Cinda Securities: Gives a buy rating to Zhongman Petroleum

Cinda Securities Co., Ltd. Zuo Qianming, Hu Xiaoyi recently conducted research on Zhongman Petroleum and released a research report "Short-term fluctuations do not change long-term performance growth potential", this report gives a buy rating to Zhongman Petroleum, the current stock price is 25.69 yuan.

Zhongman Petroleum (603619)

Affair:

On April 29, 2024, Zhongman Petroleum released its 2023 annual report and the first quarter report of 2024. In 2023, the company achieved operating income of 3.732 billion yuan, up 17% year-on-year, net profit attributable to the parent company of 810 million yuan, up 68% year-on-year, and net profit after deducting non-profits of 846 million yuan, up 61% year-on-year. Net cash flow from operating activities was 1.583 billion yuan, up 161% year-on-year, and basic earnings per share were 2.05 yuan/share, up 69% year-on-year. The debt-to-asset ratio was 68.66%, up 1pct from the full year of 2022.

Among them, in the fourth quarter of 2023, the company's single-quarter operating income was 735 million yuan, down 25.18% year-on-year and 34.05% quarter-on-quarter, the net profit attributable to the parent company in a single quarter was 120 million yuan, up 8% year-on-year and down 51.92% quarter-on-quarter, and the net profit after deducting non-profit in a single quarter was 173 million yuan, up 12% year-on-year.

In the first quarter of 2024, the company's single-quarter operating income was 807 million yuan, down 10.74% year-on-year and up 10% quarter-on-quarter, net profit attributable to the parent company in a single quarter was 172 million yuan, down 19.85% year-on-year and up 43% quarter-on-quarter, and net profit after deducting non-profits was 170 million yuan, down 21.71% year-on-year. The net cash flow from operating activities was 148 million yuan, down 52.15% year-on-year, and the basic earnings per share was 0.43 yuan/share, down 20.37% year-on-year. The debt-to-asset ratio was 67.97%, down 0.69 pct from the full year of 2023.

Comments:

From the perspective of profit structure, in 2023, the gross profit of the company's four segments of drilling rig equipment manufacturing/drilling engineering services/crude oil sales/petroleum products and trade will account for 1.38%/9.15%/88.13%/0.97% respectively, and the gross profit margin will be 10.73%/11.76%/72.67%/19.12% respectively. In 2023, the company's net profit attributable to the parent company will achieve a significant year-on-year growth, mainly from the crude oil sales sector, thanks to the strong growth of crude oil production in the Wensu block of Xinjiang under high oil prices, and the Wensu project will achieve a crude oil output of 580,800 tons in 2023, a year-on-year increase of +146,800 tons.

The net profit in the single quarter of 2023Q4 decreased significantly from the previous quarter, mainly due to the completion of the acquisition procedures of TOG Company, the holding entity of Tenge Oilfield in Kazakhstan in the fourth quarter, and the offsetting treatment of transactions between TOG Company and PETRO Company, a wholly-owned subsidiary of the Company, in accordance with accounting standards, resulting in a decrease of 69.0189 million yuan in net profit attributable to the parent company for the current period.

In 2024Q1, the company's revenue and net profit attributable to the parent company declined year-on-year, but the company's Wensu and tenge crude oil production were 154,500 tons and 43,300 tons, respectively, +24,300 tons and +25,800 tons year-on-year, respectively, and we believe that the impact of the company's 24Q1 inventory year-on-year + about 158 million yuan is mainly considered.

The company's crude oil production is expected to continue to maintain high growth. In 2023, the company has basically proved the oil and gas reserves in the upper wall of the F1 fault zone of the Kekeya Oilfield, and the production in the Aksu region of China is expected to continue to grow. Overseas, in 2023, the company's subsidiary, Zhongman Bay, completed the acquisition of 51% of the equity of Xinhuaxia Dubai, and the company obtained control of the Tenge oilfield, among which the 607 well of the Tenge oilfield drilled by the Zhongman team reduced the previous average drilling cycle from 70 days to about 17 days, laying a good foundation for the subsequent large-scale production and development of the Tenge oilfield. At the same time, the company has obtained the qualification for the development and operation of Iraqi oil and gas fields, which is an important prerequisite for the company to participate in the exploration and development of Iraqi oil and gas blocks in the future, and will help the company to obtain opportunities for investment and development of high-quality oil and gas fields in Iraq. In addition, we calculated that the company's average barrel of oil operating cost and barrel fuel depreciation cost in 2023 will be $10.44 and $5.63, respectively, still maintaining an excellent low-cost competitive advantage.

The gross profit margin of the drilling services segment improved significantly. In 2023, the gross profit margin of the company's drilling engineering services increased by +8.87 pct year-on-year to 11.76%, mainly due to the decrease in external service expenses, and the gross profit margin of the drilling equipment manufacturing segment decreased by 11.49 pct to 10.73%, mainly due to the significant increase in raw material costs. In 2023, the company signed 41 and 158 drilling engineering service contracts and equipment sector contracts respectively, with contract amounts of 3.399 billion yuan and 336 million yuan respectively, a year-on-year increase of +26.50% and +69.70%. We believe that under the upward trend of the oil service industry, the company's drilling services and equipment manufacturing segment has significantly improved the amount of new contracts signed year-on-year, or continue to contribute better performance to the company.

The company pays cash dividends and actively rewards shareholders. In 2023, the company plans to distribute a cash dividend of 6.20 yuan (tax included) for every 10 shares, totaling 246 million yuan, and the cash dividend payout ratio is 30.3%, an increase from 28.9% in the previous year. At the same time, in 2023, the company's repurchase amount will be 39.9956 million yuan, and the total proportion of repurchase + cash shares will be 35.3% of the company's net profit attributable to the parent company.

The risk of equity pledge by the controlling shareholder has decreased significantly. As of April 2024, the company's controlling shareholder "Zhongman Holdings" holds 21.59% of the company's shares, of which the cumulative proportion of pledged shares in the number of shares held has decreased to 58.55%, and the cumulative proportion of pledged shares of controlling shareholders and persons acting in concert has decreased to 45.98% of the total shares.

Profit forecast and investment rating: We predict that the company's net profit attributable to the parent company from 2024 to 2026 will be 10.89, 13.51 and 1.523 billion yuan respectively, with a year-on-year growth rate of 34.4%, 24.0% and 12.8% respectively, EPS will be 2.72, 3.38 and 3.81 yuan per share, and the PE corresponding to the closing price of A shares on April 29, 2024 will be 9.48, 7.64 and 6.78 times, and the PB will be 3.09, 2.37 and 1.88 times respectively. We maintain our Buy rating on the company, considering that the company is expected to continue to perform well in 2024-2026 due to the company's benefit from high crude oil prices and rapid production growth.

Risk factors: economic volatility and downside risks in oil prices, risks that companies may not ramp up production as expected, economic sanctions and geopolitical risks.

According to the calculation of the research report data released in the past three years, the research team of Minsheng Securities Zhou Tai has conducted in-depth research on the stock, with an average forecast accuracy of 78.35% in the past three years, and its forecast attributable net profit in 2024 is 1.121 billion yuan, and the predicted PE is 9.22 based on the current price.

The breakdown of the latest earnings estimates is as follows:

A total of 3 institutions have rated the stock in the last 90 days, 2 have given a buy rating and 1 have an overweight rating.

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