1H22 results in line with our expectations

CNOOC Energy Technology & Services (CETS) announced its 1H22 results: Revenue grew 30% YoY to Rmb20.3bn, and attributable net profit rose 47% YoY to Rmb1bn (Rmb0.10/sh), in line with our expectations.

In 2Q22, revenue grew 34% YoY or 47% QoQ to Rmb12.1bn, attributable net profit rose 52% YoY or 144% QoQ to Rmb734mn, and gross margin (GM) fell 1.5ppt YoY or rose 0.8ppt QoQ to 11.6%.

In 1H22, GM dropped 0.6ppt YoY or 2.8ppt QoQ to 11.3%. Operating cash flow grew 475% YoY or fell 44% QoQ to Rmb1.5bn as the firm strengthened management of its accounts receivable, which resulted in the collection of accounts receivable at end-2021 and YoY increase in 1H accounts receivable collection in 1H22.

Trends to watch

Low-cost advantage emerging thanks to ongoing cost-cutting and efficiency improvement efforts. The firm has been building its strategic cost management system since 2021 to optimize its cost control mechanism, and it has made initial progress. In 1H22, revenue increased significantly YoY, selling expenses dropped 2.9% YoY or 23.1% HoH, and G&A expenses grew 7.7% YoY or fell 30.2% HoH. In 2Q22, GM rose 0.8ppt QoQ to 11.6%. We believe the firm will still prioritize costs and fully leverages its lower costs. Its GM may increase in 2H22-2023, with profitability improved.

Offshore oil and gas engineering industry is entering an upward cycle driven by high international oil prices and the need to improve domestic energy security. We believe that the combination of high international oil prices and the implementation of domestic policies to increase reserves and production while ensuring energy security may unlock the growth potential of the offshore oil and gas engineering industry. The firm signed a framework agreement on an LNG carrier project (Phase II) in 2Q22, and the value of the LNG industry continues to rise. We expect oil prices to remain high in 2H22 (CICC bulk commodity team forecasts oil prices at US$100-110/bbl in 2H22). Thanks to parent company CNOOC's high capex (CNOOC guides Rmb90-100bn in capex for 2022) and its 7-year action plan for increasing reserves and production, we think the firm's workload will likely continue to grow, supporting revenue to reach new highs.

Green, low-carbon, and digital transformation are accelerating; new businesses are the major contributors to earnings growth. In 1H22, revenue from the low-carbon environmental-friendly and digitalization segment grew 15% YoY to Rmb3.3bn, and its operating profit rose 62% YoY to Rmb164mn. Given China’s goal of reaching peak carbon emissions and achieving carbon neutrality, we believe the firm will adhere to green and low-carbon development and accelerate its green and low-carbon energy and digital transformation. This segment’s earnings will likely grow further, bolstering the firm’s high-quality development.

Financials and valuation

We maintain our earnings forecasts and TP of Rmb3.45 (16x 2022e and 14x 2023e P/E), offering 28% upside. Maintain OUTPERFORM. The stock is trading at 12x 2022e and 11x 2023e P/E.

Risks

GM under pressure; overseas business risks.