Booming oil and gas sector. Beginning trading on the SGX-ST today, RH
Energy Ltd (RHE) fabricates and installs equipment and systems for oil
and gas pipelines in the PRC. The industry has been growing rapidly in the
last decade and shows no signs of slowing down. According to the BP
Statistical Review of World Energy, China's oil consumption recorded a
CAGR of 128% between 1996 and 2006 while global oil consumption has
recorded a CAGR of 156% during the same period. In 2006 alone, China's
oil consumption grew 6.6% YoY, far outpacing Asia Pacific's average YoY
growth of 1.4%. Standard & Poor's expects global capital spending in this
sector to grow by approximately 10% in 2007. The growing oil demand in
the PRC will be driven by the country's rapid economic growth and the PRC
Government's initiatives to develop the natural gas market.
Strong order book. As at 1H07, RHE order books stood at US$13.2m.
We project RHE to secure another US$20m of orders for 2H07. Based on
this, we project a 95% YoY growth in FY07 revenue to US$33.2m.
More in the pipeline. RHE has entered into a memorandum of
understanding (MOU) to form a 51%-owned joint venture (JV) for the
construction and set-up of compressed natural gas (CNG) pipeline network,
infrastructure and stations in a new tourist development zone on Hainan
Island. Construction is expected to commence in December 2007 and will
complete in late 2008 or early 2009. RHE will book upfront revenue of
approximately RMB 20m for providing equipment integration services, and
thereafter collect an estimated RMB 32.5m per annum for 20 years for
operating the CNG stations.
Initiate with BUY. We forecast revenue growth of 95% YoY to US$33.2m
for FY07 and net profit growth of 27% YoY to US$5.1m after taking into
account one-off expenses incurred for the IPO. We expect further double
digit growth in FY08 revenue and net profit. Based on FY08 PER of 16x, we
derive a fair value of S$0.69. We initiate coverage on R H Energy with a
BUY rating
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