We expect the company’s earnings to grow 28% YoY in 2024 after the estimated 32% YoY growth in 2023. Its overseas business will take over as the key growth driver with the value of new contracts signed surging 19% YoY in 2023. The expansion of the production capacity of self- developed tools and equipment will provide additional growth driver over the longer term. The recent share price weakness provides a good entry point. We reiterate our BUY call on its H share with target price increased to HK$10.20.

Key Factors for Rating

The 2024 capex of its key client CNOOC Limited (883 HK/TP: HK$16.88, BUY) is RMB125-130bn. At the mid-point of this range, it will grow 2% YoY only. Fortunately, its overseas business will see much faster growth. The value of new overseas contract signed surged 19% YoY to US$4.2bn in 2023 on top of the 3.5x YoY jump in 2022. In particular, the seven rigs serving the RMB14bn drilling contract in the Middle East will see full-year contribution for the first time.

The company is making breakthrough in overseas markets. In the past, it mainly provided drilling services. Over the past few years, the company has been able to secure contracts for oilfield technology, integration and even geophysical data collection, shipping services and equipment sales.

Its capex budget for 2024 is RMB7.4bn, down 20% YoY. The money will be mainly for two new jack-up rigs and the expansion of production capacity of self- developed tools and equipment. These tools and equipment can replace the much more expensive imports. They will be for internal use first for reducing cost and then for external sales to generate income over the longer term.

The price of its H shares dropped 20% over the past three months, partly on the pull back of oil price. We believe it just offers a good entry point for investors as the company will still post rapid growth in 2024.

Key Risks for Rating

Lower-than-expected margins.

Lack of progress of further development of overseas market.

Valuation

We raise our target price for its H shares from HK$9.78 to HK$10.20. We lower our target valuation from 1.05x P/B to 1x, with the latter being the high-end in past twelve months. We also roll over the base year from 2023 to 2024.

We also increase our target price for its A shares from RMB16.65 to RMB18.55. We still set our target price based on its 3-month A-H premium which has expanded from 82% to 98% since late October 2023.