汇丰银行-中国-石油服务与设备行业-中国工业：6个具有强劲增长机会的行业领导者-2019.11-87页.pdf

Disclosures&Disclaimer:This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it.Equity Research ReportDateAsset|SubcategoryTitle of reportIndustrialsNovember 2019By:Bonan Li(S1700518070001)China Industrials Initiate coverage:Six industry leaders with strong growth opportunitiesWe identify pockets of strong growth in the industrials sectorWe look at four sub-sectors that share common themes:rising demand,policy support and consistent R&D investmentWe initiate coverage of six stocks.Prefer Jereh Oilfield Services and Sinopec Oilfield Equipment 1 Equities Industrials November 2019 Why read this report?We highlight pockets of strong growth in the industrials sector The focus is on four sub-sectors with common themes:rising demand,policy support,and R&D investment We initiate coverage of six stocks five Buys and one Hold.We prefer Jereh Oilfield Services and Sinopec Oilfield Equipment Equities Industrials November 2019 2 Why read this report?1 Executive summary 3 Oil and gas equipment,services,and engineering 18 Special steel 24 Testing,inspection and certification 26 Chinas environmental monitoring equipment 29 Company section 31 Jereh Oilfield Services (002353 CH)32 Sinopec Oilfield Equipment (000852 CH)41 China Petro Engineering (600339 HC)49 Tiangong(826 HK)57 China Building Material T&C (603060 CH)65 Sailhero(300137 CH)74 Disclosure appendix 81 Disclaimer 84 Contents 3 Equities Industrials November 2019 We initiate coverage of six bellwether stocks in four industrial sub-sectors which play a big role in government-backed initiatives such as Chinas energy security,high-end manufacturing and the fight against pollution.We believe domestic industry leaders will benefit from sector growth,supportive policies,and R&D investment,as well as improving product quality and innovation.Valuations appear undemanding,given strong earnings growth,a rising ROE outlook and increased competitiveness.Identifying pockets of strong growth This report identifies what we see as strong pockets of growth in the sector.We look at six industry leaders in four sub-sectors:oil and gas equipment,services,and engineering;special steel;construction testing,inspection,and certification;and environmental monitoring equipment.They all play an important role in strong domestic narratives energy security,high-end manufacturing,and Chinas fight against pollution which are all high up the governments list of policy priorities.The stocks are Jereh Oilfield Services,Sinopec Oilfield Equipment,and China Petroleum Engineering,Tiangong,China Buildings Material Test&Certification,and Sailhero.We believe the domestic industry leaders will benefit from sector growth,supportive policies,R&D investment as well as improving product quality and innovation.Valuations appear undemanding given strong earnings growth,a rising ROE outlook and increased competitiveness.Lets start by taking a brief look at the four sub-sectors.Oil and gas equipment,services,and engineering Policy support is key here.In July 2018,President Xi highlighted the importance of energy security and the need to accelerate upstream oil and gas exploration and development to reduce Chinas high dependence on imports.In response,Chinas upstream oil and gas majors proposed a 2019-2025 seven-year action plan to boost upstream investment.As a result,we believe companies in this sector will be the direct beneficiaries of strong upstream capex and supportive national policies.Executive summary This report identifies what we see as strong pockets of growth Policy support is key here Equities Industrials November 2019 4 Exhibit 1.Strong growth of PetroChinas upstream E&P capex in 2019e Source:Company data,HSBC Qianhai Securities Exhibit 2.Strong growth of Sinopecs upstream E&P capex in 2019e Source:Company data,HSBC Qianhai Securities Shale gas stands out:Against this favourable policy backdrop,we think shale gas is the real bright spot in this sector.According to the National Energy Administrations Shale Gas Development Plan(2016-20),China targets shale gas production of 30bn cubic metres(bcm)in 2020 and 80-100bcm in 2030,a 10-year CAGR of 12%.The domestic shale gas fracking equipment industry is dominated by a few local companies.We believe this ambitious plan for shale gas development will lead to huge demand for shale gas drilling equipment and services.Exhibit 3.Chinas shale gas production has significant growth potential Source:National Energy Administration;HSBC Qianhai Securities 701524811040914511758138691590501001502002501H142H141H152H151H162H161H172H171H182H181H192H19guidanceE&PRefiningMarketingGas pipelineCorporateRMBbn21601341527724113120400204060801001201401H142H141H152H151H162H161H172H171H182H181H192H19guidanceE&PRefiningMkting&DistChemicalsCorp&OthRMBbn10.9309001020304050607080901002015201620172018201920202021202220232024202520262027202820292030China shale gas productionbn cubic meter 5 Equities Industrials November 2019 Special steel This sector produces sophisticated steel products using different alloys like tungsten,molybdenum,chromium and vanadium.These products are characterised by their ability to withstand heavy mechanical loads and high temperatures and resistance to corrosion-resistance.Most customers are from technology-intensive sectors such as aerospace,automotive,machinery,electronics,petrochemical processing and high-end manufacturing.The industry leader:We think Tiangong,Chinas leading special steel products manufacturer,is particularly well positioned.It has a strong brand and many overseas customers,especially in the US sales in North America increased 36%and 31%in 2018 and 1H19,respectively,despite the tariff hikes.The companys gross profit margin has risen from 16%in 2015 to 18%in 2018.We believe this trend will continue on the back of rising competitiveness,operating leverage and cost control.Exhibit 4.Cutting tools segment GPM Exhibit 5.Titanium alloy segment GPM Source:Company data,HSBC Qianhai Securities Source:Company data,HSBC Qianhai Securities China construction testing,inspection,and certification(TIC)The sector is closely aligned to Chinas huge construction and building material industry.A construction TIC company is usually involved throughout the entire life cycle of buildings,including construction,completion,revamping and demolition.This process is often mandatory,based on industry regulations.The industry is booming.According to Certification and Accreditation Administration of China(CNCA),the number of TIC companies surged to 39,472 as of end 2018 from 24,847 in 2013.Meanwhile,overall industry revenue has risen at 15%CAGR during the past five years to RMB281bn in 2018.Exhibit 6.China TIC industry revenue grew at 15%CAGR over 2013-18 Source:CNCA,HSBC Qianhai Securities 0%5%10%15%20%25%30%35%201620172018Shanghai PrimeTiangong0%5%10%15%20%25%30%201620172018Baoji TitaniumWestern MetalTiangong050100150200250300201320142015201620172018China TIC sectorRMBbnMost customers are from technology-intensive sectors Equities Industrials November 2019 6 According to CNCA,large enterprises,those with annual revenue exceeding RMB10m,accounted for only 13%of the TIC industry last year but contributed 76%of total revenue.We think the industry will consolidate,with larger companies increasing their market share.Exhibit 7.A highly-fragmented industry Exhibit 8.Market share by revenue Source:CNCA,HSBC Qianhai Securities Source:CNCA,HSBC Qianhai Securities Environmental monitoring equipment China is fighting the battle against pollution on many industrial fronts,boosting demand for environmental monitoring equipment.The industry is still very fragmented,with large numbers of domestic participants competing in the low to mid-end range and several global giants controlling the high-end market.We believe domestic leaders have the potential to enhance their market share,supported by rising product quality,broader product coverage,and solid after-sales service.Exhibit 9.Market share of domestic environmental monitoring equipment leaders Source:Wind,HSBC Qianhai Securities 12%12%13%88%88%87%05,00010,00015,00020,00025,00030,00035,00040,00045,000201620172018Large-sized companySmall-sized companyNo.of TIC service providers74%76%26%24%05010015020025030020172018Large-sized companySmall-sized companyRMBbn0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%02,0004,0006,0008,00010,00012,00014,00016,00018,0002012201320142015201620172018Chinas environmental monitoring equipment sales%of Sailhero%of SDL%of FPIRMBmChina is fighting the battle against pollution on many industrial fronts 7 Equities Industrials November 2019 Initiate coverage of six stocks Jereh Oilfield Services(002353 CH,RMB30.23,Buy,TP RMB40.20)Jereh is Chinas leading oil and gas equipment manufacturer and services provider.It is one of Chinas pioneers in terms of developing high-horsepower and electric-powered shale gas fracking equipment units.We forecast a 34%EPS CAGR over 2020-21e and we expect its ROE to rise from 7.5%in 2018 to 18.7%in 2021e on the back of strong earnings growth.The company is a major beneficiary of Chinas energy security initiative,rising upstream E&P investment by China oil majors and the countrys ambitious shale gas development plan.Potential share price catalysts over the near and medium term include(1)stronger-than-expected shale gas development in China,(2)larger-than-expected upstream capex of China oil majors,(3)faster-than-expected overseas expansion,(4)higher-than-expected crude oil price,and(5)a potential rise in foreign shareholding through the Shenzhen-Hong Kong Stock Connect.Sinopec Oilfield Equipment(000852 CH,RMB6.44,Buy,TP RMB9.60)Sinopec Oilfield Equipment,under the control of Sinopec Group,manufactures and sells oil and gas field machinery.It is a market leader in shale gas fracking equipment and oil and gas pipelines.We forecast a 74%EPS CAGR over 2020-21e.We expect ROE to rise from 0.8%in 2018 to 14.8%in 2021e on the back of solid earnings growth.The company is a major beneficiary of Chinas energy security initiative,rising upstream E&P investment by China oil majors,and the countrys ambitious shale gas development plan.Potential share price catalysts over the near and medium term include(1)stronger-than-expected shale gas development in China,(2)larger-than-expected upstream capex of China oil majors;(3)faster-than-expected overseas expansion,(4)higher-than-expected crude oil price China Petroleum Engineering(600339 CH,RMB3.57,Buy,TP RMB4.70)China Petro Engineering is an EPC company owned by the China National Petroleum Corporation(CNPC),covering the upstream,midstream and downstream of the oil and gas industry,enabling it to provide one-stop solutions to customers.We forecast a 21%EPS CAGR over 2020-21e.We expect its ROE to rise from 4.1%in 2018 to 5.8%in 2021e on the back of continued profit improvement.Share price catalysts over the near and medium term include(1)stronger-than-expected oilfield construction and engineering demand in China,(2)higher-than-expected crude oil price,(3)rising capex of the China oil majors,and(4)continued overseas expansion.Tiangong International(826 HK,HKD2.41,Buy,TP HKD3.70)The company is the largest manufacturer of high speed steel(HSS)in the world by production capacity,and ranked the third largest among global die steel(DS)producers.It is also the third largest manufacturer of titanium alloy in China.We forecast a 30%EPS CAGR over 2020-21e.We expect its ROE to rise from 8.0%in 2019 to 11.7%in 2021e on the back of solid earnings growth.Share price catalysts over the near and medium term include(1)faster-than-expected ramp-up of its powder metallurgy production,(2)stronger-than-expected sales growth of Tiangongs self-owned brand products,and(3)further penetration into overseas markets.China Building Material Test&Certification(603060 CH,RMB20.75,Hold,TP RMB22.70)Chinas largest testing,inspection and certification(TIC)service provider in the construction sector.The company tests and verifies the safety and quality of construction materials,buildings and engineering construction.We forecast a 20%EPS CAGR over 2020-21e.We expect ROE to rise from 16.1%in 2019e to 17.9%in 2021e on the back of solid earnings growth.We initiate with a Hold rating as we think competition could intensify in some regions.One of Chinas pioneers in shale gas fracking equipment We expect ROE to rise from 0.8%in 2018 to 14.8%in 2021e The largest manufacturer of high speed steel in the world Equities Industrials November 2019 8 Sailhero Environmental Protection(300137 CH,RMB7.54,Buy,TP RMB10.80)Sailhero is a leading company in Chinas environmental monitoring equipment manufacturing industry.The company has a strong presence in the domestic air pollution monitoring equipment market.It differentiates itself with a light-asset business model and limited exposure to public-private partnerships(PPP)projects,according to our understanding.We forecast a 21%EPS CAGR over 2020-21e.We expect ROE to rise from 15.5%in 2019e to 16.4%in 2021e on the back of solid earnings growth.Potential catalysts over the near and medium term include(1)strong environmental investment and supportive policies from the government.(2)better-than-expected development in the water monitoring sector in China,and(3)technology breakthroughs and new product launches.Where we are different from consensus Jereh:Our earnings estimates are in line with the Street for 2019e and 4-15%above the Street for 2020-21e,largely due to our more bullish view on the companys revenue growth.This is based on a more optimistic view regarding Chinas oil and gas demand outlook,particularly for and particularly shale gas fracking equipment.Exhibit 10.HSBC Qianhai Securities estimates vs Bloomberg consensus for Jereh _ HSBC Qianhai _ _ Consensus _ _ HSBC vs Consensus _ RMBm 2019e 2020e 2021e 2019e 2020e 2021e 2019e 2020e 2021e Revenue 6,923 8,903 11,457 6,597 8,367 10,083 5%6%14%Gross profit 2,452 3,184 4,137 2,356 3,048 3,727 4%4%11%GPM 35.4%35.8%36.1%35.7%36.4%37.0%-0.3ppt-0.7ppt-0.9ppt Net profit 1,240 1,660 2,235 1,224 1,601 1,949 1%4%15%Source:Bloomberg,HSBC Qianhai Securities estimates(as of 5 November2019)Sinopec Oilfield Equipment:Our earnings forecast is below Bloomberg consensus for 2019-20e but 7%above for 2021e.The companys earnings appear to be quite volatile with very thin net margin(-24.1%in 2016,0.2%in 2017,and 0.3%in 2018).Hence,the companys earnings visibility is relatively low.Exhibit 11.HSBC Qianhai Securities estimates vs Bloomberg consensus for Sinopec Oil Equipment _ HSBC Qianhai _ _ Consensus _ _ HSBC vs Consensus _ RMBm 2019e 2020e 2021e 2019e 2020e 2021e 2019e 2020e 2021e Revenue 6,536 8,038 9,916 6,323 7,413 8,547 3%8%16%Gross profit 1,252 1,566 1,965 1,165 1,532 1,889 7%2%4%GPM 19.2%19.5%19.8%18.4%20.7%22.1%0.7ppt-1.2ppt-2.3ppt Net profit 110 204 333 140 218 312 -21%-7%7%Source:Bloomberg,HSBC Qianhai Securities estimates(as of 5 November201