Report summary:

A leading oil and gas equipment company, the traditional business has achieved rapid growth. The company is Sinopec's only oil and gas equipment R&D, manufacturing and professional technical service center. Its main business covers the three major fields of petroleum engineering, oil and gas development, and oil and gas collection and transportation. It has developed collaboratively in multiple industries and has good performance. By business, revenue from the petrochemical machinery and equipment, oil and gas steel pipes, drill bits and drilling tools business increased from 1,675/1,122/ 615 billion yuan in 2017 to 35.59/ 25.44/911 billion yuan in 2022, all showing an increasing trend.

State-owned enterprise reform is progressing gradually, and financial indicators have gained new vitality. In the context of the “Double Hundred Action” of state-owned enterprise reform, petrochemical machinery has continuously adjusted the direction of reform and optimized reform measures, and is beginning to show results. In 2017-2022, the company's revenue increased from $3994 billion to $7.752 billion, and net profit from net income increased from $109 million to $52 million, with an average compound annual growth rate of 14.18%/33.96%; fee rates declined year by year, net interest rate increased from 0.87% to 1.57%; the number of employees was streamlined, and the average compound annual growth rate of profit per capita reached 32.73%; various financial indicators met the “one increase, one steady four increases” requirements.

The oil and gas industry is picking up, and traditional businesses have ushered in new growth. The international crude oil market is recovering, and three barrels of domestic oil have created a stable, moderate and upward capital expenditure environment. As a leading oil service enterprise, the company is expected to fully benefit from its traditional business. The amount of resources that can be extracted from shale oil and gas in China is large, but shale gas production in 2022 is 24 billion cubic meters, which falls short of the planned target. In the future, in response to the national shale gas development policy, shale oil and gas extraction efforts are expected to increase, and the company's drilling equipment market space is expected to grow to 36.9 billion yuan in 2025. The market space for fracturing equipment is vast. The company's fracturing equipment has now achieved localized production and self-supply of key components. Accelerating progress in fracturing equipment fundraising projects is expected to further increase the company's market share.

Seize the new trend of development and rely on Sinopec to lay out the hydrogen energy sector. In 2022, various provinces introduced policies to speed up the planning of hydrogen refueling stations. It is estimated that the planned construction of more than 1,000 hydrogen fueling stations in 2025 is expected, and there is huge room for future development. Sinopec, the majority shareholder of the company, is actively developing hydrogen production and hydrogen refueling station projects. It expects to build 502-902 hydrogen refueling stations by 2025, with a potential equipment market space of 7.73-13.89 billion yuan. The company relies on Sinopec to provide complete equipment solutions for hydrogen refueling stations. It is estimated that the potential market space for hydrogen compressors is 193-4.44 billion yuan.

Profit forecast: The company is a leading oil service equipment enterprise. As capital expenditure for three barrels of oil increases and shale oil and gas extraction continues to accelerate, the company's traditional petroleum machinery, oil and gas steel pipes, drills and drilling tools business is expected to fully benefit. In terms of hydrogen energy business, the company relies on Sinopec and actively lays out the hydrogen energy industry chain, compounded by Sinopec's active layout of hydrogen refueling stations and hydrogen pipeline construction, so the hydrogen energy business is expected to become a new growth point for the company's performance. It is estimated that the company's operating income for 2023-2025 will be 8585/94.92/10.505 billion yuan, respectively, and net profit from the return mother in 2023-2025 will be 123/181/223 million yuan respectively, and the corresponding PE will be 54/37/30 times respectively. 2024E was given a profit of 45 times the PE valuation, and the corresponding target price was 8.52 yuan. It was covered for the first time and given a “buy” rating.

Risk Warning: State-owned enterprise reform results fall short of expectations, profit forecasts and valuation judgments fall short of expectations