Hilong Holding, China's largest supplier of oil and gas drill pipes, plans to raise up to HK$1.48 billion in a Hong Kong initial public offering to expand production and service capacity and retire debt.
The Shanghai-based firm wants to expand its overseas business to cut reliance on slow-paying domestic state-owned customers; however, it faces challenges from North American anti-dumping duties and instability in some North African nations.
Its clients, including PetroChina and Sinopec, last year took an average of six months to pay their bills.
Hilong, which sourced 40 per cent of its sales from outside the mainland in the first nine months of last year, has forecast a net profit of not less than 172 million yuan (HK$203.77 million) for last year. This is up 184 per cent from 60.63 million yuan in 2009 but lower than the 259.96 million yuan in 2007 and 437.29 million yuan in 2008. The recovery in spending on oil equipment and services has lagged behind that of oil prices.
The gross profit margin on drill pipes rose to 38.5 per cent in the first nine months of last year from 31.9 per cent in 2009 but trailed the 45.6 per cent in 2008. Drill pipes link surface drilling gear to drill bits under ground.
Margins on pipe coating and materials grew to 47.1 per cent during the first nine months of last year from 44.4 per cent in 2008, and margins for oilfield services rose to 37.4 per cent from 27.3 per cent.
Chairman Zhang Jun said the firm planned to set up sales offices in South America and North Africa, drill pipe production facilities in Russia and Central Asia and coating plants in North America, Russia, Central Asia and North Africa.
It has budgeted 370 million yuan to buy drilling rigs and 121 million yuan to set up coating plants in the next two to three years. No expansion is planned of drill pipe facilities, whose utilisation stood at only 59 per cent last year.
Despite political instability in oil-producing Egypt and Libya, Zhang said North Africa remains an attractive market in the long term.
Expansion in North America - the world's largest services market - has been held back by hefty anti-dumping duties on drill pipes, so Hilong is turning to Russia, Central Asia, the Middle East and South America for growth.
Hilong is offering 400 million new shares at HK$2.50 to HK$3.70 each. Malaysia-listed UMW, which helped Hilong win some business in Southeast Asia, will see its stake diluted to 3.5 per cent from 4.67 per cent.
Former Citic Pacific chairman Yung Chi-kin will buy shares equivalent to a 1.6 per cent stake upon Hilong's listing on March 24.