valuation proposal

We expect that Andong oil service fundamentals will continue to recover in 2021, and financial costs will decline significantly compared with the same period last year (mainly considering the disappearance of debt stacking), and the company's share price may be more flexible.

Keep the company's earnings forecast and target price unchanged at HK $0.60, corresponding to 0.55 times 2020 price-to-book ratio and 38% upside space, and the current share price trades at 0.4 times 2020 price-to-book ratio.

Keep the rating of the outperforming industry unchanged.

Risk.

The risk of US dollar debt in 2022, the global epidemic repeatedly affected the resumption of work and production