Orient Group (600811 CH, NR) announced last week that it was not able to withdraw deposits from Orient Finance, a sister company of Orient Group, as Orient Finance is facing financial difficulties. As at 17 Jun 2024, Orient Group's total deposit amount in Orient Finance was RMB1.64bn while the total borrowing was RMB666mn (net deposit: RMB974mn). ZHANG Hong Wei, the major shareholder of the Orient Group, Orient Finance as well as United Energy (UEG), agreed to improve the financial condition of Orient Finance, through the disposal of UEG's shares over the coming 3-6 months. In addition, ZHANG agreed to utilise the cash from his pledged UEG's shares to support Orient Finance. ZHANG has pledged ~1.86bn shares of UEG for ~RMB2.35bn of borrowings.

Given that the financial situation of Orient Finance is unknown at this stage, we believe such arrangement suggests substantial uncertainties and creates an overhang on the stock price of UEG, at least over the coming 3-6 months. While our earnings forecast remains unchanged, we revise down our TP to HK$0.3, benchmarking to the current price and implying 2.5x 2024E P/E (Our Brent price assumption in 2024E is US$87 per barrel). Downgrade to HOLD from Buy. We will be more constructive on UEG when the incident at the controlling shareholder level has a positive development.

Upside risks: 1) An improvement of financial condition of Orient Finance; 2) potential disposal of shares to strategic investors; 3) potential sizeable share buyback.

Downside risks: 1) High volatility of share price due to potential share sales; 2) low visibility on trading business; 3) decline in crude & gas price; 4) further impairment loss; 5) rising receivables.