We expect supply-demand to deteriorate further in 2016

Deutsche Bank Markets Research Asia China Energy Oil & Gas Industry China Oilfield Services Sector Date 4 December 2015 Recommendation Change We expect supply-demand to deteriorate further in 2016 FY16 should remain challenging for sector, reinstate COSL coverage with Sell ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Johnson Wan Research Analyst (+852) 2203 6163 johnson.wan@db.com Vitus Leung Research Analyst (+852) 2203 6158 vitus.leung@db.com Key Changes Company Target Price Rating 2883.HK NA to 5.67(HKD) NR to Sell 1033.HK 2.22 to 1.55(HKD) Hold to Sell 1623.HK 2.37 to 1.70(HKD) - Source: Deutsche Bank Companies Featured China Oilfield Services (2883.HK),HKD7.58 Sell 2014A 2015E 2016E P/E (x) 9.1 9.3 21.5 EV/EBITDA (x) 7.3 6.4 8.7 Price/book (x) 1.1 0.6 0.6 Sinopec Oilfield Service (1033.HK),HKD2.18 Sell 2014A 2015E 2016E P/E (x) 10.8 – – EV/EBITDA (x) 3.3 12.9 9.9 Price/book (x) 1.3 1.6 1.7 Hilong Holding (1623.HK),HKD1.52 Hold 2014A 2015E 2016E P/E (x) 13.6 8.0 7.7 EV/EBITDA (x) 10.8 5.8 5.1 Price/book (x) 0.8 0.7 0.6 Source: Deutsche Bank Consensus vs. DBe FY16 (E) COSL SSC Hilong Sales (CNYm) DBe 19,644 45,444 2,868 Consensus 24,461 61,883 2,946 EPS (CNY/share) DBe 0.230 -0.080 0.164 Consensus 0.520 0.038 0.197 Source: Bloomberg & Deutsche Bank This report changes ratings, price targets, and estimates for several companies under coverage. For a detailed listing of these changes, see page 2. Valuation and risk: Our target prices are based on 2016E P/B and ROE. Key risks include: oil price and day rate changes, changes in E&P spending. See pages 25, 30, and 34 for details. Recently, we me with many OFS participants and found a few generic themes (i.e. risk of spending cuts by NOCs, slashing of day rates, slipping utilizations and the possibility of impairments on sustained lower crude prices). We believe many of these risks are not completely prices, despite recent consensus earnings revisions. Most oilfield players have initiated cost optimization to address these headwinds. We think the outlook for Chinese OFS is much bleaker as further spending cuts lurk ahead. Amid these headwinds and uncertainties, we reinstate our target price and rating for COSL (Sell , TP of HK$5.67) Downside risks to NOC capex spend in FY16 In 2015, the Chinese NOC’s slashed their E&P spending by 17% yoy, resulting in intensified competition for OFS players. For 2016, NOCs will not declare their budgets before early 2016, but we note 2015 spending targets for PTR, SNP and CNOOC were based on US$70/bbl, US$65-70/bbl and US$60/bbl, respectively. As Brent is averaging at US$45-50/bbl in 4Q15 and looks likely to remain subdued next year, we see a high possibility of further spending cuts in 2016. COSL and SSC derive 60% and 55% of their revenue from their parents, respectively, so such spending cuts will not be good news for them. Lower utilization rates and softer day rates likely in 2016 The correction in global rig day-rates has been ongoing since May ’14 and shows no sign of abating. Our supply-demand analysis of Jack-ups and Semi-subs shows that utilization rates could head lower in 2016, due to ample new supply and soft demand. If 2015 was bad, 2016 could be worse, as rig utilization is likely to bottom in 4Q16 with Jack-ups at 57% and Semi-subs at 61%. COSL’s 14 of 43 rigs operating internationally are exposed to day-rate cuts, as six international rigs were contracted till 3Q15 and two rigs are up for renewal in 1H16. COSL rig day-rates fell 21%/6% yoy in 1H15 and utilization was down to 78%/66% for Jack-ups/Semi-subs in 9M15. We are expecting 16%/6% yoy fall in day-rates for COSL’s JUs/Semi-subs, respectively for ‘16. What is priced in at the moment for oilfield service stocks? We note Chinese OFS stocks are down by an average of 41% YTD but it seems that all the bad news is not yet priced in. In the current cycle of a crude crash, OFS stocks (i.e. COSL) have responded promptly to Street earnings revisions that have followed oil price falls, unlike in the 2008-09 cycle, which lasted for just seven months (vs. 17 months recently) and led to only limited revision in earnings of COSL (34%/28% for ‘09/10). However, the current situation is graver, on prolonged soft oil p