China Oilfield Tech IPO

There is a new IPO coming up next week. Some of the points were taken from the web or prospectus.

SINGAPORE (Thomson Financial) - China Oilfield Technology Services Group Ltd, which provides engineering services to oil exploration companies in China, said it is launching its Singapore initial public offering (IPO) of 211.61 million new and vendor shares at 60 Singapore cents each on Monday.

Invitation in respect of 211,607,000 Shares of HK$0.50 each comprising 127,500,000 New
Shares and 84,107,000 Vendor Shares as follows:-
(i) 3,228,000 Offer Shares at $0.60 each by way of public offer; and
(ii) 208,379,000 Placement Shares at $0.60 each by way of placement,
payable in full on application.

>> There are 3228 lots up for grab. A small offering.

We have a wide range of tertiary oil recovery products, which can
be divided into three segments:
(i) Enhanced Oil Recovery;
(ii) Environmental Protection; and
(iii) Energy Saving and Others

>> In summary, the oil extraction consists of 3 phases. Their product operate in the tertiary phase which allow the additional 20 to 30% of oil to be extracted.

Favourable development trend for tertiary oil recovery technology

• Daqing Oilfield Co., Ltd. plans to extend the use of tertiary oil recovery technique in more than 80% of its oil extraction sites in Daqing oilfield in the next 15 to 20 years
• Other PRC oilfields, such as Shengli, Changqing and Xinjiang, have gradually expanded the scale of their tertiary oil recovery processes as their oilfields approach maturity

>> If this trend is right, not distorted by the news, this would be a powerful trend. Looking at every kind of cycle, people enter at the first phase would enjoy good growth going forward.

Future Plans

• Enhance our R&D capabilities
• Expand our production capacity
• Expand our sales and marketing network in the PRC and overseas markets

>> I guess the expansion plan is quite standard. Most of the new IPO plan to do similar things. The pity thing is there is no discussion on the company position in the industry. How do they rank compared to the competitor?

IPO price
60.00 cents (equivalent to 299.34 RMB cents)
NAV
after adjusting for the estimated net proceeds of the Invitation and based 91.36 RMB cents
on the post-Invitation enlarged share capital of 728,595,000 Shares
PE
Historical PER based on the historical EPS of our Group for FY2006 assuming 18.69 times
that the Service Agreements had been in place from the beginning of FY2006

>> It is a bit pricey. Consider they didn't take the share dilution into the PE calculation. However, if they can achieve the earning growth as past few years CAGR 135%. This should not be a problem.

Risk

• We are dependent on our major customers, which are the operating units of Daqing Oilfield Co., Ltd., a wholly-owned subsidiary of PetroChina
• Our growth and prospects are dependent on our research and development capability
• We are dependent on our patents
• We are dependent on the protection of our proprietary technical know-how
• We are dependent on our management team
• We are dependent on qualified professional staff
• We are dependent on the PRC oil industry
• ...
• We may be required to pay penalties or liquidated damages for failure to meet delivery deadlines

>> The major risk here is dependent on single customer. Having said that, once they can get more customer on board. The market should re-rate them with higher PE.

Summary

The company business do sounds interesting and poses for strong growth in the coming years. Forget about the initial valuation. Base on small offer size, current strong oil and gas sector play and good IPO sentiment. The new listing should do well on the first day. Subscribe! Although we all know that it would be very hard to get, but the chance should be higher than strike toto.