The company’s net profit slipped 4% YoY to RMB856m in 1Q26, mainly on mark-to-market FX loss arising from intra-group FX exposure. Its operating profit actually grew about 20% YoY excluding FX loss. We expect much higher earnings in subsequent quarters as 1Q is usually a low season for the company. We trim our 2026-28 earnings forecast by 3-6% after post-results adjustments. We reiterate our BUY calls with target price of its H shares lifted slightly to HK$10.75.

Key Factors for Rating

In 1Q26, the company’s turnover grew 5% YoY. Its gross profit grew 8% YoY as gross margin improved from 17.6% in 1Q25 to 18.2% in 1Q26. However, net finance expense jumped 1.5x YoY to RMB427m as the company recorded an RMB303m mark-to-market FX loss on intra-group FX exposure. RMB appreciated 1.4% against US$ and 3% against EUR throughout 1Q26.

Excluding the FX loss, the company’s operating profit actually grew about 20% YoY. The growth mainly came from the drilling and well services segments.

Partly owing to maintenance, the total operating days of its drilling rigs dropped 2.5% YoY in 1Q26. In which, the operating days of jack-ups dropped 5% YoY. That of its semi-subs increased 6.5% YoY mainly on the contribution from NH8 which started operations in Brazil in mid-2025.

We expect the company to see stronger earnings in subsequent quarters as 1Q is usually a low season in a year. 2Q and 3Q are normally the peak seasons.

We trim our 2026-28 earnings forecasts after slightly lowering our assumptions on the operating days of its drilling rigs and factor in higher depreciation charge. We also assume an FX loss of RMB123m for 2026. Despite the cuts, we still expect 16% YoY EPS growth in 2026.

Key Risks for Rating

Significant negative impact from the war in the Middle East.

Lack of progress in developing overseas market.

Valuation

We raise our target price for its H shares slight from HK$10.70 to HK$10.75. While we trim our earnings forecast and maintain our target valuation at 0.9x 2026E P/B, the recent appreciation of RMB against HK$ lift the target price in HK$ terms.

We lower our target price for its A shares from RMB19.41 to RMB18.64. We still base our target price on the company’s 3-month average A-H premium which has narrowed from 106% to 99% since late March.