1Q24 results are in line with our expectations

The company announced 1Q24 results: operating income of 5.67 billion yuan, -11% year over year; net profit to mother of 475 million yuan, +6% year over year; 1Q24 results are basically in line with our expectations. 1Q24's gross margin was 9.9%, -1.7ppt year over year, net margin was 8.5%, +1.4ppt year over year.

Cash flow from 1Q24 operating activities changed from negative to $2.56 billion year-on-year. The main reason was that the company's lean cash flow management continued to be effective, and 1Q24 completed project receipts and advance payments for new projects increased dramatically. 1Q24 R&D expenses were 14 million yuan, a sharp decrease of 94% over the previous year, mainly due to 1) the slowdown in R&D approval; 2) the reclassification of cost categories. The construction business of 1Q24 completed 136,000 structural tons of steel processing, +13% compared to the same period; it invested 0.48,000 ships and days in offshore operations such as installation, -23% over the same period, mainly due to differences in workload distribution.

Development trends

The revenue structure has been optimized, and the net interest rate has increased year by year. The company's net margin for 1Q24 was 8.5%, +1.4ppt year over year. Looking back, we believe there is still room to improve the company's net profit margin in the future. By: 1) optimizing order quality and selecting high-quality international orders; 2) increasing the number of turnkey projects: almost all new overseas orders signed in 2023 are EPC turnkey contracts and are expected to be maintained in 2024.

The operating rate remains high. We judge that the company's 1Q24 site construction operating rate is about 90%, and it is basically at full capacity. Looking ahead, we believe that the company's 2024 order volume is sufficient, and the site construction commencement is expected to continue to remain high at 80%-90%. If long-term demand continues to rise, we expect to increase total revenue through site expansion or increased outsourcing.

Increase dividends and actively give back to shareholders. The company's 2023 dividend payout rate increased by 10ppt to 40% year over year, and the three-year (2024-2026) shareholder reward plan promises that profits distributed in cash every year (including cash dividends already distributed in the interim) will be no less than 30% of the parent company's shareholders' net profit in the consolidated statements achieved in that year. We expect the future dividend payment ratio to gradually increase from 2023.

Furthermore, we judge that 1) the company, as a subsidiary of CNOOC Group, is likely to follow policy guidelines in the future (on January 24, the State Council will further study the inclusion of market value management in the performance assessment of central enterprise leaders), pay more attention to its own asset quality and return on assets, and steadily increase profits; 2) the company's free cash flow may continue to improve, further increasing the amount and ratio of cash dividends.

Profit forecasting and valuation

Considering the rising costs brought about by high oil prices, we lowered our 2024/25 profit forecast by 11/10% to 21/25 billion yuan, respectively. The current stock price corresponds to 13.3/11.5 times the 2024/25 price-earnings ratio. Considering that the increase in the dividend ratio boosted the valuation, we kept the target price of 6.5 yuan unchanged, corresponding to 13.5/11.7 times the 2024/25 price-earnings ratio, with 2% upside compared to the current stock price. Maintaining a “outperforming the industry” rating.

risks

International oil prices fluctuated sharply; revenue growth fell short of expectations.