海油工程(600583)

2017 a kitchen-sink year - prelim results down >60% YoY

E&P capex hovered at a trough cycle level in 2017 and has yet to rebound; CNOOCLimited (COOEC's largest customer) recorded RMB50bn in 2017 vs. RMB49bnin 2016, while the oil price rebounded by 18% in 2017. We cut our 2017E netprofit after accounting for: 1) FX loss of RMB350mn due to significant exposurein US$ deposits (c.US$500mn by end-2017); 2) investment loss of RMB180mn; 3)potential impairments loss. Our revised 2017E net profit is aligned to the low endof prelim results of RMB445-535mn. The demanding valuation and uncertaintiesfrom non-operating items prevent us for holding a more positive view; thus, wemaintain Hold.

50% rebound in sales in 2018

COOEC's largest customer, CNOOC Limited, a subsidiary of CNOOC Group,budgeted 2018E capex to surge by 40%-60% to RMB70-80bn. We assume 65% ofthis to be development capex, and 25% to go into COOEC, meaning RMB11-13bnof revenue for COOEC; including overseas projects, we expect COOEC's sales torebound by 50% YoY. Overseas E&P activities continue to recover, and COOEC isalso a beneficiary. For example, Fluor won the FPSO for Shell's Penguins projectin the North Sea in Jan 2018, and COOEC has been awarded fabrication subcontract works, which are worth c.RMB800mn. In addition, with stabilized oilprices and new discovery fields in offshore China, we believe there will be a newwave of development capex spending ahead beyond 2018.

Demanding valuation, maintaining Hold

We derive our target price of RMB7.1 by applying 9.0x EV/EBITDA. With thecurrent share price trading at 7.5x 2018E EV/EBITDA and 1.3x 2018E P/B(with 7.6% ROE), we believe it has priced in near-term recovery. Moreover,COOEC is trading in line with its global offshore engineering peers and with abacklog-to-revenue ratio of 1.1x in 2017E. Key risks include: 1) slower-/fasterthan-expected CNOOC capex recovery, 2) slower-/faster-than-expected overseasbusiness expansion, 3) major accidents and 4) exchange rate volatility. COSL (Buy;HK$8.57) is our preferred pick as an E&P proxy, while SEG (2386 HK, Buy; HK$7.76) is our top Chinese oil & gas capex proxy.