1H22 results in line with our forecast Jereh Oilfield Services (Jereh) announced its 1H22 results: Revenue rose 24% YoY to Rmb4.56bn; net profit attributable to shareholders grew 29% YoY to Rmb983mn, mainly thanks to high oil prices and ample orders on hand. In 2Q22, Jereh’s revenue rose 22% YoY to Rmb2.74bn, and net profit attributable to shareholders increased 58% YoY to Rmb765mn, showing notable QoQ improvement in profit. The firm’s results are in line with our forecast. Booming oilfield equipment and service market boosted the firm’s earnings growth. In 1H22, revenue from drilling and completion equipment rose 30% YoY to Rmb2.18bn, which we attribute to ample orders on hand since 2H21; revenue from the maintenance & parts business fell 16% YoY to Rmb0.79bn; revenue from oilfield technological services surged 81% YoY to Rmb0.67bn; revenue from the liquefied natural gas (LNG) and engineering segment grew 70% YoY to Rmb0.51bn; revenue from environmental protection equipment dropped 15% YoY to Rmb0.25bn; revenue from the oilfield E&P business soared 78% YoY to Rmb0.15bn. 2Q22 profitability improved markedly QoQ. In 1H22, the firm’s overall gross margin fell 3.2ppt YoY to 34.4%; period expense ratio declined 5.4ppt YoY to 8.5%; financial expense ratio fell 3.6ppt YoY to 4.1%, mainly as the firm recorded Rmb0.18bn in exchange gains due to the appreciation of the US dollar and the ruble since 2Q22. Profitability rose sharply QoQ in 2Q22, with gross margin up 6.4ppt QoQ to 37%, mainly because of falling raw material prices QoQ, a rising proportion of fracturing equipment, and an improving product mix. Trends to watch Ample orders on hand; 2H22 earnings likely to maintain rapid growth. According to corporate filings, oil and gas companies were more willing to enhance capex due to rising oil and gas prices, thus leading to accelerated growth in Jereh’s order volume. The firm secured Rmb7.15bn worth of new orders in 1H22, up 36% YoY, and the value of new orders overseas rose 60% YoY. Considering revenue from new orders will not be recognized until 6 months later, and major domestic clients are likely to complete the bidding process for fracturing equipment in 2H22, we expect the firm’s revenue in 2H22 to continue to grow rapidly. According to CICC’s commodities research team, the oil market may continue to maintain a tight balance in supply and demand, or may even face a mild shortage of supply, and the median of Brent oil prices will likely stand at US$100-110/bbl in 2H22. We believe oil and gas companies may continue to boost capex given high oil prices, which may lay a sound foundation for Jereh’s earnings growth. Proportion of procurement of fracturing equipment may grow, likely to benefit the company. The 14th Five Year Plan (2021-2025) has seen China commit more effort to develop unconventional oil and gas resources. Major downstream clients also shifted toward the procurement of fracturing equipment. As such, we think the firm, as an industry leader, is likely to benefit from the trend. Meanwhile, as fracturing equipment has a higher profit margin, we think the improved product mix may bolster the firm’s profit. In addition, Jereh has been expanding its presence in the North America market. It secured orders for turbine fracturing equipment worth over Rmb0.2bn in June, showcasing the firm’s competitiveness in the global market. Financials and valuation We maintain our 2022 and 2023 earnings forecasts. The stock is trading at 18.0x 2022 and 14.6x 2023 P/E. We maintain OUTPERFORM and our TP of Rmb50.70 (23.7x 2022 P/E and 19.2x 2023 P/E), offering 31.5% upside. Risks Disappointing business expansion in North America and/or capex at domestic oil and gas companies.