PREPARED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (ASIA) LTD THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 33 Time to revisit n Mixed 2013 results, robust 2014 top-line guidance China’s OFS sector reported mixed 2013 results, with, on the positive side, COSL beating both our and consensus estimates while Hilong and Honghua came in with negative surprises. Stock prices underperformed significantly despite robust 2014 top-line growth guidance. We estimate sector revenue will go up 21% on average in 2014, slightly below 2013, but still robust. We expect profit growth to slow to 11% y-y in 2014 mainly due to company-specific issues (overseas business exposure and surging financing costs) before resuming at a solid 21% in 2015. n 2 014: Shale gas breakthrough Despite relatively stable upstream capex, we expect OFS companies to register robust revenue growth underpinned by continuing investment in mature oil & gas fields and high-cost unconventional resources. Given the breakthrough in shale gas production in Sichuan (Sinopec expects to build 5bcm capacity by 2015 and 10bcm by 2017 in the Fuling block while Petrochina eyes 1bcm new capacity by 2015 and 3bcm by 2020 in the Changning block), we expect new orders from shale gas projects from 2Q14 to be the key catalyst for China’s OFS sector. n T op BUYs: SPT, COSL; Upgrade Hilong to BUY After recent consolidation, China OFS are trading at an average 2014E P/E of 13.3x, which we believe is attractive given solid two-year average earnings growth of 16%. SPT and COSL are our top BUYs for the sector given their solid earnings growth, healthy financial positions and undemanding valuations. We upgrade Hilong from HOLD to BUY as we believe that market reaction to its earnings miss has been overdone. Trading at a 2014E P/E of 11.4x vesus two-year earnings growth of 16%, we think Hilong is attractive now. BNPP recommendations Company BBG code Rating Share price Target price Upside/downside Petro-king Oilfield 2178 HK BUY 2.87 3.80 +32.4% SPT Energy 1251 HK BUY 4.30 5.60 +30.2% Hilong 1623 HK BUY 4.09 5.20 +27.1% COSL 2883 HK BUY 20.30 24.00 +18.2% Anton 3337 HK BUY 5.11 5.70 +11.5% Honghua Group 196 HK HOLD 1.97 2.10 +6.6% Source: BNP Paribas estimates 11 APRIL 2014 SECTOR REPORT CHINA OILFIELD SERVICES IMPROVING Anna Yu anna.yu@asia.bnpparibas.com +852 2825 1861 Yong Liang Por yongliang.por@asia.bnpparibas.com +852 28251877 Our research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the inside back cover. China Oilfield Services Anna Yu BNP PARIBAS 11 APRIL 2014 Investment thesis We are positive on the China OFS sector, given the significant potential for unconventional resource development in onshore markets, and deepwater in offshore markets. China’s OFS sector reported robust results in 2013 (revenue up 24% y-y on average, and NP up 30% y-y) and management guided for strong 2014 top-line growth. We estimate sector revenue will go up an average of 21% in 2014, slightly below 2013, but still robust. However the sector profit growth is expected to slow to 11% y-y in 2014 mainly due to company-specific issues (overseas business exposure and surging financing costs) before resuming at a solid 21% in 2015. Key risks to our sector view include: 1) margin squeeze due to increasing competition; 2) delay in shale gas/deepwater E&P projects; 3) execution risks on new projects. Onshore BUYs – SPT and Hilong We expect SPT to benefit from both the unconventional resources boom in China and increasing E&P activity in Central Asia. Despite the devaluation of KTZ, we believe its underlying operations are intact. We upgrade Hilong from HOLD to BUY as we believe that the market reaction to its results miss has been overdone. Hilong is trading at a 2014E P/E of 11.4x, which we believe is attractive given solid two-year earnings growth of 16%. Offshore BUY – COSL We expect COSL to benefit from robust offshore E&P activities underpinned by deepwater potential. COSL is trading at a 2014E P/E of 10.6x and a P/BV of 1.6x, which we believe is attractive given projected two-year net profit growth of 9% and a favourable ROE of 17%. CONTENTS What to watch in 2014? ............................................................... 3 Robust top line growth guidance unchanged........................... 5 Earnings revisions and TP derivation ........................................ 9 Time to revisit OFS players........................................................ 10 Company report ........................................................................... 12 Onshore OFS companies’ revenue Sources: Companies; BNP Paribas estimates Offshore OFS company (COSL)’s revenue Sources: Companies; BNP P