The higher-than-expected 2025 capex and the lack of new overseas contracts for two previously suspended rigs may be slightly disappointing. Despite this, we expect COSL to see 42% YoY earnings growth in 2025. Its drilling segment should see increase in both operating days and average day rate. It has successfully developed overseas markets for some business lines of its well services segment. Despite trimming our 2024-26 earnings forecasts by 2%, we reiterate our BUY call and raise our target price for its H shares to HK$10.19.

Key Factors for Rating

According to its strategy preview, COSL proposed a capex budget of RMB7.2bn for 2025, just slightly lower than RMB7.4bn for 2024. This is higher-than- expected as it should no longer see spending on new rigs and rig modification in 2025. However, the company will have to keep investing in R&D, building new ships running on cleaner fuel and building production bases. The company hinted that its annual capex is likely to stay above RMB5bn over the medium term as some of its old rigs and equipment would need replacement. This is likely to disappoint those investors hoping for increasing dividend payout.

Two remaining jack-ups which suspended by a Middle East client last year will return to offshore China as they did not manage to secure new overseas contracts. This will have negative implication on average day rate.

Despite all these, we still expect COSL to see 42% YoY growth in 2025. The operating profit of its drilling segment should triple on 5% YoY increase in operating days and 14% YoY surge in average day rate of its rigs. We assume less disruption of rigs suspension and typhoons. The commencement of high rate contracts in Norway and Brazil for five of its semi-subs lifts overall day rate.

We expect its operating profit of its well services segment to grow 9% YoY in 2025 on further growth in sales. The company has been making progress in developing overseas markets with overseas revenue of this segment surging from RMB2.1bn in 2021 to RMB4.8bn in 2023.

Key Risks for Rating

Slower-than-expected growth.

Slower-than-expected progress in developing overseas markets.

Valuation

We raise our target price for its H shares from HK$9.55 to HK$10.19 as we roll over our target valuation 0.95x 2024E P/B to 0.95x 2025E P/B.

We also increase our target price for its A shares from RMB17.78 to RMB20.14 as the company’s A-H premium has expanded since late October.