Initial Coverage

June 19, 2012

Bin GUAN
SFC CE Ref: AGL097

Oil & Gas

RESEARCH
Initiate with ACCUMULATE

guanbin@cicc.com.cn

Shuai HE
heshuai@cicc.com.cn

Chu Kong Pipe (001938.HK)

Catching the Pipeline Boom

Financial highlights
(Rmb mn) Revenue (+/-%) Operating profit (+/-%) Net Profit (+/-%) EPS (HK$) P/E (x) P/B (x) EV/EBITDA (X) ROE (%) Dividend Yield Net profit margin ROA (%) D/A 2009A 2,826 7.7% 474 22.8% 401 45.6% 0.45 5.0 2.1 7.2 51.7% 0.0% 14.2% 18.6% 59.2% 2010A 1,681 -40.5% 102 -78.5% 70 -82.5% 0.08 28.5 1.0 25.3 4.8% 1.1% 4.2% 2.4% 44.9% 2011A 3,377 100.8% 270 165.5% 231 228.5% 0.27 8.3 0.9 11.7 11.0% 2.5% 6.8% 5.1% 59.5% 2012E 3,867 14.5% 369 36.3% 238 3.4% 0. 29 7.8 0.8 7.9 10.4% 2.6% 6.2% 4.3% 58.7% 2013E 5,272 36.3% 420 14.1% 304 27.7% 0.35 6. 5 0. 7 6. 4 12.1% 3.3% 5.8% 5.0% 59.3%

Investment positives
Chu Kong Pipe is the largest LSAW pipeline manufacturer and exporter in China, with ~50% of the industrys production capacity. The company is the only Chinese LSAW steel pipe producer recognized by Shell as a key supplier, and the first Chinese producer of deep sea LSAW pipes. Natural gas pipeline construction to speed up in China. China plans to almost double the length of its natural gas trunk and branch pipelines during the 12th FYP, and many major national pipeline projects may commence construction during 2H2012 and 2013. In the meantime, pipelines network at provincial and city levels should also grow rapidly during 12th FYP. We expect annual demand for LSAW to reach 2.4mt by the end of the period. New opportunities from CNOOC and State Grid. CNOOC looks set to build oil & gas transmission pipelines with a total length of 15,000km during the 12th FYP period. Only LSAW steel pipes can be used for offshore transmission, and Chu Kong Pipe is the first local steel pipe manufacturer with products meeting deep sea requirements. We expect Chu Kong Pipe to obtain orders from CNOOC, which may contribute annual LSAW demand of 1.2mn tonnes. In addition, there will be approximately 4mn tonnes of steel pipe demand from the State Grid over the next 5~6 years for LSAW steel pipe, which is mandated in the construction of new ultra-high-voltage towers.

Share information
Bloomberg c ode Share price Target price 30d avg daily turnover (mn shs) 52wk high/low Market cap (HK$ mn) Is sued shares (mn) Free float (mn) H-share 1938.hk HK$2.27 HK$2.60 1.14 HK$3.5/1.1 2,295 1,011 308

Recent price performance

% 01938. hk HSCE I CHCCI Oil & Gas Last w eek -4.62 +4.98 +2.71 1m -10.70 +1.22 +5.20 3m -24. 86 -12. 46 -9. 62 YTD +16.08 -1.27 +6.10

52wk performance
120 1938.hk HSCEI

Relative Value (%)

100

Valuation and recommendation

Our 2012/13 EPS forecasts are HK$0.29/0.35, and the stock is trading at 7.8x/6.5x 2012/13e P/E. We expect to see the start of massive construction of oil & gas pipelines in China in 2H2012 or 1H13. We initiate coverage with ACCUMULATE, and our price target of HK$2.60 implies 7.5x 2013e P/E.
2011/Sep/18 2011/Dec/18 2012/Mar/18 2012/Jun/18

80

60

40 2011/Jun/18

Risks
Capacity overbuild; slowdown in natural gas consumption growth, inefficient development of downstream city gas market; order suspension/delay; severe steel price fluctuations lead to inventory risk; currency risk; overseas policy risks; small cap and trading liquidity constraints.

Source: Bloomberg, company data, CICC Research

Regulation AC certifications and important disclosures are located at the end of this research report

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012

Contents
Company description.................................................................................................................................... 3 The largest LSAW pipeline manufacturer and exporter in China.............................................................. 3 Industry background................................................................................................................................. 4 Investment positives..................................................................................................................................... 6 Natural gas pipeline construction to speed up in China ........................................................................... 6 New opportunities from CNOOC and State Grid ...................................................................................... 7 Global line pipe construction to peak in the next few years...................................................................... 8 Production capacity expansion to catch the pipeline boom ...................................................................... 9 Earnings forecast and valuation................................................................................................................ 10 Risks............................................................................................................................................................. 13

Figures
Financial highlights .....................................................................................................................................................1 Share information........................................................................................................................................................1 Recent price performance ..........................................................................................................................................1 52wk performance ......................................................................................................................................................1 Figure 1: Chu Kong Pipes sales volume, revenue and gross profit by business segment........................................3 Figure 2: Chu Kong Pipes sales revenue by region ..................................................................................................3 Figure 3: Chu Kong Pipes main market .....................................................................................................................4 Figure 4: Chu Kong Pipes shareholding structure .....................................................................................................4 Figure 5: Oil & gas steel pipeline market segment .....................................................................................................5 Figure 6: Chinas natural gas pipeline construction plan ............................................................................................6 Figure 7: Chinas natural gas pipeline reform roadmap..............................................................................................7 Figure 8: Global major oil & gas pipeline projects ......................................................................................................8 Figure 9: Global oil & gas pipelines by type ...............................................................................................................8 Figure 10: Chu Kong Pipes maximum achievable annual production capacity.........................................................9 Figure 11: Historical and forecasted operating and financial data........................................................................... 10 Figure 12: DCF and WACC calculation ....................................................................................................................11 Figure 13: Chu Kong Pipes forward P/E and P/B ....................................................................................................11 Figure 14: Valuation table of comparables .............................................................................................................. 12

Regulation AC certifications and important disclosures are located at the end of this research report 2

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012

Company description
The largest LSAW pipeline manufacturer and exporter in China
Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited (Chu Kong Pipe) is the largest LSAW pipeline manufacturer and exporter in China. The company has 4 LSAW and 1 ERW production lines with annual production capacity of 1,450kt (1,300kt for LSAW and 150kt for ERW) as of end-2011, and plans to raise annual production capacity to 2,410kt (1,900kt for LSAW, 360kt for SSAW and 150kt for ERW) by the end of 2012 and 3,210kt (2,200kt for LSAW, 660kt for SSAW and 350kt for ERW) by end-2013. Chu Kong Pipe has about 50% of the industrys production capacity. The companys products are used in oil & natural gas transmission pipelines, deep sea oil & gas pipelines, city gas networks, petrochemical, power grid and infrastructure projects. Chu Kong Pipe has exported a large quantity of pipes to over 50 countries and areas, including the USA, Southeast Asia, Europe, and the Middle East. Figure 1: Chu Kong Pipes sales volume, revenue and gross profit by business segment
500 400 300 200 100 0 2006 2007 LSAW 2008 2009 2010 ERW 2011 K tonnes Sales volume 4000 Rmb mn 3200 2400 1600 800 0 2006 2007 LSAW 2008 2009 ERW 2010 2011 Others Revenue 600 500 400 300 200 100 0 2006 LSAW 2007 2008 ERW 2009 2010 2011 Others Rmb mn Gross profit

Source: Company report, CICC Research

Figure 2: Chu Kong Pipes sales revenue by region

100% 80% 60% 40% 20% 0% 2006
Source: Company report, CICC Research

Revenue by region

2007 Domestic

2008

2009 Overseas

2010

2011

Chu Kong Pipe is the industry pioneer, particularly strong in R&D, with 50 registered utility patents and five registered invention patents. In May 2010, the company successfully developed deep sea LSAW steel pipes, with a diameter of 559 mm and a wall thickness of 28 mm, and delivered deep sea LSAW pipelines to the Liwan offshore project in 2011. Chu Kong Pipe is the only Chinese LSAW steel pipe producer recognized by Shell as a key supplier and qualified for Shell Global Solution Design & Engineering Practices. As one of the four approved LSAW suppliers for state pipeline projects, the company has strong working relationships with CNPC, Sinopec and CNOOC.

Regulation AC certifications and important disclosures are located at the end of this research report 3

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012 Figure 3: Chu Kong Pipes main market

Source: Company report, CICC Research

Figure 4: Chu Kong Pipes shareholding structure

Source: Company report, CICC Research

Industry background
SSAW (spiral submerged arc welded pipe): Spiral welded pipes are formed using narrower plates or hot rolled coils, which lowers their production costs significantly. The spiral welding process permits the production of large-diameter pipes suitable for transporting large volumes of oil and gas. Traditional SSAW pipes were historically limited to low pressure applications; however, modern SSAW pipes have been used extensively in Russia, Canada and Asian countries in high pressure gas pipelines. LSAW (longitudinally submerged arc welded pipe): LSAW pipes are welded tubular products made out of flat plates that are formed, bent and prepared for welding. LSAW pipes are welded with a straight seam that runs lengthwise across the pipe. They are commonly used in high pressure oil and gas pipelines because their shorter welded seams decrease the likelihood of ruptures and make repairs easier. These pipes are commonly required for sections of a pipeline that extend across areas with a large population or high building density or involve subsea applications. Due to their high raw material costs and the substantial investment required for LSAW pipe production lines, LSAW pipes are generally more costly to produce than SSAW pipes. ERW (electric resistance welded pipe): ERW pipes have a longitudinal weld running the length of the pipe that is formed by resistance heating or high frequency induction heating. These pipes were traditionally used in low pressure applications, but manufacturing improvements have made modern ERW suitable for medium-to-high pressure gas transportation.
Regulation AC certifications and important disclosures are located at the end of this research report 4

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012 Figure 5: Oil & gas steel pipeline market segment

Source: Company report, CICC Research

Regulation AC certifications and important disclosures are located at the end of this research report 5

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012

Investment positives
Natural gas pipeline construction to speed up in China
China plans to almost double the scale of its natural gas trunk and branch pipeline networks during the 12th FYP from 55,000km in 2010 to 100,000km by 2015. Many major national pipeline projects, including PetroChinas West-to-East III & IV, the Sino-Myanmar project (the section within China) and the fourth Shannxi-Beijing natural gas pipeline, Sinopecs Xinjiang-Zhejiang-Guangdong and Xinjiang-Shandong Coal-to-Gas pipelines could all commence construction during 2H2012 and 2013. We expect China to build 40,000km natural gas trunk and branch pipelines in the next four years. Supposing 30% of the pipeline projects choose to use LSAW pipes, and the average pipe usage is 480tonnes/km, annual demand of LSAW would reach 1.44mn tones in the next four years. Construction of West-to-East natural gas pipeline III to start in later 2012: PetroChina will commence the construction of the third West-to-East natural gas pipeline in late 2012 after it secured investment from other companies. PetroChina signed the investment cooperation framework agreement for construction of the third West-to-East Gas Pipeline with the National Council for Social Security Fund, China Urban Infrastructure Investment Fund and Bao Steel Group on 31 May, 2012. The JV is led by PetroChina with a 52% stake, with the NCSSF, China Urban Infrastructure Investment Fund and Baosteel Group each holding 16%. The fourth West-to-East natural gas pipeline: The pipeline will transmit natural gas from Xinjiang Province to East China, and the Tarim Basin is the main gas source. The natural gas production of Tarim Basin is 17bcm in 2011, and its expected to reach 30bcm in 2015 and 40bcm in 2020. PetroChina may kick off the construction project next year. Sino-Myanmar project (China section): The NDRC approved the Sino-Myanmar oil & gas project (the section within China) on 6 April, 2012, with construction expected to begin in 2H2012. The fourth Shannxi-Beijing natural gas pipeline: PetroChina plans to build the fourth Shaanxi-Beijing natural gas pipeline during 2013~15, starting from Changqing Oilfield with transmission capacity of 15bcm/year and a total length of 1,468 for the trunk and branch pipelines. Sinopecs two Coal to Gas pipelines: Sinopec has signed a strategic cooperation agreement with the Urumqi High-tech Zone in Xinjiang province to invest Rmb245bn to transfer Xinjiang's abundant coal resources into natural gas for easier transportation, making Xinjiang the world's largest coal to gas production base with the highest conversion efficiency. Sinopec plans to build two CTG pipelines, one from Xinjiang to Zhejiang and Guangdong provinces with a total length of 8,200km, and another from Xinjiang to Shandong province with a total length of 4,400km.

Figure 6: Chinas natural gas pipeline construction plan

km By end 2007 By end 2008 By end 2009 By end 2010A By end 2015E CAGR (2011-2015) Trunk 31,000 32,000 38,000 40,700 70,000 11% 14,300 30,000 16% 55,000 100,000 13% Branch Total

City gas pipeline Total length (th km) CAGR

Source: PetroChina, Industry data, CICC Research

2000A 50

2010A 200 15%

2015E 340-590 11%-24%

Total length of city pipelines network to grow at 11~24% CAGR during 12th FYP period. In late November 2011,
Regulation AC certifications and important disclosures are located at the end of this research report 6

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012 Guangdong province rolled out a new reform plan on key pipeline networks at the provincial level, which marks a critical step in the nationwide reform of pipeline network investment and operation, and we expect the reform to be rolled out nationwide gradually, which could significantly spur demand for steel pipes. We estimate China will build at least 140km of city gas pipelines during the 12th FYP period. Assuming LSAW pipe usage reaches 80% and 40t/km, the annual demand of LSAW pipes from city gas pipelines would be at least 0.9mn tonnes. Figure 7: Chinas natural gas pipeline reform roadmap
Provincial pipeline reform: +ve to local govt & distributors; to stimulate competition among upstream suppliers. City pipeline reform: Exclusive "participation right" enjoyed by local distributors to be removed +ve to upstream suppliers as city markets reopen. National pipeline reform: Upstream suppliers have to give up exclusive gas allocation privilege; +ve to private & foreign E&P projects on unconventional resources.

City gate

Storage tanks (spherical or cylinder)

Guangdong reform

Provincial pipelines

Residential households* Car refueling station Commercial users*

National pipelines

Source: Chinagas, industrial data, CICC Research

New opportunities from CNOOC and State Grid

According to industry source1, CNOOC may build oil & gas offshore pipelines and coastal natural gas transmission pipelines with a total length of 15,000km during the 12th FYP period. Only LSAW steel pipes can be used for offshore oil and gas and coastal natural gas transmission, and Chu Kong Pipe is the first steel pipe manufacturer to meet the deep sea requirements. We expect Chu Kong Pipe to obtain orders from CNOOC, which could contribute annual LSAW demand of up to 1.2mn tonnes. In addition, the State Grid may invest Rmb500bn in ultra-high voltage power grids, creating approximately 4mn tonnes of steel pipe demand over 5~6 years. SGCC has mandated the use of LSAW steel pipes in new ultra-high-voltage towers, and we expect Chu Kong Pipe to win orders from State Grid projects in the future.

http://www.pipechina.net/info/detail/2011/5/27682/ Regulation AC certifications and important disclosures are located at the end of this research report 7

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012

Global line pipe construction to peak in the next few years

Many big oil & gas pipeline projects are planned for next few years across Asia, the Middle East, Russia and the EU. Despite economic uncertainty in Europe and the US, demand from pipeline projects in developing countries remains high. Figure 8: Global major oil & gas pipeline projects
Name Length (km) Kazakhstan-China I (Phase II) n.m. pipeline 506 Keystone Oil 3,457 Myanmar-China I (Myanmar branch) 771 Myanmar-China I (China branch) 1,631 Phase II 4,023 Kazakhstan-China II n.m. Kazakhstan-China III n.m. Myanmar-China phase II n.m. Middle East-Africa-China 1,102 extension 940 Pipeline 1,299 Gas Pipeline n.m. Myanmar-China ( Myanmar branch) 793 Myanmar-China (China branch) Yunnan-Guizhou-Guangxi Brazil Petrobras 10 gas pipelines Iran Pars Pipeline Balticconnector pipeline Trans-Sahara Gas Pipeline Russia-China (East) Russia-China (West) South Stream subsea Nabucco gas pipeline Altai Pipeline Nabucco White Stream McKinsey Valley gas pipeline National Unification Gas Pipeline TAPI Pipeline Middle East-Africa-China 1,727 2,543 3,300 n.m. 2,775 4,506 n.m. n.m. 885 n.m. n.m. n.m. n.m. 1,207 5,000 2,000 2,807 Region Asia Middle East North America Asia Asia Russia&East Europe Asia Asia Asia Middle East Asia Union Union Asia Current Status Partly in operation Under construction Under construction Under construction Under construction n.m. Planning Planning Planning Planning n.m. n.m. n.m. Under construction Commencement Dec-07 n.m. 2009 n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. 2009 n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. 2011 n.m. n.m. 2014 n.m. n.m. n.m. Come on Stream 2012 2012 2012 2013 2013 2014 2015 2015 2015 n.m. 2012 2012 2012 2013 2013 2013 2014 2014-2015 2015 2015 2015 2015 2015 2015 2015 2015 2016 2018 n.m. n.m. n.m.

Oil Pipe

Gas Pipe

Asia Under construction South America Under construction Middle East n.m. Union n.m. Middle East n.m. Africa n.m. Russia&East Europe Under negotiation Russia&East Europe Under negotiation Russia&East Europe n.m. Russia&East Europe n.m. Russia&East Europe Under construction Union n.m. Russia&East Europe n.m. North America Planning South America n.m. Asia Planning Middle East Planning

Source: Spears and Associate, Company data, CICC Research

Figure 9: Global oil & gas pipelines by type

World oil & gas pipelines in operation Crude oil 27% World oil & gas pipelines under construction Crude oil 23%

Natural gas 56% Oil products 17% Natural gas 66%

Oil products 11%

Source: CNPC, CICC Research

Regulation AC certifications and important disclosures are located at the end of this research report 8

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012

Production capacity expansion to catch the pipeline boom

Industry supply remains tight. In our forecasts, the maximum achievable production capacity from qualified suppliers in China will be 3.29mn tonnes in 2012 and 3.95mn tonnes in 2013. There would be a shortfall up to 0.5mn tonnes compared to 4.5mn tonnes total demand, from gas trunk and branch pipelines projects, city gas pipelines, CNOOCs deep sea projects, and State Grids ultra-high-voltage towers. Furthermore, the estimated maximum achievable production capacity is based on the most often produced maximum diameter pipes, which can be very much different from the specification of actual orders. In other words, the maximum achievable capacity is normally hard to achieve in reality. The maximum achievable production capacity of Chu Kong Pipe was 1.3mn tonnes of LSAW in 2011, while output was merely 0.43mn tonnes in that year, with a capacity utilization rate already above 90%. In practice, the average effective rate of maximum achievable production capacity is about 40% for the industry, meaning only 1.6mn tonnes in 2013, far below demand. New capacity construction to gain a bigger share of the pipeline boom. As of December 31, 2011, the company had production capacity of 1.3mn tonnes LSAW and 150,000 tonnes ERW. Another two LSAW production lines with capacity of 300,000 tonnes each are under construction and expected to come on stream within 2012. Since SSAW covers 70% of oil & gas transmission pipelines in China, the company is planning two SSAW production lines in Lianyungang and Zhuhai, totally 0.66mn tonnes, to complement its LSAW production lines. In order to meet the demand for high-quality pipelines and to minimize the burden from material price fluctuation, the company plans to build a 2mn tonnes capacity steel plate processing production line in Lianyungang, which is expected to be completed in late 2013. This steel plate facility is capable of producing American Petroleum Institute-grade steel plate and is expected to meet requirement from more customers. Saudi factory to form oversea production base and marketing center. The company has signed a joint venture agreement with Abdel Hadi Abdullah Al Qahtani & Sons Co. (AHQ), to establish a 50:50 JV with total capital of US$106mn. The proposed principal business of the JV is manufacturing LSAW and ERW steel pipes. The production capacity is 500,000 tonnes (300,000 tonnes LSAW and 200,000 tonnes ERW). The JV will increase Chu Kongs production capacity and help it expand market share in Saudi Arabia and other neighboring countries. Figure 10: Chu Kong Pipes maximum achievable annual production capacity
Maximum achievable capacity ('000 tonnes) LSAW - UOE; Panyu, Guangdong LSAW - JCOE; Panyu, Guangdong LSAW - JCOE; Jiangyin, Jiangsu LSAW - JCOE; Zhuhai, Guangdong LSAW - COE; Liangyungang, Jiangsu LSAW - Infrastructure; Panyu, Guangdong LSAW subtotal SSAW - Zhuhai SSAW - Lianyungang, pre-welding and precision welding SSAW subtotal ERW; Panyu, Guangdong

2006A 2007A 2008A 400 400 400 300 300 300 700 700 700 150 150 150 850 850 850

2009A 400 300 300 1,000 150 1,150

2010A 400 300 300 300 1,300 150 1,450

2011A 400 300 300 300 1,300 150 1,450

2012E 400 300 300 300 300 300 1,900 360 360 150 2,410

2013E 400 300 300 300 300 300 1,900 300 360 660 150 300 200 500 3,210

A 50-50 J V with AHQ, Saudi ('000 tonnes) LS AW - JCOE ERW Subtotal

Total
Source: Company report, CICC Research

Regulation AC certifications and important disclosures are located at the end of this research report 9

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012

Earnings forecast and valuation

Our 2012/13 EPS forecasts are HK$0.29/0.35, and the stock is trading at 7.8x/6.5x 2012/13e P/E. We expect to see the start of massive construction of oil & gas pipelines in China in 2H2012 or 1H13. We initiate coverage of Chu Kong Pipe with an ACCUMULATE rating, and our DCF based 12-month price target HK$2.60 implies 7.5x 2013e P/E. Figure 11: Historical and forecasted operating and financial data
(Rmb mn) Income statement Revenue Cost of sales Selling and distribution cost Administrative expenses Other expenses Operating profit Finance costs Other income and gains Currency translation gain (loss) Share of profit of JV Profit before income tax Income tax Net income Minority interest NPAT EBITDA Effective income tax rate Balance sheet Cash and bank balances Trade and bill receivables Prepayments and other receivables Inventories Other current assets Total current assets Property, plant and equipment Prepaid land lease payments Other non current assets Total non current assets Total assets Interest-bearing bank loans Trade and bill payables Other current liabilities Total current liabilities Interest-bearing bank loans Other non current liabilities Total non current liabilities Total liabilities Shareholders equity Total liabilities & equity Cash flow statement Profit before tax Depreciation & amortization Change in Working Capital Others Cash flow from operating Capital expenditure Others Cash flow from investing Issuance of new shares Bank and government loans Dividend and interest paid Others Cash flow from financing Foreign exchange gain (loss) Net changes in cash 2009A 2,825.7 (2,183.8) (87.6) (79.9) (0.8) 473.5 (41.9) 35.6 (1.8) 0.0 465.4 (64.4) 401.0 401.0 507.2 14% 349.3 267.2 116.2 520.2 201.1 1,453.9 499.9 84.7 295.8 880.3 2,334.2 293.0 395.6 311.0 999.5 377.0 5.8 382.8 1,382.3 951.9 2,334.2 465.4 33.7 179.7 (44.3) 634.5 (392.6) 118.3 (274.3) 0.0 (78.7) (92.2) 0.0 (170.9) (0.0) 189.3 2010A 1,681.5 (1,417.1) (42.8) (116.0) (3.8) 101.8 (22.7) 11.5 (1.6) 0.0 89.0 (18.7) 70.2 70.2 144.0 21% 599.2 355.0 360.9 977.5 51.9 2,344.5 1,071.2 123.0 76.6 1,270.8 3,615.3 727.0 204.0 413.8 1,344.8 240.0 39.5 279.5 1,624.3 1,991.0 3,615.3 89.0 42.2 (719.0) 1.4 (586.4) (432.6) 32.3 (400.3) 977.7 297.1 (38.6) 0.0 1,236.2 0.1 249.7 2011A 3,376.9 (2,866.5) (71.0) (165.9) (3.1) 270.3 (65.2) 69.0 5.4 0.0 279.5 (48.8) 230.7 230.7 312.7 17% 981.8 803.3 462.4 1,190.2 47.5 3,485.2 1,420.3 339.8 185.4 1,945.5 5,430.7 1,434.8 666.6 363.0 2,464.4 732.3 36.4 768.7 3,233.1 2,197.7 5,430.7 279.5 42.3 (353.5) 33.0 1.3 (686.3) 0.0 (686.3) 0.0 1,071.3 (90.3) 90.0 1,071.0 (3.4) 382.6 2012E 3,867.2 (3,240.5) (81.2) (174.0) (3.0) 368.5 (116.2) 30.0 5.0 0.0 287.3 (48.8) 238.5 238.5 459.3 17% 376.9 847.6 532.7 1,331.7 47.5 3,136.4 2,139.9 328.5 185.4 2,653.8 5,790.2 834.8 799.0 398.2 2,032.1 1,332.3 36.4 1,368.7 3,400.8 2,389.4 5,790.2 287.3 90.8 (92.0) (44.3) 241.8 (800.0) 0.0 (800.0) 0.0 0.0 (46.7) 0.0 (46.7) 0.0 (604.9) 2013E 5,271.9 (4,472.9) (112.1) (263.6) (3.0) 420.3 (105.4) 30.0 5.0 16.8 366.8 (62.4) 304.4 304.4 571.0 17% 52.4 1,155.5 735.3 1,838.2 47.5 3,828.8 2,166.0 317.5 185.4 2,668.9 6,497.8 634.8 1,102.9 545.2 2,282.9 1,532.3 36.4 1,568.7 3,851.6 2,646.1 6,497.8 366.8 133.8 (578.0) (49.4) (126.8) (150.0) 0.0 (150.0) 0.0 0.0 (47.7) 0.0 (47.7) 0.0 (324.5)

Financial ratios Growth ability Revenue Operating profit EBITDA Net profit Profitabilty Gross margin Operating margin EBITDA margin Net margin Liquidity Current ratio Quick ratio Cash ratio Debt / asset Net debt / equity Return RoA RoE RoCE Data per share EPS (HK$) DPS (HK$) CPS (HK$) BPS (HK$) Valuation P/E P/B EV/EBITDA P/CF Dividend yield Operating data Capacity (K tonnes) LSAW SSAW ERW Subtotal 50% JV with AHQ LSAW ERW Subtotal Total Sales volume (K tonnes) Sales of steel pipes LSAW SSAW ERW Subtotal Manufacturing services LSAW SSAW ERW Subtotal Total Gross profit (Rmb/tonne)

2009A 8% 23% 20% 46% 23% 17% 18% 14% 1.5 0.9 0.3 59% 34% 19% 52% 32% 0.45 0.00 0.71 1.07 5.0 2.1 7.2 3.2 0.0% 2009A 1,000 150 1,150 1,150

2010A -40% -78% -72% -82% 16% 6% 9% 4% 1.7 1.0 0.4 45% 18% 2% 5% 4% 0.08 0.02 -0.67 2.26 28.5 1.0 25.3 -3.4 1.1% 2010A 1,300 150 1,450 1,450

2011A 101% 165% 117% 228% 15% 8% 9% 7% 1.4 0.9 0.4 60% 54% 5% 11% 8% 0.27 0.06 0.00 2.62 8.3 0.9 11.7 n.m. 2.5% 2011A 1,300 150 1,450 1,450

2012E 15% 36% 47% 3% 16% 10% 12% 6% 1.5 0.9 0.2 59% 75% 4% 10% 8% 0.29 0.06 0.30 2.92 7.8 0.8 7.9 7.7 2.6% 2012E 1,900 360 150 2,410 2,410

2013E 36% 14% 24% 28% 15% 8% 11% 6% 1.7 0.9 0.0 59% 80% 5% 12% 8% 0.35 0.07 -0.16 3.24 6.5 0.7 6.4 -14.6 3.3% 2013E 1,900 660 150 2,710 300 200 500 3,210

230 75 305 31 17 48 354 1,814

185 34 219 18 9 27 246 1,076

416 22 438 16 4 20 457 1,116

461 27 24 512 14 9 6 29 541 1,158

553 99 36 688 17 33 9 59 747 1,070

Source: Company report, Bloomberg, CICC Research

Regulation AC certifications and important disclosures are located at the end of this research report 10

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012 Figure 12: DCF and WACC calculation
Rmb mn EBIT After tax EBIT DD&A Working capital change Capex Free cash flow Entity value Net debt MI Equity value (Rmb mn) Total shares (mn) Equity value per share (Rmb) Equity value per share (HK$) 2012E 404 335 91 -88 -800 -463 3,906 1,790 2,116 1,011 2.1 2.6 2013E 472 392 134 -566 -150 -190 2014E 540 448 147 -140 -100 354 2015E 556 461 151 13 -60 565 2016E 562 467 154 25 -60 586 2017E 568 472 156 -128 -60 440 2018E 573 476 159 -134 -60 440 2019E 577 479 161 -141 -60 440 2020E 581 482 164 -148 -60 438

WACC calculation Risk free rate Risk premium Beta Cost of equity Pre-tax cost of debt Income tax rate Cost of debt Debt weighting target WACC Long-term growth
Source: Company report, Bloomberg, CICC Research

4.3% 7.5% 1.40 14.8% 6.0% 20.0% 4.8% 50.0% 9.8% 2.0%

Figure 13: Chu Kong Pipes forward P/E and P/B

5 4 3 2 1 0 Mar/11 Price HK$ Chu Kong Pipe forw ard P/E 5 4 3 2 1 0 Mar/11 Price HK$ Chu Kong Pipe forw ard P/B

Jun/11

Sep/11 4.0 x

Dec/11 6.0 x

Mar/12 8.0 x

Jun/12 10.0 x

Jun/11

Sep/11 .6 x

Dec/11 .8 x

Mar/12 1.0 x

Jun/12 1.2 x

Source: Company report, Bloomberg, CICC Research

Regulation AC certifications and important disclosures are located at the end of this research report 11

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012 Figure 14: Valuation of comparables

Bloomberg code A-Share COSL-A (*) COOEC (*) Jereh Oilfield Service (*) HBP (*) GI Technologies (*) Tong Oil Tools (*) LandOcean Energy Service Sino Geophysical Renzhi Oilfield Service Xinjiang Zhundong Kingdream SK Petroleum Equipment Baode Energy Equipment Haimo Technologies Shandong Molong-A Average HK Stock COSL-H (*) Anton Oilfield Service (*) Hilong Holding (*) Chu Kong Pipe (*) SPT Energy Honghua Group Shengli Pipe Shandong Molong-H Tianda Oil Pipe Average Global comparables Schlumberger Ltd. Baker Hughs Inc. Halliburton Co. Weatherford RPC Inc National Oilwell Vareco Cameron International FMI Technologies Nabors Industrie Transocean Ltd. Noble Corp ION Geophysical Corp Average Global Summary Highest Lowest Average 601808 CH 600583 CH 002353 CH 002554 CH 300309 CH 300164 CH 300157 CH 300191 CH 002629 CH 002207 CH 000852 CH 002278 CH 300023 CH 300084 CH 002490 CH Curr. Price Px chg Mkt. cap 2012/6/18 YTD (%) (US$ 17.00 5.84 44.83 9.07 28.97 15.18 19.87 14.47 15.93 15.60 17.12 11.60 11.35 10.56 17.17 17.3 6.2 28.1 13.8 -6.5 15.2 -22.5 15.4 0.3 21.2 79.3 27.9 12.9 36.8 74.7 57.9 3.6 3.2 0.4 0.5 0.4 0.6 0.4 0.3 0.2 1.1 0.5 0.2 0.2 0.8 EPS 11A 0.90 0.05 0.92 0.30 0.91 0.49 0.46 0.52 0.80 0.11 0.26 0.31 0.09 0.15 0.42 12E 1.01 0.20 1.36 0.40 1.25 0.61 0.94 0.58 0.76 0.30 0.35 0.43 n.m. 0.41 0.72 13E 1.11 0.18 1.89 0.53 1.86 0.77 1.31 0.74 0.93 0.31 0.39 0.55 n.m. 0.76 0.89 11A P/E (x) 12E 13E P/B (x) 12E (11A) Net cash/ equity Yield (12E) Net income Net margin Div. ROE (US$mn) 11A (%) 11A (%) 15.0% 7.9% 21.9% 10.0% 16.4% 8.3% 5.3% 7.2% 15.5% 3.0% 10.0% 7.1% 2.4% 3.0% 6.1% 9.3% 15.0% 9.4% 15.2% 4.8% 23.9% 8.5% 7.3% 6.1% 6.1% 10.7% 17.8% 9.3% 20.3% 8.5% 29.6% 13.2% 15.8% 30.0% 10.8% 6.0% 8.7% 6.2% 14.4% 635.3 28.5 67.3 14.5 15.6 12.1 12.9 12.1 11.4 1.7 16.4 12.6 1.3 3.0 26.5 22% 2% 29% 23% 57% 26% 41% 65% 14% 3% 7% 13% 10% 13% 6% -76% -27% 36% 57% 12% 64% 75% 72% 62% -3% -20% 45% 57% 63% -24%

RMB RMB RMB RMB RMB RMB RMB RMB RMB RMB RMB RMB RMB RMB RMB

18.9 16.8 15.3 125.5 29.3 33.0 48.5 33.0 23.8 30.0 22.8 17.2 31.8 23.2 15.6 31.2 24.8 19.8 43.2 21.1 15.2 28.1 24.8 19.6 19.9 21.1 17.1 141.8 52.5 51.1 65.8 48.9 43.9 37.4 27.1 21.3 126.1 n.m. n.m. 71.9 25.8 14.0 40.9 23.8 19.3 57.4 28.2 23.3 10.4 26.2 7.8 8.3 7.2 20.1 16.1 5.0 13.1 12.7 17.8 9.9 9.4 35.9 7.4 14.1 20.7 24.7 15.5 n.m. 21.2 42.0 19.9 141.8 5.0 34.1 9.0 11.4 6.9 7.8 5.2 9.5 8.9 2.9 6.3 7.6 15.4 10.9 8.8 10.5 7.8 11.2 13.5 19.3 6.0 14.9 11.3 14.0 12.0 52.5 2.9 17.3 8.1 9.1 5.5 6.5 4.1 7.3 5.5 2.4 9.2 6.4 12.6 8.7 7.8 7.6 8.4 9.6 10.0 15.2 5.3 8.5 7.0 9.8 9.2 51.1 2.4 14.1

2.4 1.2% 2.3 0.8% 6.5 0.4% 2.2 1.3% 2.3 1.2% 1.0 2.4% 2.0 0.8% 2.0 1.4% 2.1 2.0% 3.7 0.3% 5.2 1.2% 2.2 1.7% 2.9 0.0% 2.0 0.6% 2.0 0.6% 2.7 1.1% 1.3 2.2% 1.0 2.2% 1.0 3.6% 0.8 2.6% 0.9 4.1% 0.7 2.0% 0.6 4.6% 0.2 2.4% 0.4 2.2% 0.8 2.9% 2.2 1.7% 0.9 1.5% 1.4 1.3% 0.8 0.0% 2.0 3.2% 1.2 0.7% 1.7 0.0% 3.9 0.0% 0.5 0.0% 0.9 3.5% 0.8 1.8% 2.2 0.0% 1.5 1.1% 6.5 0.2 1.8

2883 HK 3337 HK 1623 HK 1938 HK 1251 HK 196 HK 1080 HK 568 HK 839 HK

HKD HKD HKD HKD HKD HKD HKD HKD HKD

11.28 1.16 1.77 2.27 1.20 1.28 0.74 2.56 1.12

-8.0 34.9 32.1 10.2 -7.0 70.7 -6.3 9.9 -13.8

10.1 0.3 0.4 0.3 0.2 0.5 0.2 0.8 0.1

1.08 0.04 0.23 0.27 0.17 0.06 0.05 0.51 0.09

1.25 0.10 0.26 0.29 0.23 0.13 0.08 0.88 0.18

1.39 0.13 0.32 0.35 0.29 0.17 0.13 1.09 0.12

635.3 12.2 47.4 11.0 28.6 26.4 14.7 26.5 10.0

22% 6% 17% 14% 14% 5% 5% 6% 1%

-76% 9% -22% -34% 9% 9% -11% -24% -8%

SLB US BHI US HAL US WFT US RES US NOV US CAM US FTI US NBR US RIG US NE US IO US

USD USD USD USD USD USD USD USD USD USD USD USD

65.85 39.49 28.98 12.57 10.01 66.60 43.99 41.04 13.17 43.71 30.90 6.30

-3.6 -18.8 -16.0 -14.1 -17.7 -2.0 -10.6 -21.4 -24.1 13.9 3.0 2.8

87.8 17.3 26.7 9.5 2.2 28.4 10.8 9.8 3.8 15.3 7.8 1.0

3.70 3.99 3.09 0.35 1.36 4.73 2.13 1.66 0.85 n.m. 1.46 0.15

4.27 3.63 3.28 1.20 1.29 5.95 3.25 2.13 2.18 2.93 2.73 0.45

5.21 4.53 3.71 1.66 1.19 6.91 4.39 2.69 2.49 5.16 4.42 0.64

4,997.0 1,695.8 2,768.4 255.5 289.0 1,944.4 508.9 389.9 237.6 -5,582.6 361.7 24.2

13% 9% 11% 2% 16% 14% 7% 8% 4% -63% 14% 5%

-16% -19% -15% -76% -26% 17% -6% -19% -72% -60% -47% -10%

4.6% 30.0% 0.0% 2.4% 1.5% 11.4%

Source: Company report, Bloomberg, CICC Research *Using data of CICC estimate, others represent market consensus

Regulation AC certifications and important disclosures are located at the end of this research report 12

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012

Risks
Capacity overbuild with little downside protection in down cycles; Slowdown in natural gas consumption growth; inefficient development of downstream city gas market; Suspension or delay of orders due to economic downturn; Sustainability of new project orders, the company may not be able to continuously secure new sales orders from new and existing customers; Severe steel price fluctuations lead to inventory risk; Currency risk; Overseas policy risks; Small cap and trading liquidity constraints.

Regulation AC certifications and important disclosures are located at the end of this research report 13

hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

CICC Research: June 19, 2012

Important legal disclosures

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hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}

Beijing
China International Capital Corporation Limited
28th Floor, China World Office 2 1 Jianguomenwai Avenue Beijing 100004, P.R. China Tel: (86-10) 6505-1166 Fax: (86-10) 6505-1156

Shanghai
China International Capital Corporation Limited Shanghai Branch
32nd Floor Azia Center 1233 Lujiazui Ring Road Shanghai 200120, P.R. China Tel: (86-21) 5879-6226 Fax: (86-21) 5888-8976

Hong Kong
China International Capital Corporation (Hong Kong) Limited
29th Floor, One International Finance Centre 1 Harbour View Street Central, Hong Kong Tel: (852) 2872-2000 Fax: (852) 2872-2100

Singapore
China International Capital Corporation (Singapore) Pte. Limited
#39-04, 6 Battery Road Singapore 049909 Tel: (65) 6572-1999 Fax: (65) 6327-1278

United Kingdom
China International Capital Corporation (UK) Limited
Level 25, 125 Old Broad Street London EC2N 1AR, United Kingdom Tel: (44-20) 7367-5718 Fax: (44-20) 7367-5719

Beijing Jianguomenwai Avenue Branch

1st Floor, Capital Tower 6A Jianguomenwai Avenue Beijing 100022, P.R. China Tel: (86-10) 8567-9238 Fax: (86-10) 8567-9235

Shanghai Middle Huaihai Road Branch

398 Huaihai Road (M) Shanghai 200020, P.R. China Tel: (86-21) 6386-1195 Fax: (86-21) 6386-1180

Shenzhen Fuhuayilu Branch

Rooms 107 & 201, Annex Building Shenzhen Duty Free Commercial Tower 6 Fuhua 1st Road, Futian District Shenzhen 518048, P.R. China Tel: (86-755) 8832-2388 Fax: (86-755) 8254-8243

Hangzhou Jiaogong Road Branch

1st Floor, Euro American Center 18 Jiaogong Road Hangzhou 310012, P.R. China Tel: (86-571) 8849-8000 Fax: (86-571) 8735-7743

Nanjing Zhongshan Road (North) Branch

2nd Floor, Greenland Plaza 1 Zhongshan Road (North) Nanjing 210008, P.R. China Tel: (86-25) 8316-8988 Fax: (86-25) 8316-8397

Guangzhou Tianhe Road Branch

40th Floor, Teemtower 208 Tianhe Road Guangzhou 510620, P.R. China Tel: (86-20) 8396-3968 Fax: (86-20) 8516-8198

Chengdu Binjiang Road (East) Branch

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hykim9@gsconst.co.kr Seongho Kang 02/15/13 10:13:25 AM GS Engineering & Construction {Inv. Relations}