Report summary

Demand for oil drilling equipment has increased. Driven by the recovery in international oil prices, the desire of oil producers to explore and drill oil fields has gradually picked up. As of April 22, the number of active exploration wells in the US had risen to 1,800, which is about the average of the peak crude oil exploration period in 2007-2008; the total planned capital expenditure of China's three major oil groups in 2011 also reached 505.5 billion yuan, an increase of 17.7% year-on-year, which is comparable to the compound annual increase of 19.9% from 2002 to 2008. Shandong Molong's management also said that the group's product production plan has been scheduled until August of this year, reflecting the ideal market demand situation.

One of the leading suppliers of oil bushings in China. Compared with other major competitors in China, Shandong Molong has advantages such as 1) focusing on the production of oil casings; 2) the only manufacturer of a complete set of drilling equipment; 3) a small number of oil bushing suppliers with self-operated brick steel facilities; and 4) excellent research and development capabilities, making Shandong Molong one of the few enterprises that have obtained oil bushing supplier qualifications for the three major petroleum groups. We acknowledge that the three major oil groups will continue to maintain a limited number of designated oil casing suppliers in the future, so that existing qualified suppliers can fully benefit from the future increase in capital expenditure of the three major oil groups.

The commissioning of the transformation project has led to a significant increase in production capacity. The “180mm Petroleum Special Pipe Renovation Project”, which the group began construction in 2008, was put into operation at the end of 2010. The project increased Shandong Molong's oil bushing production capacity from 350,000 kilos in 2010 to 650,000 tons in 2013, with a compound annual increase of 22.9% over the period. In 2009 and 2010, the capacity utilization rate of Shandong Molong's oil casings exceeded 95%. The timely commissioning of the transformation project solved the problem of production capacity bottlenecks.

valuations

Currently, Shandong Molong's price-earnings ratio in 2011 is only 8.0 times, far lower than 17.4 times that of international peers such as Tenaris and Vallourec. There is also a compromise of over 20% compared to the group's median valuation over the past 5 years. As the economy in the oil drilling industry in China and even around the world has recovered optimism, we have given Shandong Molong a reasonable price-earnings ratio of 12 times, which is comparable to its average over the past 5 years. Based on the estimated profit of RMB 1.03 per share in 2011, the corresponding reasonable stock price should be HK$14.0. There is room for an increase of 43.6%, so it is the first purchase rating.