Two Asian analysts share their top picks within China’s property and oilfield services sectors.
Fubon Securities (Hong Kong) Limited
1) Honghua Group (HK 196)
As China’s leading private onshore drilling rig maker with a robust demand for land drilling rigs, Honghua Group appears to have a sustainable advantage within China’s burgeoning shale gas exploration and extraction market. After its IPO in 2007, Honghua managed to use its capital to develop offshore drilling equipment business which comprises drilling rig and land drilling equipment manufacturing; ocean drilling rigs & equipment manufacturing; and oil & gas engineering services.
Honghua sells drilling rigs mostly to China’s private oilfield services companies which are currently experiencing significant replacement demand, and manufacturing of offshore devices will be Honghua’s further earnings driver. Through consistent technology innovation, aggressive sales strategies, Honghua has also become China’s largest drilling rig exporter. Having gradually expanded into North America, and the Middle East, Honghua is also making significant inroads into Russia one of the major markets for future drilling rig replacement demand with a drilling rig inventory of around 1,000. Honghua has also establishes own brand in Venezuela. Honghua ROE is around 15%, and while EPS growth has been poor, it is expected to growth from $0.26 in 2013 to $0.31 in 2015. Honghua is currently at around a 50% discount to Shen’s target price of HK$3.10, equivalent to 9x FY14F PE or 11% to DCF of HK$3.46. “With a potential upside of 14%, we rate the stock ADD.”
2) Anton Oilfield (HK 3337)
Founded in 1999, and headquartered in Beijing, Anton Oilfield (Antonoil) is comprised of four principal business divisions: Drilling Services; Completions; Downhole intervention; Downhole Tools and OCTG. Through patented technologies and proprietary products of downhole tools, chemical materials and service equipment combined with job design, the company operates as a one-stop service centre for oil and gas Upstream Industry.
In the past ten years Antonoil has rapidly expanded its technical expertise and global reach well beyond China to include overseas offices and operations in the Middle East and Middle and Central Asia with rapid response service stations located in major oil production areas. Antonoil currently owns 63 Ownership Patents, with another 176 patent applications pending, keeping it at the forefront of oilfield services (OFS) technology globally.
While Shen expects state-owned oil enterprises to dominate the early stage of China’s shale gas E&P, Antonoil is his top pick of private OFS providers poised to follow due to A) the company’s extensive foothold in most of China’s oil and gas reservoirs, B) clear lead in horizontal drilling and multi-stage hydraulic fracturing, C) increasingly close partnership with Schlumberger and D) its predominance in technological breakthroughs.
“We like Anton, which has established a stronghold in drilling technologies highly geared toward tight gas extraction, and expect it to deliver compound annual growth of 28% in FY13-15,” says Shen. “We value Anton at 19x FY14F EPS and rate this stock as an Add with a target price of HK$5.70 and 19.0% upside potential.
Orient Securities (Hong Kong) Ltd
1) China Overseas Land & Investment (HK 688)
China Overseas Land & Investment (COLI) investment holding company is the biggest developer listed on Hong Kong exchange; the company is engaged in property development and investment, real estate agency and management, and treasury operations.
COLI company operates in three segments: property development, which includes proceeds from sale of properties; property investment, which includes property rentals, and other operations, which includes revenue from real estate agency and management services, construction and building design consultancy services. Its property development, property investment and other activities are carried out in Hong Kong, Macau and other regions in China. It has land in 16 mainland cities in China plus two parcels of land in Hong Kong.
Based on presales growth outlook and company-specific catalysts, COLI is Gong’s top pick within the delicately poised China property market. As of November, COLI achieved Rmb105bn presales, 10% higher than its Rmb95bn full year target and has consistently outperformed peers, due to its strong management team. It also has one of the best balance sheets in the sector with declining net-debt to equity (15%), which Gong says supports further expansion and provide a safe shield for tightening liquidity.
“Apart from solid presales growth and active land banking, we believe the asset injection plan is another reason to support its share price,” says Gong. “Based on our understanding of its operation nature, we believe the first asset injection is very likely to happen in 2014, and reiterate Buy with target price of HK$27.3.”
2) Country Garden Holdings Company Limited (HK 2007)
Country Garden Holdings Company Limited is an investment holding company engaged in the property development, construction, fitting and decoration, property management and hotel operations. Its products include large-scale residential projects, such as townhouses, apartment buildings, as well as car-parks and retail shops. It develops and manages hotels within some of its projects to enhance potential for property value appreciation, and also develops hotels independent of property developments.
As at 31 December 2011 it operated five five-star hotels, 21 five-star standard hotels, plus one four-star hotel, with a total of 8,352 guest rooms. Its subsidiaries included Zengcheng Country Garden Property Development Co Ltd, Guangzhou Huadou Country Garden Property Development Co, Ltd and others. While developers achieved 40% year on year presales growth on average in 2013, Country Garden topped the list at 131%.
As a big developer, Gong says Country Garden is on the way to becoming an industry leader, and he maintains a Buy rating on the company. Country garden has delivered excellent EPS growth over the last five years, and has averaged 28.15% ROE since 2004. The stock currently trades at around a 30% discount to his target price of HK$6.30. “We expect its share price performance to outperform continuously in 2014.”
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