Private drilling fluid technology service leader

21 March 2012 Equity Research Report Company Research Petroleum & Petrochemical Sichuan Renzhi Oilfield Technology Services (002629) Investment value analysis report Private drilling fluid technology service leader Investment Highlights A leading private drilling fluid service provider in China. Originated from the Sinopec system, the company is one of the leading enterprises in China that are able to provide integrated one-stop drilling fluid technology services. In 2011, the company took 1.5% of the drilling fluid technology service market in China, and 13.3% in Sichuan market. More than 85% of the company s core business revenue comes from Southwest China. The drilling fluid technology service market will grow along with the number of drillings. The drilling fluid technology service refers to the integrated services including the dispensing, circulation, and recycle of drilling fluid, accounting for around 5%-8% of the exploration and development investment of oil companies. The drilling fluid technology service market is positively correlated with the number of oil and gas field drillings. During the 12 th Five Year Plan period, the number of drillings in China will increase by 40% from the level in the 11 th Five Year Plan period. Thus the drilling fluid technology service market will expand by more than 30%, revealing a bright future of the market. Based in Southwest China, the company s development will be boosted by the exploitation of new market. The company values the R&D, and is able to provide special drilling fluid technology services of deep drilling and ultra-deep drilling. The company s core business is based in Southwest China. As Petro China and Sinopec made plans of 30bn cubic meters gas field and 10bn cubic meters gas field respectively in Southwest China during the 12 th Five Year Plan period, the company has great growth potential. Besides, the company has made presence in Northwest, North China, and overseas market. The proportion of revenue from areas outside Southwest China will likely grow from around 12% to 20% in the next two years. Projects financed with proceeds will boost the company s capacity and reduce the raw material costs. The proceeds raised through IPO will be mainly used in the construction of the drilling fluid technology service capacity and the transformation and expansion of the drilling fluid material production capacity. The two projects will likely be put into operation by the end of 2012E and 2013E. The company owns 38 drilling fluid technology service teams. When the projects complete, the company will have 27 more drilling fluid technology service teams, increasing its capacity by 70%, and the ratio of self-processed drilling fluid material will be raised from 35.18% to 72.16%, which will effectively reduce the raw material costs. Overweight (Initial Coverage) Current price: Rmb 19.08 Target price: Rmb 22.00 CITIC Securities Research Lili Huang Tel: 010-60838728 Email: hll@citics.com Practicing license no.: S1010510120048 Xiaodong Yin Tel: 010-60838901 Email: yinxd@citics.com Practicing license no.: S1010510120011 Contact: Chen Rong Tel: 010-60838699 Email: rongchen@citics.com Performance Relative to lndices Growth% Source: CITIC Securities Quantitative Investment Analysis System Main Data S&P/ CITIC300 (Points) 2203.5 Total equity/shares o/s (mn) S&P/CITIC 300 Sichuan Renzhi Oilfield Technology Services (002629) Equipment service 114.4/28.6 LTM High/low 24.87/14.69 1-month absolute gain 9.7% YTD Absolute gain 28% Source: CITIC Securities Quantitative Investment Analysis System Oil & gas equipments Please read the disclaimer at the end of the report

Potential risks: the company s business relies on single client; high difficulty in regional exploitation; large amount of accounts receivable. Earning forecast, valuation and investment advice. Based in Southwest China, the company is one of the leading enterprises in China that are able to provide integrated one-stop drilling fluid technology services. With the development of natural gas in Southwest China and the exploitations in new markets at home and abroad, the company will likely maintain rapid growth. We predict the company s 2011-13E EPS at Rmb0.63/Rmb0.82/Rmb1.04, with net CAGR of the next two years at 28% (with the data of 2011 as the base). We apply 27x 2012E PE to the counter, equivalent to target price of Rmb22. Initiate our coverage with OVERWEIGHT rating. 2009 2010 2011E 2012E 2013E Turnover (Rmb mn) 368 430 519 672 843 Growth rate YoY % 10.38 16.86 20.50 29.55 25.43 Net (Rmb mn) 41 60 72 94 120 Growth rate YoY% 1.49 47.12 20.06 30.08 27.00 EPS (Rmb) 0.62 0.70 0.63 0.82 1.04 Gross margin % 28.93 29.48 30.68 30.68 30.95 ROE % 21.13 25.41 10.02 11.60 12.92 cash flow per share (Rmb) 0.76 0.47 0.30 0.71 0.96 P/E 31 27 30 23 18 P/B 11.3 9.2 3.0 2.7 2.4 EV/EBITDA 37 24 20 15 12 Source: CITIC Securities Quantitative Investment Analysis System Note: Closing prices as of 20 March 2012 Please read the disclaimer at the end of the report

Income statement (Rmb mn) Balance Sheet (Rmb mn) Indicators 2009 2010 2011E 2012E 2013E Indicators 2009 2010 2011E 2012E 2013E Revenue 368 430 519 672 843 Cash and cash equivalents 110 126 564 518 500 Cost 262 303 360 466 582 Inventory 32 42 50 65 81 Gross Margin 28.9% 29.5% 30.7% 30.7% 30.9% Accounts receivable 149 198 233 306 385 Business tax and Other current 5 4 5 7 8 surcharges 10 21 28 37 46 28 26 31 40 50 Current 301 387 876 925 1013 7.7% 5.9% 6.0% 5.9% 5.9% Fixed 37 61 63 131 219 Administrative Long term equity 27 31 39 50 64 investments 12 18 18 18 18 Administrative 7.4% 7.2% 7.5% 7.5% 7.6% Intangible 5 10 10 11 11 Finance Other long term 2 1 (2) (3) (3) 19 7 5 45 55 Finance Non-current 0.6% 0.2% -0.3% -0.4% -0.3% 74 95 96 204 303 Investment (2) 4 2 0 0 Total 374 483 972 1129 1316 42 67 86 111 140 Short term loans 0 0 0 0 0 margin 11.5% 15.6% 16.6% 16.5% 16.6% Accounts payable 118 130 162 212 268 Non-operating Other current 0 2 1 1 1 63 111 83 101 118 Non-operating expense 1 0 2 1 0 Current 180 240 245 313 386 Income-total 42 69 85 111 141 Long term 0 5 5 5 5 Income tax 1 9 13 17 21 Other long term 0 0 0 0 0 Income tax ratio 2.1% 13.3% 15.0% 15.0% 15.0% Non-current 0 5 5 5 5 Minority shareholders (0) (0) 0 0 0 Total 180 245 250 318 391 interests Net profit attributable to 41 60 72 94 120 Share capital 86 86 114 114 114 parent company Net Profit 11.1% 14.0% 14.0% 14.0% 14.2% Capital reserves 29 29 417 417 417 Total shareholders 194 237 722 812 925 equity Minority interest 0 (0) (0) (0) (0) Total and Cash flow statement (Rmb mn) shareholders' 374 483 972 1129 1316 equity Indicators 2009 2010 2011E 2012E 2013E Pre-tax profit 42 69 85 111 141 Key financial indicators 2009 2010 2011E 2012E 2013E Income tax paid -1-9 -13-17 -21 Growth rate (%) Depreciation & amortization 7 8 10 16 23 revenue 10.4% 16.9% 20.5% 29.6% 25.4% Changes in working capital 30-2 -46-28 -32 profit 4.5% 58.2% 28.2% 28.6% 26.1% Others 8-12 -2-1 -1 Net profit 1.5% 47.1% 20.1% 30.1% 27.0% cash flow 87 54 34 81 109 Profit margin (%) Capital expenditure -9-15 -12-125 -123 Gross margin 28.9% 29.5% 30.7% 30.7% 30.9% Investment -2 4 2 0 0 EBIT Margin 11.9% 16.4% 16.1% 16.0% 16.4% Disposal of EBITDA Margin 13.9% 18.3% 18.1% 18.4% 19.1% Others 7-6 0 0 0 Net margin 11.1% 14.0% 14.0% 14.0% 14.2% Please read the disclaimer at the end of the report 21 March 2012 1

Cash flow from investments -3-17 -10-125 -123 Rate of return (%) Equity issuance 43 0 416 0 0 ROE 21.1% 25.4% 10.0% 11.6% 12.9% Changes in 0 5 0 0 0 ROTA 10.9% 12.4% 7.4% 8.3% 9.1% Dividends payout 0 0-4 -5-6 Others (%) Other -53-26 2 3 3 Debt-to-asset ratio 48.2% 50.9% 25.7% 28.1% 29.7% Financing cash flow -10-21 414-2 -3 Income tax rate 2.1% 13.3% 15.0% 15.0% 15.0% Indicators 74 16 438-46 -17 Dividend yield 0.0% 0.0% 5.0% 5.0% 5.0% Source: CITIC Securities Quantitative Investment Analysis System Please read the disclaimer at the end of the report 21 March 2012 2

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