-Recently, Antonoil published the earnings guidance for the year of 2014. Antonoil is expected to see a slight increase of revenue in 2014, but it still bears relatively big cost pressure because of the increase of manpower, depreciation and interest cost due to the human resource, equipment, and funds reserved in advance by the company for the sake of long term development. Besides, calling of accounts receivable will promote significant improvement of the operating cash flow in the second half of the year in comparison with that in the first half of the year.

-The guidance has a positive view of the industry development prospects. Antonoil believes, the domestic demand for natural gas will continue increasing, and the overseas market business will continue keeping high speed growth, so in the long run, the revenue will still hold a high-speed increase. At the same time, the net profit margin will fluctuate in a short term due to changes of the market, but in the long run, along with the increase of capacity utilization rate, the net profit margin is expected to come back to the previous normal level.

-The declining of newly added orders and orders in hand makes the operation of Antonoil face a severe test, and the duration of the negative impact of the anti-corruption campaign on the company is longer than we have expected. We expect that, in the next half year PetroChina will continue to slow down its release of land oil service orders to private oil service companies, and Antonoil needs to increase efforts to obtain oil and gas services orders from other pipelines, but overall sluggish situation of orders in 2014 has already been established.

How we view this

The company's earnings guidance of 2014 also lacks more highlights, and the market reflection is neutral. In addition, the orders of Antonoil in the second quarter are disappointing, furthermore, the negative impact of the anti-corruption campaign on the upstream capital expenditure of PetroChina still continues. In the aspect of industry competition structure, though the announcement of the Big Tiger case has eliminated some uncertainties and made the market activity increased, the oil and gas services companies are still facing the challenges brought about by the new interest structure dividing.

Investment Action

Because of reform of state-owned enterprises, internal cost control, and implementation of marketization of major oil companies, it is difficult for Antonoil to get rid of the difficulty in a short term. We cut its 12m TP to HK$2.2, giving a “Neutral” rating.

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