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Shandong Molong Petroleum Machinery Company Limited (568.HK) - Low oil price has relatively less impact to the industry

Friday, February 27, 2009

6699

Shandong Molong Petroleum Machinery Company Limited(568)

Recommendation on 27 February 2009
Recommendation	Buy
Price on Recommendation Date	$0.530
Target Price	$0.630

Weekly Special - 3606 Fuyao Glass

Summary

The company released its annual result for FY2008. Its revenue reached RMB2.76 billion, rising 62.2% year-on-year. Over the same period, the profit attributable to shareholders achieved RMB319.4 million, increasing 52.7% year-on-year. The basic earning per share is RMB0.093 and the proposed final dividend is RMB0.02 per share, implying a dividend yield of about 3.8%.

Operations review

In the financial year of 2008, the company recorded total revenue of RMB2.76 billion, from both China and overseas market. The revenue rose 62.2% year-on-year. Although the international oil prices slumped in the second half of 2008, the company is less affected. Profit attributable to the shareholder increased 52.7% to RMB305.8 million.

Of the revenue, the casing segment showed a substantial growth. The casing segment now accounted for more than 52% of the total revenue and it increased 103% to RMB1.46 billion when compared with the result in FY2007.

Other products except oil well sucker rods had a remarkable growth in 2008. The decrease in sales of oil well sucker rods was mainly due to the sharp increase of raw material prices which made the company unable to reach an agreement with overseas customers.

Customer base

In China, the major customers of Shandong Molong are PetroChina, Sinopec, CNOOC Limited and Yanchang Petroleum. According to the management, the contract amount from PetroChina increased in 2009 when compared with 2008. PetroChina and Sinopec are the main customers of the company. The sales to these two big oil companies accounted for more than 39% of the company's revenue. The contracts remain stable in China.

For the overseas market, its major customers are from USA and Europe, accounting for more than 34% of total revenue. Due to the financial turmoil in developed regions, the company planned to expand its business to less affected regions like Africa, Middle East and South America.

Peers comparison

Risk factors

- Decline in oil price further which prevents oil companies from investing more

- Economic slowdown in China which lowers the oil demand growth

- Delay in any major projects of oil companies

- Government policy

Valuation

Although the world economy is in downturn, China is still expected to maintain a stable and rapid economic growth. It is estimated that the oil demand will increase in 2009 in China, thus the demand for oil machinery and equipment will still remain strong, as China is still a net oil importer and it needs a larger capex amount to maintain its production amount. Since some of the business contracts of Shandong Molong are arranged till October 2009, its revenue is guaranteed.

Therefore, we set our estimated 2009 P/E to be 5x. We would rate Shandong Molong as “Buy”. The 2009 target price is HK$0.63.

Company Description

Shandong Molong Petroleum Machinery Company Limited is a listed company specializing in design, research and development, processing and manufacturing, sales in China and export of petroleum machinery, with leading products comprising tubing, casing, special seamless tube, sucker rod, sub-surface sucker rod pump, pump unit, fluid injection pump and various down hole tools.

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