Hit by weather related disruptions and FX loss, COSL’s 3Q24 earnings dropped 9% YoY and 11% QoQ to RMB852m, 9% below our forecast. We expect its earnings to grow 18% QoQ in 4Q24 assuming no more such impact. The company is confident that it can find new jobs for all suspended jack-ups by the end of the year. More importantly, we expect its earnings growth to accelerate next year as the company starts to execute a few high-value drilling contracts. We adjust our 2024/25/26 earnings forecasts by -3%/11%/2% after post-results adjustments. We reiterate our BUY calls with target price slightly lowered to HK$9.55 for its H shares.

Key Factors for Rating

In 3Q24, the operating days of COSL’s semi-subs dropped 25% YoY to 648 days mainly owing to disruptions caused by typhoons. Ten of its semi-subs were suspended for more than 100 days in total due to severe sea conditions. In addition, the company also booked a roughly RMB200m FX loss owing to the appreciation of RMB against US$. Its underlying earnings were actually stronger.

We expect its earnings to grow 18% QoQ in 4Q24 assuming no more such one- off impact. While 4Q is not the peak season for drilling, the dominance of well services makes the earnings impact of this seasonality less obvious in recent years.

For the four jack-ups previously suspended by a Middle East client, one of them has resumed work in offshore China and another one has secured new job in SE Asia for next year. The remaining two are likely to win new contracts before the end of the year.

We expect its growth to accelerate to 43% YoY next year as at least three semi- subs will be working on new contracts in the North Sea with day rates exceeding US$300k. NH8 will also work in Brazil on new contract with day rate at US$220k. All these will boost the average day rates of its semi-subs.

Key Risks for Rating

Slower-than-expected growth.

Lack of further progress in developing overseas markets.

Valuation

We lower our target price for its H shares from HK$9.62 to HK$9.55 to reflect the cut in our 2024 earnings forecast. Our target valuation remains at 0.95x 2024E P/B.

We also reduce our target price for its A shares from RMB18.52 to RMB17.78. We still set our target price based on its 3-month average A-H premium which has narrowed from 140% to 132% since late August.