China Oil & Gas
Oil Equipment & Services –
2013 Another Strong Year
Our checks with companies provided aggressive
2013 earnings growth targets of 20-50% driven by
strong revenue growth. More outsourcing work by
domestic SOEs will boost revenue growth, but we
see margin risks in the international market from
increased competition. Prefer Equipment over Oil
Services.
Robust onshore demand outlook: Continuous order
flows are the key to driving earnings growth for the
industry. This is supported by: i) increased complexity in
geology, which has allowed more outsourcing work to
private companies outside domestic SOE subsidiaries;
ii) a sustained high oil price environment, which has
re-ignited the E&Ps’ interest in onshore investments.
We expect Honghua to post the strongest earnings
growth of 65% YoY in 2013 – ahead of Hilong’s 19%
and SPT’s 25%. We see Honghua achieving above-peer
earnings growth, without the need of margin expansion.
Oil services – potential margin risks: We see
increased competition for oil services contracts in the
international market. Our global team expects margins
to come under pressure in 2013. China’s market is also
seeing rising competition from global players entering
the market via JVs. In our view, this poses margin risk to
Chinese oil services companies as they may need to
sacrifice margins to achieve high growth. We therefore
see better earnings visibility in equipment manufacturer
Honghua over oil services play SPT.
Honghua still attractive on valuation: The industry
outperformed strongly in 2012, by 170-380% vs. the HSI,
supported by above-average earnings growth. We
expect the strong earnings momentum into 2013 will
continue to drive industry outperformance. At current
levels, Honghua’s valuation remains the most attractive
at 10x 2013e PER vs. peers’ average of 15x. We see
Honghua’s share price as undervaluing its growth