Events:

On August 29, the company announced its 2011 mid-term report that in the first half of the year, the company achieved operating income of 1.519 billion yuan, an increase of 13.94% over the same period last year; operating profit of 74 million yuan, down 37.09% over the same period last year; and total profit of 89 million yuan, down 39.58% over the same period last year; net profit belonging to shareholders of listed companies was 75 million yuan, down 37.59% from the same period last year; and basic earnings per share were 0.19 yuan.

Comments:

Affected by rising costs, performance continued to fall sharply by 37.59%

In the first half of the year, the company's operating income increased by 13.94% compared with the same period last year, while after the fund-raising project was put into production, fixed assets increased significantly and raw material prices were high, and the company's cost pressure was still high. as a result, the net profit belonging to shareholders of listed companies continued to fall sharply by 37.59% compared with the same period last year.

In terms of business scale, the company achieved an operating income of 1.519 billion yuan in the first half of the year, an increase of 13.94% over the same period last year. The low growth rate was mainly due to a sharp drop of 75.17% in revenue from other products, and a high base of other products in the same period last year (the fund-raising project was not put into production last year. A large number of billets and semi-finished products supporting fund-raising projects were sold to the outside world. The income from oil casing of the main products was 1.287 billion yuan, an increase of 29.13% over the same period last year, 97 million yuan for petroleum machinery parts, an increase of 68.37% over the same period last year, and the income of three pumping equipment for traditional products was 45 million yuan, down 2.63% from the same period last year.

In terms of profitability, the price of raw materials such as steel, which accounts for nearly 80% of the cost, is running at a high price, but the company cannot completely transfer the increase in raw material costs downstream, and the capacity release progress of the 180mm oil special pipe renovation project is lower than the rate of increase in fixed assets, resulting in a substantial increase in the company's fixed costs, with a comprehensive gross profit margin of 9.07%, a sharp drop of 5 percentage points compared with the same period last year. A slight increase of 0.32 percentage points over the first quarter. Among them, the gross profit margin of oil casing, three pumping equipment and petroleum machinery parts decreased by 8.93%, 3.14% and 5.08% respectively compared with the same period last year. The cost is well controlled, and the expense rate during the period is 4.61%, down 1.5 percentage points from the same period last year.

The profit in the third quarter is expected to improve, and the increase in fixed costs of fund-raising projects still needs to be digested.

The company is expected to improve its profitability from the third quarter. On the one hand, the company has raised the price of tubing products in the second quarter, which is expected to be reflected in the products sold in the third quarter and beyond. On the other hand, with the further running-in of the 180mm oil special pipe transformation project, the production capacity release progress and production efficiency will be improved in the second half of the year, and the company's comprehensive profitability is expected to improve.

After the fund-raising project is put into production, the company's significantly increased fixed costs still need to be digested. At the end of 2010, the renovation project of 180mm oil special pipe raised by the company was put into production, and the fixed assets increased rapidly from 849 million yuan to 1.649 billion yuan. It is expected that the annual depreciation expense will be about 70 million yuan (accounting for about 20% of the total profits in 2010), which will lead to a substantial increase in fixed costs. The release of 300000 tons of capacity for investment projects is a process, with production expected to reach 60 per cent this year (101400 tons in the first half of the year), 80 per cent in 2012 and full capacity in 2013. Before the production capacity of the fund-raising project has not been fully reached, the company is facing greater cost pressure.

Maintain the "overweight" rating

Considering that the company's performance in the first half of 2011 is lower than expected, and raw material prices are expected to remain high in the second half of the year, while the profitability of the 180mm project raised by the company has yet to be released, we lower our performance forecast for the company. The company's operating income from 2011 to 2013 is expected to be 3.452 billion yuan, 4.271 billion yuan and 5.098 billion yuan, respectively. The net profits belonging to shareholders of listed companies are 258 million yuan, 375 million yuan and 481 million yuan respectively, and earnings per share are 0.65 yuan, 0.94 yuan and 1.21 yuan respectively, corresponding to 24 times, 17 times and 13 times of PE respectively.

Risk hint

Lower-than-expected release of profitability of fund-raising projects; rising prices of raw materials; exchange rate fluctuations