COSL’s 2023 earnings surged 28% YoY to about RMB3bn and its operating profit was 5% above our forecast. Looking into 2024, the company should see even stronger growth as it will enjoy the full period contributions from the big drilling order in the Middle East. The much higher day rates of semi-subs in 2H23 is also likely to last. The progress in developing overseas market will continue to drive the growth of well services segment. We raise our 2024-25 earnings forecasts by 9-10%. We reiterate our BUY call and raise the target price of its H shares to HK$10.71.

Key Factors for Rating

The company’s net profit is 3% below our forecast. The discrepancy mainly came from the bigger-than-expected FX loss and finance cost. However, its operating profit jumped 78% YoY to RMB4.86bn, 5% above our forecast. All four segments showed improved earnings and are profitable.

The value of newly signed overseas contracts grew 20% YoY to US$4.2bn in 2023 and it got more big orders. Its overseas revenue surged 47% YoY in 2023 as all seven rigs serving the big drilling order in the Middle East started operations. This partly explained why the average day rate of jack-up rigs rose 14% HoH in 2H23. The average day rate of semi-subs gained 16% HoH in 2H23 as the company raised the price of newly signed orders amid a strong market.

For 2024, we expect its earnings to jump 43% YoY as it sees the full-year contributions from the big drilling orders in the Middle East and four of the seven rigs started operations in 2H23. Two new jack up rigs were delivered in 2H23 and two more will be delivered in 1H24. They will also show contributions. The higher day rates in 2H23 will stay, if not getting higher, in 2024. We also should no longer see modification cost related to the big drilling order.

Key Risks for Rating

Lower-than-expected margins.

Lack of further progress in development of overseas market.

Valuation

We raise our target price for its H shares from HK$10.20 to HK$10.71. We increase our target valuation from 1x 2024E P/B to 1.05x as its average 2023- 25E ROE increases from 8.7% to 9.1%.

We also increase our target price for its A shares from RMB18.55 to RMB21.76. We still set our target price based on its 3-month A-H premium which has expanded from 98% to 120% since late January 2024.

Well Services Segment Continued to See Strong Growth in 2023

The revenue of well services, the biggest segment for the company, surged 31% YoY in 2023 as the demand in domestic market was strong and more of its service lines were recognised in the international market. In which, the revenue from overseas market jumped 50% YoY to RMB4.8bn. While the segmental operating margin dropped from 17.7% in 2022 to 15.7% in 2023, the segmental operating profit still grew 16% YoY.

Changes in Earnings Forecasts

We increase our 2024-25 earnings forecasts by 9-10% mainly to reflect the higher- than-expected earnings at the well services and geophysical segments. For the latter, the utilisation of its fleet improved as the segmental revenue grew 18% YoY mainly on the 5x YoY jump in overseas revenue. We believe the geophysical segment will continue to see strong growth in overseas market.