1 August 2017 Oil & Gas China Oilfield Services

Deutsche Bank Markets Research

Rating Company Date Buy China Oilfield 1 August 2017 Recommendation Asia Services China Change Reuters Bloomberg Exchange Ticker Price at 31 Jul 2017 (HKD) 6.66 Energy 2883.HK 2883 HK HSI 2883 Price target - 12mth (HKD) 8.57 Oil & Gas 52-week range (HKD) 8.48 - 5.87 HANG SENG INDEX 26,979 Cost cuts and new contract wins to revive earnings growth; U/G to Buy Valuation & Risks Johnson Wan Lower costs + CNOOC support + new overseas contracts = 2018 turnaround After losing money for the last 1.5 years, COSL returned to a slight profit of Research Analyst RMB148m in 2Q17. We believe this is a direct outcome of aggressive cost cuts, +852-2203 6163 both operating and non-operating, over the last three years, which have prepared COSL for a lower-for-longer oil price environment. COSL's reduced cost base Vitus Leung has made it highly competitive when bidding for overseas contracts starting in Research Analyst 2017. COSL secured three new semi-sub contracts in July 2017 and has now +852-2203 6158 signed eight contracts ytd outside of CNOOC overseas. COSL is also benefiting from increased activity at CNOOC, which increased infield drilling in 1H17 in Key changes accordance with its c.20% yoy capex growth target for 2017. While the offshore Price target 5.09 to 8.57 ↑ 68.4% drilling market remains oversupplied, we think the worst is now over for COSL Rating Sell to Buy ↑ and we expect a strong earnings recovery in 2018. Upgrading from Sell to Buy Sales (FYE) 17,332 to ↑ 1.1% with TP of HKD8.57. 17,521 Op prof margin -2.5 to 4.8 ↑ -287.1% (FYE) New contract wins overseas pave way for utilization rebound Net profit (FYE) -1,192.0 to 48.1 -104.0% Based on our analysis of COSL's contract signings per rig as of July 2017, COSL ↑ Source: Deutsche Bank has already locked in contracts to boost utilization rates to c.58% and c.69% for semi-subs (SS) and jack-ups (JU), respectively, in 2017, exceeding COSL's Figure 1: EPS: DB versus consensus targets of 50% and 60-65% for 2017. For comparison, SS and JU utilization rates (RMB/sh) DBe Cons % diff were 32% and 53% in 1Q17 and stood at 40% and 56% in FY16, suggesting a FY17 0.010 -0.062 NA sharp recovery in utilization rates in 2H17. Further, new contract wins overseas by FY18 0.400 0.162 147% COSL's European subsidiary (CDE) in Norway have been a positive surprise; it has FY19 0.740 0.276 168% secured contracts with both Lundin Petroleum and Nexen for 2018 work using its Source: Deutsche Bank, Bloomberg Finance LP Innovator and Pioneer rigs. Its Nanhai VIII rig also won contracts with Gazprom for four months of work in 2H17, with Russia emerging as a new source of revenue Our TP of HKD 8.57 is based on a WACC growth in 2018. Based on the current new contract signings and assuming that of 7.6%, using a CoE of 12.0%, an after-tax CNOOC will reward COSL with the same amount of work in 2018 as in 2017, CoD of 2.8% and a three-year beta of 1.45 (vs. the HSI). We apply 1% terminal growth utilization rates for SS and JU should rebound to c.66% and c.70%+, respectively. for COSL. Risks: lower-than-expected capex spending by CNOOC; contract cancellations. Cost cutting was likely the surprise in 1H17 results COSL reported a significant decline in losses to -RMB370m for 1H17. The result was likely due to better-than-expected cost cuts rather than revenue generation, as operating numbers in 1Q17 were rather soft. We believe COSL is on track to cut another c.10% or RMB1bn in costs in 2017 after shedding RMB1bn and RMB3bn in 2016 and 2015, respectively. The deep cuts should enable COSL to break-even in 2017 alongside increased workload. The areas where we expect further cost cuts are a reduction in employee costs, lower subcontracting expenses as less work is outsourced, lower operating lease expenses with contract renegotiations for its leased ships, and lower materials costs. Further, we believe COSL has

Deutsche Bank AG/Hong Kong Distributed on: 31/07/2017 19:21:07 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. 0bed7b6cf11c 1 August 2017 Oil & Gas China Oilfield Services already provisioned for RMB8.3bn in 2016 and that further impairments will not be necessary in 2017; we even see the potential for some accounts receivable writeback from its Statoil contract loss last year, though we have not modeled this for the moment.

Market still oversupplied but shallow depth rigs have recovered With oil prices stabilizing at USD50/bbl, global utilization rates for semi-subs hit a trough of 56.8% in Dec 2016 and those for jack-ups troughed at 46.7% in Jan 2017. They have since started to recover: July 2017 utilization rates have improved to 59.4% for JU and 51.4% for SS, up 3 ppts and 5 ppts from the troughs, respectively. However, day rates have continued to decline, with June 2017 day rates for JU and SS at USD71k/d and USD162k/d, down 11% and 35% yoy. That said, day rates for shallow water depth rigs (JU ≤ 300 ft and SS ≤ 3000 ft) have already rebounded and are now up 24%-32% yoy. COSL currently has 63% and 48% of its SS and JU rigs in the shallow water category.

Forecasts and ratios Year End Dec 31 2015A 2016A 2017E 2018E 2019E Sales (CNYm) 23,416.7 15,238.8 17,520.7 20,392.8 23,323.2 EBITDA (CNYm) 7,614.9 1,425.1 5,290.1 7,183.8 9,057.5 Reported NPAT (CNYm) 1,073.9 -11,456.2 48.1 1,919.8 3,541.2 DB Net Profit (CNY) 2,756.1 -3,452.2 -71.9 1,919.8 3,541.2 Reported EPS FD(CNY) 0.23 -2.40 0.01 0.40 0.74 DB EPS FD(CNY) 0.58 -0.72 -0.02 0.40 0.74 OLD DB EPS FD(CNY) 0.46 -0.96 -0.25 0.07 0.35 % Change 25.9% -24.6% -94.0% 470.7% 112.9% DB EPS growth (%) -65.5 – 97.9 – 84.5 PER (x) 15.6 – – 14.3 7.7 EV/EBITDA (x) 8.5 36.6 10.0 7.3 5.5 DPS (net) (CNY) 0.07 0.05 0.07 0.20 0.26 Yield (net) (%) 0.8 0.9 1.2 3.5 4.5 Source: Deutsche Bank estimates, company data

Page 2 Deutsche Bank AG/Hong Kong 1 August 2017 Oil & Gas China Oilfield Services How has COSL turned the corner?

Profit generation begins with cost cutting

After losing money for the last 1.5 years, COSL returned to a slight profit of RMB148m in 2Q17. We believe this is a direct outcome of aggressive cost cuts, both operating and non-operating, over the last three years, which have prepared COSL for a lower-for-longer oil price environment. COSL's reduced cost base has made it highly competitive when bidding for overseas contracts starting in 2017. We believe that the better-than-expected 1H17 results, with COSL reporting a significant decline in losses to -RMB370m, were not a function of revenue growth (as seen from soft 1Q17 operating data) but rather to do with further cost cuts.

Operating cost cuts - We believe COSL is on track to cut another 10-15% or RMB1bn in costs in 2017 after shedding RMB1bn and RMB3bn in 2016 and 2015, respectively. The deep cuts should enable COSL to break-even in 2017 alongside increased activity. The areas where we expect further cost cuts are a reduction in employee costs, lower subcontracting expenses as less work is outsourced, lower operating lease expenses given contract renegotiations for its leased ships, and also lower materials costs. From its peak in 2014, COSL has cut c.30% in operating costs.

Figure 2: COSL's operating expenses Figure 3: COSL's impairments and one-offs vs. its profit

RMB mn RMB mn 30,000 25% 10,000 20% 25,000 15% 5,000 20,000 10%

5% 0 15,000 0%

10,000 -5% -5,000

-10% 5,000 -15% -10,000

0 -20% 2011A 2012A 2013A 2014A 2015A 2016A 2017E -15,000 Other Operating Subcontracting 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Office Operating lease Employee Repair and maintenance Core NP Reported NP Impairments incl. exchange loss Depreciation & Amortization Consumption of materials, fuel, services

Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

Non-operating cost cuts - COSL made heavy provisions of RMB8.3bn in 2016 and we do not rule out the possibility of AR write backs of RMB1.1bn in 2017, such as for its Statoil contract cancellations, though we have not modeled this in for the moment. Since 2014, COSL has made provisions amounting to RMB10.5bn for property, goodwill, receivables and inventories. Therefore, we do not expect further impairments in 2017 for COSL, with increased work activity. With the overhang of impairments now largely removed, we expect investors to re-focus on its core business, which should experience a material rebound in 2018.

Deutsche Bank AG/Hong Kong Page 3 1 August 2017 Oil & Gas China Oilfield Services

Revenue to recover after new contract wins

While 1Q17 revenue numbers were generally soft for COSL, we see momentum picking up in 2H17 and going into 2018, with new contract signings. COSL secured three new semi-sub contracts in July 2017 and has now signed eight contracts ytd outside of CNOOC overseas, winning highly competitive bids after adjusting its cost base. COSL is also benefiting from increased activity at parent CNOOC, which increased infield drilling in 1H17 in accordance with its c.20% yoy capex target for 2017. The increase in drilling activity should also benefit its well services segment, which we expect to return to profitability in 2017. Schlumberger held an investor call for its 2Q17 results on July 21 and it too confirmed increased well completion activity in China.

Figure 4: Upstream capex of global O&G operators Figure 5: CNOOC's capex plans for 2017-2019

E&D capex (US$M) RMB bn USD/bbl 120 50% 120 120 45% 100 40% 100 100 80 35% 80 80 30% 60 25% 60 60

16% 20% 40 40 40 15% 20 20 20 10% 5% 0 0 - 0% Mid/Small-Cap Large-Cap NOC Major 2016 upstream E&D capex (US$M) 2017 upstream E&D capex (US$M) CNOOC capex Average Brent Price (RHS) y-o-y change in upstream E&D capex (%) average

Source: Woodmac, company data Source: Company data, Deutsche Bank

Based on our analysis of COSL's contract signings per rig up to July 2017, COSL has already locked in contracts to boost SS and JU utilization rates to c.58% and c.69%, respectively, in 2017, exceeding its targets of 50% and 60-65% for 2017. For comparison, SS and JU utilization rates of 32% and 53% in 1Q17 and 40% and 56% in FY16 suggest a sharp recovery in utilization rates in 2H17. Further, new contract wins overseas by COSL's European subsidiary (CDE) in Norway have been a positive surprise; it secured contracts with Lundin Petroleum and Nexen for 2018 work for its Innovator and Pioneer rigs on July 11 and July 4, respectively. In addition, on July 6 its Nanhai VIII rig won contracts with Gazprom for four months of work in 2H17, with Russia emerging as a new source of revenue growth in 2018.

Based on the current new contract signings and assuming that CNOOC will reward COSL with the same amount of work in 2018 as in 2017, utilization rates for semi-sub and jack-ups should rebound to c.66% and c.70%+, respectively. In particular, we expect the overseas utilization rate for semis to rebound from 31% in 2017 to 64%-71% in 2018.

Page 4 Deutsche Bank AG/Hong Kong 1 August 2017 Oil & Gas China Oilfield Services

Figure 6: Semi-subs: Expected work for COSL in 2017 and 2018 2017 Rig Name Service year Water Depth (ft) Country Rig Status Contract Type Operator Contract date Start Date End Date Base utilization rate Base+ utilization rate COSLPioneer 2010 2,500 Norway Warm stacked Not under contract 24-Jun-2015 20-Feb-2018 0% 0% COSLInnovator 2011 2,500 Norway Warm stacked Not under contract 6-Mar-2016 15-Feb-2018 0% 0% COSLProspector 2014 5,000 China Warm stacked Not under contract 30-Jun-2016 27-Jul-2017 0% 25% Nanhai VIII 1983 4,600 Russia Under Contract Standard Gazprom 6-Jul-2017 8-Jul-2017 6-Oct-2017 25% 25% COSLPromoter 2012 2,500 Norway Under Contract Standard Statoil 4-Apr-2013 6-Dec-2019 100% 100% HAIYANGSHIYOU 981 2008 10,000 China Under Contract Standard CNOOC 3-Apr-2017 13-Jun-2017 10-Nov-2017 41% 41% Nanhai II 1974 1,000 China Under Contract Standard CNOOC 1-Dec-2016 25-Jan-2017 1-Jan-2018 93% 93% Nanhai V 1983 1,500 China Under Contract Standard CNOOC 1-Dec-2016 1-Jan-2017 1-Jan-2018 100% 100% Nanhai VI 1982 1,500 China Under Contract Standard CNOOC 1-Dec-2016 24-Dec-2016 1-Jan-2018 100% 100% Nanhai VII 1977 1,500 China Under Contract Standard CNOOC 1-Dec-2016 1-Jan-2017 1-Jan-2018 100% 100% Nanhai IX 1988 5,000 China Under Contract Standard CNOOC 1-Dec-2016 14-Dec-2016 1-Oct-2017 75% 75% 11 rigs Avg. 22.3 yrs Avg. 3,418 ft Overall 58% 60% Domestic 73% 73% Overseas 31% 31% 2018 Rig Name Service Year Water Depth (ft) Country Rig Status Contract Type Operator Contract date Start Date End Date Base utilization rate Base+ utilization rate COSLPioneer 2010 2500 UK Moving to location Not under contract 20-Feb-2018 1-Mar-2018 COSLPioneer 2010 2500 UK Under Contract Standard Nexen 4-Jul-2017 1-Mar-2018 1-Mar-2019 84% 84% COSLInnovator 2011 2500 Norway Moving to location Not under contract 15-Feb-2018 1-Mar-2018 COSLInnovator 2011 2500 Norway Under Contract Standard Lundin Petroleum 11-Jul-2017 1-Mar-2018 30-Apr-2018 33% COSLInnovator 2011 2500 Norway Under Contract Unexercised option Lundin Petroleum 30-Apr-2018 30-May-2018 COSLInnovator 2011 2500 Norway Under Contract Unexercised option Lundin Petroleum 30-May-2018 29-Jun-2018 COSLInnovator 2011 2500 Norway Under Contract Unexercised option Lundin Petroleum 29-Jun-2018 29-Jul-2018 41% Nanhai IX 1988 5000 China Yard Not under contract 1-Oct-2017 1-Feb-2018 Nanhai IX 1988 5000 Indonesia En route Not under contract 1-Feb-2018 15-Feb-2018 Nanhai IX 1988 5000 Indonesia Under Contract Standard Kangean Energy 6-Jan-2017 15-Feb-2018 19-Nov-2018 80% 80% COSLPromoter 2012 2500 Norway Under Contract Standard Statoil 4-Apr-2013 6-Dec-2019 100% 100% DB assumed utilization rates for 2018 same as in 2017 HAIYANGSHIYOU 982 2018 5000 China In port Not under contract 31-Jan-2018 7-Feb-2018 0% 50% COSLProspector 2014 5000 China Warm stacked Not under contract 30-Jun-2018 1-Oct-2018 25% 50% HAIYANGSHIYOU 981 2008 10000 China Under Contract Standard CNOOC 13-Jun-2018 10-Nov-2018 41% 41% Nanhai VIII 1977 4600 Russia Under Contract Standard Gazprom 8-Jul-2018 6-Oct-2018 25% 50% Nanhai II 1974 1000 China Under Contract Standard CNOOC 1-Jan-2018 1-Jan-2019 100% 100% Nanhai V 1983 1500 China Under Contract Standard CNOOC 1-Jan-2018 1-Jan-2019 100% 100% Nanhai VI 1982 1500 China Under Contract Standard CNOOC 1-Jan-2018 1-Jan-2019 100% 100% Nanhai VII 1977 1500 China Under Contract Standard CNOOC 1-Jan-2018 1-Jan-2019 100% 100% 12 rigs Avg. 21.3 yrs Avg. 3,550 ft Overall 66% 75% Domestic 67% 77% Overseas 64% 71%

Source: Source: IHS Petrodata, company data, Base+ assumes options are fully exercised

Lundin Petroleum- According to CDE's website, COSL Innovator has been awarded a contract to drill one well, with the addition of an option for eight wells, for Lundin Norway AS. The contract will commence in March 2018.

Nexen - According to CDE's website, on July 4 COSL won work from Nexen Petroleum U.K. Limited (a subsidiary of CNOOC) to carry out plugging and abandonment work at the Ettrick and Blackbird fields in the UK. The work will be conducted by the semi-submersible COSLPioneer for 12 months and will commence in March 2018. The work will involve decommissioning 13 wells, 14 flowlines and umbilicals, and subsea structures. This work will also benefit COSL's well services business, besides its drilling services segment.

On the jack-up side, where COSL operates 33 rigs, CNOOC gave 19 contracts to COSL, which translates into an 85% utilization rate for its domestic rigs. There has also been a lot of positive momentum for its overseas rigs, with three new contracts signed in 2Q17 with COSL Seeker, COSL Power and Haiyangshiyou 936. The contracts are in Papua New Guinea, Mexico and Nigeria. Even with the new contract signings, however, the overseas utilization rate remains low at only c.40%. We do not forecast the contracts for 2018 jack-ups as visibility remains low compared to semi-subs, but we assume that all work given by CNOOC will resume in 2018 given CNOOC's higher capex plans.

Deutsche Bank AG/Hong Kong Page 5 1 August 2017 Oil & Gas China Oilfield Services

Figure 7: Jack-ups: Expected work for COSL in 2017

Rig Name Service Year Water Depth (ft) Region Country Rig Status Contract Type Operator Contract Fixture Date Start Date End Date Base utilization rate Base+ utilization rate COSLBoss 2008 400 SE Asia Malaysia Warm stacked Not under contract 1-Jan-2016 27-Jul-2017 0% 0% COSLConfidence 2008 375 Mexico Mexico Warm stacked Not under contract 30-Dec-2016 27-Jul-2017 0% 0% COSLGift 2013 375 Far East China Warm stacked Not under contract 1-Aug-2016 27-Jul-2017 0% 0% COSLForce 2008 375 Middle East UAE Warm stacked Not under contract 13-Sep-2016 27-Jul-2017 0% 0% Kaixuan 1 2011 400 Far East China Warm stacked Not under contract 31-Dec-2016 27-Jul-2017 0% 0% HAIYANGSHIYOU 932 2010 300 Far East China Warm stacked Not under contract 1-Jan-2017 27-Jul-2017 0% 0% COSLSeeker 2008 375 SE Asia Malaysia Hot stacked Not under contract 7-Jul-2017 26-Aug-2017 COSLSeeker 2008 375 SE Asia Papua New Guinea Moving to location Not under contract 26-Aug-2017 5-Sep-2017 COSLSeeker 2008 375 SE Asia Papua New Guinea Under Contract Standard Twinza Oil 15-Jun-2017 5-Sep-2017 13-Oct-2017 10% 10% COSLStrike 2006 400 Middle East UAE Yard Not under contract 9-Jul-2017 19-Aug-2017 COSLStrike 2006 400 Middle East UAE Hot stacked Not under contract 19-Aug-2017 19-Aug-2017 0% 0% COSLPower 2006 375 SE Asia Malaysia Warm stacked Not under contract 4-Jul-2016 31-Jul-2017 COSLPower 2006 375 W Africa Nigeria En route Not under contract 31-Jul-2017 30-Sep-2017 COSLPower 2006 375 W Africa Nigeria Under Contract Standard Sirius 24-May-2017 30-Sep-2017 29-Mar-2018 25% 25% HAIYANGSHIYOU 936 2009 350 Mexico Mexico Under Contract Standard Fieldwood Energy 26-Jun-2017 11-Jun-2017 28-Dec-2017 55% 55% Bohai-12 1978 250 Far East China Under Contract Standard CNOOC 11-Dec-2015 31-Dec-2016 31-Dec-2017 100% 100% Bohai-4 1977 300 Far East China Under Contract Standard CNOOC 1-Dec-2016 31-Dec-2016 1-Jan-2018 100% 100% Bohai-5 1983 130 Far East China Under Contract Standard CNOOC 1-Dec-2016 31-Dec-2016 1-Jan-2018 100% 100% Bohai-7 1983 131 Far East China Under Contract Standard CNOOC 1-Dec-2016 31-Dec-2016 1-Jan-2018 100% 100% Bohai-8 1980 250 Far East China Under Contract Standard CNOOC 1-Dec-2016 31-Dec-2016 1-Jan-2018 100% 100% Bohai-9 1984 131 Far East China Under Contract Standard CNOOC 1-Dec-2016 31-Dec-2016 1-Jan-2018 100% 100% Bohai-10 1980 250 Far East China Under Contract Standard CNOOC 1-Dec-2016 31-Dec-2016 1-Jan-2018 100% 100% Gulf Driller I 2013 300 Far East China Under Contract Standard CNOOC 1-Apr-2017 26-Mar-2017 1-Jan-2018 77% 77% HAIYANGSHIYOU 921 2010 200 Far East China Under Contract Standard CNOOC 1-Dec-2016 1-Jan-2017 1-Jan-2018 100% 100% HAIYANGSHIYOU 922 2010 200 Far East China Under Contract Standard CNOOC 1-Dec-2016 1-Jan-2017 1-Jan-2018 100% 100% HAIYANGSHIYOU 923 2011 200 Far East China Under Contract Standard CNOOC 1-Dec-2016 1-Jan-2017 1-Jan-2018 100% 100% HAIYANGSHIYOU 924 2011 200 Far East China Under Contract Standard CNOOC 1-Dec-2016 1-Jan-2017 1-Jan-2018 100% 100% HAIYANGSHIYOU 931 2008 300 Far East China Under Contract Standard CNOOC 1-Dec-2016 1-Jan-2017 1-Jan-2018 100% 100% HAIYANGSHIYOU 941 2006 400 Far East China Under Contract Standard CNOOC 1-Dec-2016 1-Jan-2017 1-Jan-2018 100% 100% HAIYANGSHIYOU 942 2008 400 Far East China Under Contract Standard CNOOC 1-Dec-2016 1-Jan-2017 1-Jan-2018 100% 100% HAIYANGSHIYOU 943 2015 400 Far East China Under Contract Standard CNOOC 1-Dec-2016 31-Dec-2016 1-Jan-2018 100% 100% HAIYANGSHIYOU 944 2016 400 Far East China Under Contract Standard CNOOC 1-Dec-2016 28-Feb-2017 1-Jan-2018 84% 84% Nanhai I 1976 135 Far East China Under Contract Standard CNOOC 1-Dec-2016 1-Jan-2017 1-Jan-2018 100% 100% Nanhai IV 1980 300 Far East China Under Contract Standard CNOOC 1-Dec-2016 1-Jan-2017 1-Jan-2018 100% 100% COSLHunter 2013 375 Mexico Mexico Under Contract Standard Hokchi Energy 29-Aug-2016 31-Oct-2016 2-Mar-2018 100% 100% COSLSuperior 2007 375 Middle East Iran Under Contract Standard IOEC 30-Mar-2016 1-Jul-2016 1-Jul-2018 100% 100% COSLCraft 2008 400 Middle East Iran Under Contract Standard IOEC 2-Feb-2016 1-Jul-2016 2-Jul-2018 100% 100% HAIYANGSHIYOU 937 2009 350 SE Asia Indonesia Under Contract Standard Saka Energi Indonesia 19-Dec-2016 15-Mar-2017 30-Jul-2017 38% HAIYANGSHIYOU 937 2009 350 SE Asia Indonesia Under Contract Unexercised option Saka Energi Indonesia 30-Jul-2017 30-Aug-2017 HAIYANGSHIYOU 937 2009 350 SE Asia Indonesia Under Contract Unexercised option Saka Energi Indonesia 30-Aug-2017 29-Sep-2017 HAIYANGSHIYOU 937 2009 350 SE Asia Indonesia Under Contract Unexercised option Saka Energi Indonesia 29-Sep-2017 29-Oct-2017 HAIYANGSHIYOU 937 2009 350 SE Asia Indonesia Under Contract Unexercised option Saka Energi Indonesia 29-Oct-2017 28-Nov-2017 HAIYANGSHIYOU 937 2009 350 SE Asia Indonesia Under Contract Unexercised option Saka Energi Indonesia 28-Nov-2017 28-Dec-2017 79% 33 rigs Average 15.4 years Average 306 feet Target 60-65% Overall 69% 71% Domestic 85% 85% Overseas 39% 43%

Source: IHS Petrodata, company data, Base+ assumes options are fully exercised

Figure 8: COSL jack-up utilization rates Figure 9: COSL semi-sub utilization rates

12,000 100% 4,000 100% 95% 3,500 10,000 90% 90% 3,000 85% 80% 8,000 2,500 80% 70% 6,000 75% 2,000 60% 70% 1,500 4,000 65% 50% 1,000 60% 2,000 40% 55% 500 0 50% 0 30% 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E

Jack-up operating days Calender Utilization Semi-Sub operating days Calender Utilization

Source: Deutsche Bank, company data Source: Deutsche Bank, company data

Page 6 Deutsche Bank AG/Hong Kong 1 August 2017 Oil & Gas China Oilfield Services Offshore market

Still oversupplied globally but has bottomed

With oil prices stabilizing at USD50/bbl, global utilization rates for semi-subs (SS) and jack-ups (JU) hit their respective troughs of 56.8% in Dec 2016 and 46.7% in Jan 2017, and have since started to recover. July 2017 utilization rates have improved to 59.4% for JU and 51.4% for SS, up 3 ppts and 5 ppts from the respective troughs.

Figure 10: Global semi-sub supply-demand and utilization Figure 11: Global jack-up supply-demand and utilization rates rates

230 100 570 95 520 210 90 90 470 190 85 80 420 80 170 370 70 75 150 320 60 70 130 270 51.4 65 50 220 110 59.4 Low of 46.7 in 170 60 40 90 Jan 2017 120 Low of 56.9 in 55 Dec16

70 30 70 50

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WW Semi-subs Supply WW Semi-subs Contracted WW JUs Supply WW JUs Contracted WW Semi Utilizations (%) - RHS WW JUs Utilizations (%) - RHS

Source:IHS petrodata Source: IHS petrodata

Day rates, on the other hand, have continued to decline, with June 2017 day rates for JU and SS at USD71k/d and USD162k/d, down 11% and 35% yoy.

Figure 12: Global jack-up average day rates and % Figure 13: Global semi-sub average day rates and % change yoy change yoy

200 30% 700 150% 180 20% 600 120% 160 10% 500 90% 140 0% 120 -10% 400 60% 100 -20% kUS$/d 80 300 30% -30% US$/d k 60 200 0% 40 -40% 20 -50% 100 -30%

0 -60% 0 -60%

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Jun-08 Jun-07 Y/Y change (RHS) WW JUs avg. day rates (k $/d) Y/Y change (RHS) WW Semi avg. day rates (k $/d)

Source: IHS petrodata Source: IHS petrodata

However, day rates for shallow water depth rigs (JU ≤ 300 ft and SS ≤ 3000 ft) have already rebounded and are now up 24%-32% yoy. COSL currently has 63% and 48% of its SS and JU rigs in the shallow water category.

Deutsche Bank AG/Hong Kong Page 7 1 August 2017 Oil & Gas China Oilfield Services

Figure 14: Global jack-up (300 ft and below) day rates and Figure 15: Global jack-up (300 ft and above) day rates and % change yoy % change yoy

200 30% 200 30% 180 20% 180 20% 160 10% 160 10% 140 0% 140 0% 120 120 -10% -10% 100 100

-20% -20% kUS$/d 80 kUS$/d 80 60 -30% 60 -30% 40 -40% 40 -40% 20 -50% 20 -50%

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Jun-08 Jun-07 Y/Y change (RHS) WW JU 300 IC Y/Y change (RHS) WW JU> 300 IC avg. (k $/d) avg. (k $/d)

Source: IHS petrodata Source: IHS petrodata

Figure 16: Global jack-up (7500 ft and above) day rates Figure 17: Global semi-sub (3000 ft and below) day rates and % change yoy and % change yoy 700 150% 450 150% 400 600 120% 120% 350 90% 90% 500 300 60% 60% 400 250 30% 30% 200

300 US$/d k

k US$/d k 0% 0% 150 200 -30% 100 -30% -60% 100 -60% 50 0 -90%

0 -90%

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Jun-08 Jun-07 Y/Y change (RHS) WW Semi >7500 (k $/d) Y/Y change (RHS) WW Semi <=3000 (k $/d)

Source: IHS Petrodata Source: IHS Petrodata

Page 8 Deutsche Bank AG/Hong Kong 1 August 2017 Oil & Gas China Oilfield Services Revisions

Assumptions

As a result of the new contract wins leading to higher utilization rates, and better- than-expected cost cutting efforts, we now expect COSL to return to breakeven in 2017 versus a loss of RMB-1.2bn in our previous forecast. We assume higher utilization rates across the board for jack-ups and semi-subs in 2017-2019 versus our previous forecasts, and also higher day rates for jack-ups, though we have lowered our day rate assumptions for semi-subs.

Figure 18: Revisions Actual New Forecasts Previous Forecasts (RMB mn) 2014A 2015A 2016A 2017E 2018E 2019E 2017E 2018E 2019E Total Revenue 33,217 23,417 15,239 17,521 20,393 23,323 17,332 22,315 26,181 Drilling services 17,389 12,040 6,499 6,990 8,887 10,785 7,884 10,996 12,870 Well services 9,533 6,913 5,568 6,682 7,176 7,750 6,181 7,586 9,103 Marine support and transportation services 3,469 2,703 1,949 2,572 2,765 3,006 2,046 2,291 2,566 Geophysical services 2,602 1,518 1,070 1,117 1,396 1,605 1,061 1,273 1,464 Others 224 242 153 161 169 177 161 169 177 Operating expenses -24,303 -20,015 -18,334 -16,687 -17,535 -18,511 -17,773 -21,499 -23,816 Total EBIT 8,914 3,401 -3,095 834 2,858 4,812 -441 816 2,365 Drilling services 6,572 967 -10,080 -70 1,777 2,804 -79 330 1,030 Well services 1,632 514 -385 535 718 1,162 -309 379 910 Marine support and transportation services 319 314 -327 180 277 361 0 69 205 Geophysical services 244 7 -559 22 70 241 -53 38 220 Others 147 1,600 8,256 167 17 244 0 0 0 Tax -1,002 -288 348 -100 -367 -677 0 -62 -308 Net Profit 7,492 1,074 -11,456 48 1,920 3,541 -1,192 336 1,664 EPS 1.57 0.23 -2.40 0.01 0.40 0.74 -0.25 0.07 0.35

Revenue growth YoY 21% -30% -35% 15% 16% 14% 14% 29% 17% Opex growth yoy 23% -18% -8% -9% 5% 6% -4% 21% 11% EBIT growth YoY 16% -62% -191% N.A. 243% 68% N.A. N.A. 190% NP growth YoY 12% -86% -1167% -100% N.A. 84% N.A. N.A. 395% Overall EBIT Margin 27% 15% -20% 5% 14% 21% -3% 4% 9% Overall EBITDA Margin 38% 33% 9% 30% 35% 39% 21% 22% 24% Overall Net margin 23% 5% -75% 0% 9% 15% -7% 2% 6% Drilling services rev. growth 21% -30% -35% 15% 16% 14% 14% 29% 17% Drilling services EBIT margin 38% 8% -155% -1% 20% 26% -1% 3% 8% Well services rev. growth 47% -27% -19% 20% 7% 8% 11% 23% 20% Well services EBIT margin 17% 7% -7% 8% 10% 15% -5% 5% 10% Marine support rev. growth 7% -22% -28% 32% 8% 9% 5% 12% 12% Marine support EBIT margin 9% 12% -17% 7% 10% 12% 0% 3% 8% Geophysical rev. growth -12% -42% -30% 4% 25% 15% -1% 20% 15% Geophysical EBIT margin 9% 0% -52% 2% 5% 15% -5% 3% 15% Avg. jack-up day rate (k USD/d) 176 136 89 83 87 91 62 67 72 Avg. semi-sub day rate (k USD/d) 322 296 185 145 149 156 155 165 180 Jack-up operating days 10,381 8,802 6,745 7,829 8,432 9,034 7,446 8,067 8,687 Semi-sub operating days 3,517 2,374 1,625 2,008 2,847 3,285 1,927 2,628 2,716 Jackup Calendar day utilization 90.3% 73.7% 55.6% 65.0% 70.0% 75.0% 60.0% 65.0% 70.0% Semi-sub Calendar day utilization 96.4% 61.5% 40.4% 50.0% 65.0% 75.0% 48.0% 55.0% 62.0%

Source: Company data, Deutsche Bank

We expect the drilling services segment to remain loss-making in 1H17, though it should rebound in 2H17 with higher utilization rates for its rigs. Complementing the increase in drilling activity, we also expect the well services segment to benefit from more work and a return to profitability. Schlumberger highlighted in its 2Q

Deutsche Bank AG/Hong Kong Page 9 1 August 2017 Oil & Gas China Oilfield Services results conference call on July 21 that it had seen increased well completion activity in China in 1H17.

Figure 19: Earnings sensitivity to 1% change in day rates Figure 20: Earnings sensitivity to 1ppt change in 80.0% utilization 72.5% 70.0% 120.0% 111.5%

60.0% 100.0% 86.7% 50.0% 45.6% 80.0% 40.0%

30.0% 60.0%

20.0% 40.0% 10.0% 1.7% 1.3% 20.0% 0.0% 2.1% 2.5% SS FY17 SS FY18 JU FY17 JU FY18 0.0% SS FY17 SS FY18 JU FY17 JU FY18 Source: Deutsche Bank

Source: Deutsche Bank

Figure 21: Key operational data

Key operational data - Drilling Services For the year ended Dec 31 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E QoQ YoY 1H16 2H16 1H17E HoH YoY 2016A 2017E 2018E 2019E YoY YoY YoY Jack-ups and Semi-subs Number of operating rigs 45 44 44 44 44 44 0 0 44 44 44 0 0 44 44 45 45 0% 2% 0% Operating days 2,043 1,929 2,107 2,291 1,905 2,172 0 0 3,972 4,398 4,077 0 0 8,370 9,837 11,279 12,319 18% 15% 9% Calender Utilization 52% 48% 51% 57% 48% 56% 16% 16% 52% 54% 53% -3% 2% 52% 62% 69% 75% 20% 11% 9% Day rates (k USD/day) 116 83 80 0 0 89 83 87 91 -8% 5% 5% Jack-ups Number of operating rigs 34 33 33 33 33 33 0 0 33 33 33 0 0 33 33 33 33 0% 0% 0% Jack-up operating days 1,781 1,555 1,654 1,755 1,585 1,739 0 0 3,336 3,409 3,324 0 0 6,745 7,829 8,432 9,034 16% 8% 7% Calender Utilization 61% 51% 53% 59% 53% 59% 10% 16% 56% 56% 56% 1% 1% 56% 65% 70% 75% 17% 8% 7% Day rates (k USD/day) 76 60 60 0 0 68 62 64 67 -9% 3% 5% Semi-subs Number of operating rigs 11 11 11 11 11 11 0 0 11 11 11 0 0 11 11 12 12 0% 9% 0% Semi-Sub operating days 262 374 453 536 320 433 0 0 636 989 753 0 0 1,625 2,008 2,847 3,285 24% 42% 15% Calender Utilization 26% 37% 45% 53% 32% 44% 35% 17% 32% 49% 38% -22% 19% 40% 50% 65% 75% 24% 30% 15% Day rates (k USD/day) 236 152 140 0 0 185 145 149 156 -22% 3% 5%

Source: Deutsche Bank, company data

Figure 22: Quarterly income statement Income statement For the year ended Dec 31 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E QoQ YoY 1H16 2H16 1H17E HoH YoY 2016A 2017E 2018E 2019E YoY YoY YoY Revenue (RMB mn) 3,375 3,605 3,814 4,444 3,058 4,257 39% 18% 6,980 8,259 7,315 -11% 5% 15,239 17,521 20,393 23,323 15% 16% 14% Drilling services 3,502 2,997 2,829 -6% -19% 6,499 6,990 8,887 10,785 8% 27% 21% Well services 2,135 3,434 2,562 -25% 20% 5,568 6,682 7,176 7,750 20% 7% 8% Marine support and transportation services 859 1,089 1,286 18% 50% 1,949 2,572 2,765 3,006 32% 8% 9% Geophysical services 467 603 558 -7% 20% 1,070 1,117 1,396 1,605 4% 25% 15% Others 17 136 80 -41% 365% 153 161 169 177 5% 5% 5% Opex (4,050) (3,927) (4,066) (6,290) (3,335) (3,962) 19% 1% (7,978) (10,356) (7,297) -30% -9% (18,334) (16,687) (17,535) (18,511) -9% 5% 6% Operating Profit (675) (323) (252) (1,845) (277) 296 -207% NA (998) (2,097) 18 NA NA (3,095) 834 2,858 4,812 -127% 243% 68% Drilling services (406) (9,673) (113) NA NA (10,080) (70) 1,777 2,804 -99% NA 58% Well services (150) (235) 205 NA NA (385) 535 718 1,162 -239% 34% 62% Marine support and transportation services (149) (179) 90 NA NA (327) 180 277 361 -155% 54% 30% Geophysical services (265) (295) 11 NA NA (559) 22 70 241 -104% NA 245% Others (28) 8,284 (175) NA NA EBITDA 433 786 900 (694) 837 1,410 69% 79% 1,219 206 2,247 NA 84% 1,425 5,290 7,184 9,057 271% 36% 26% Net finance cost (249) (178) (270) (219) (294) (164) -44% -8% (428) (489) (458) -6% 7% (917) (1,022) (783) (804) 11% -23% 3% Investment income 24 131 28 8 66 34 -47% -74% 155 37 100 173% -36% 192 200 200 200 4% 0% 0% Share of profit/ (loss) of associates and JVs 13 16 3 (15) 7 0 -95% -98% 28 (11) 8 -166% -73% 17 15 17 20 -10% 15% 15% Exchange loss 0 22 0 247 0 (120) NA -651% 22 247 (120) -149% -651% 269 0 0 0 -100% NA NA Impairments (0) (7,143) (187) 187 (0) 120 NA NA (7,144) 0 120 NA NA (8,287) 120 0 0 -101% -100% NA Profit before taxation (888) (7,476) (678) (1,637) (499) 167 NA NA (8,364) (2,314) (332) -86% -96% (11,807) 147 2,292 4,228 -101% 1463% 84% Taxation (22) (13) (8) 391 (27) (17) -38% 24% (35) 383 (44) -111% 23% 348 (100) (367) (677) NA 267% 84% Profit after taxation (910) (7,489) (686) (1,245) (526) 151 NA NA (8,400) (1,931) (375) -81% -96% (11,459) 47 1,926 3,552 -100% NA 84% Less: Minority interest 4 (0) (0) (6) 12 (6) -152% 2349% 4 (7) 6 -180% 51% (3) (1) 6 11 NA -513% 84% Net attributable profit (914) (7,489) (685) (1,239) (538) 157 NA NA (8,403) (1,924) (370) NA NA (11,456) 48 1,920 3,541 -100% NA 84% EPS (Rmb/shr) (0.19) (1.57) (0.14) (0.26) (0.11) 0.03 NA NA (1.76) (0.40) (0.08) NA NA (2.40) 0.01 0.40 0.74 -100% NA 84% Core NP (excl. one-off items) (914) (355) (496) (1,569) (537) 156 NA NA (1,251) (1,924) (337) NA NA (3,688) 10 1,920 3,541 -100% NA 84% Core EPS (excl. one-off items, RMB/sh) (0.19) (0.07) (0.10) (0.33) (0.11) 0.03 NA NA (0.26) (0.40) (0.07) NA NA (0.77) 0.00 0.40 0.74 -100% NA 84% DPS (RMB/sh) 0.05 0.07 0.20 0.26 40% 187% 29%

Source: Deutsche Bank, company data

Page 10 Deutsche Bank AG/Hong Kong 1 August 2017 Oil & Gas China Oilfield Services Valuation

Upgrading to Buy with target price of HKD8.57

Our TP of HKD 8.57 is based on a WACC of 7.6%, using a CoE of 12.0%, an after- tax CoD of 2.8% and a three-year beta of 1.45 (vs. the HSI). We apply 1% terminal growth for COSL.

Risks: lower-than-expected capex spending by CNOOC; contract cancellations.

Figure 23: DCF valuation of COSL

Weighted Average Cost of Capital Cost of Equity Cost of Debt Gross Debt/Total Capital 48% Risk-free Rate of Return (b) 3.9% Pre-tax Cost of Debt (a) 3.3% Market Equity/Total Capital 52.5% Equity Risk Premium (c) 5.6% Tax Rate 16.0% WACC (f) 7.6% Company Beta (d) 1.45 After-tax Cost of Debt 2.8% Terminal growth 1.0% Cost of Equity (e) 12.0% 1 2 3 4 5 6 7 8 9 10 DCF Unit 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 EBIT RMBmn 834 2,858 4,812 6,144 7,662 7,701 7,604 7,904 8,218 8,549 Tax RMBmn (100) (367) (677) (947) (1,205) (1,284) (1,269) (1,412) (1,477) (1,628) Tax-Effected EBIT RMBmn 734 2,491 4,136 5,197 6,457 6,417 6,335 6,492 6,741 6,921 + Depreciation RMBmn 4,456 4,326 4,245 4,216 4,237 4,257 4,258 4,258 4,258 4,258 - Capital Expenditure RMBmn (2,500) (3,050) (3,450) (4,250) (4,750) (4,259) (4,259) (4,259) (4,259) (6,389) - Working capital RMBmn (1,205) (1,437) (1,125) (920) (978) (607) (41) (88) (92) (97) Free Cash Flow RMBmn 1,485 2,330 3,806 4,243 4,967 5,808 6,292 6,403 6,648 4,693 Number of Shares mn 4,772

Price target valuation NPV for CashFlow RMBmn 29,773 PV of Terminal value RMBmn 34,250 Net (debt) / cash RMBmn (26,088) Minority interest RMBmn (89) Equity value RMBmn 37,847 Outstanding shares mn 4,772 Price target HKD 8.57

(a) Based on Deutsche Bank estimates (b) Based on Deutsche Bank estima(c) Based on Deutsche Bank estimates (d) Bloomberg (5 years adjusted beta against Shenzhen A-share(e) I As per CAPM, the cost of equity equals: Risk-free Rate + (beta*equity risk premium). (f) Weighted average cost of capital equals: (cost of debt*debt/total capital) + (cost of equity*equity/total capital).

Source::Deutsche Bank

Deutsche Bank AG/Hong Kong Page 11 1 August 2017 Oil & Gas China Oilfield Services

Figure 24: COSL's 12m-fwd PB Figure 25: COSL's 12m-fwd EV/EBITDA Fwd PB ROE Fwd EV/EBITDA 4.5 25% 40.0 4.0 20% 35.0 3.5 15% 30.0 3.0 10% 25.0 2.5 +1SD,2.2x 5% 20.0 2.0 +1SD,15.4x Average,1.5x 0% 15.0 1.5 Average,10.0x 10.0 1.0 -5% -1SD,4.7x 0.5 -1SD,0.8x -10% 5.0

0.0 -15% 0.0

Jul-17

Jul-12

Jul-07

Jul-07 Jul-12 Jul-17

Oct-13

Oct-08

Apr-16

Apr-11

Jun-15

Jan-15

Jun-10

Jan-10

Oct-08 Apr-11 Oct-13 Apr-16

Mar-14

Mar-09

Feb-17

Feb-12

Jun-15 Jun-10

Jan-10 Jan-15

Sep-16

Nov-15

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Dec-12

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Mar-09 Mar-14

Feb-12 Feb-17

May-13

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Sep-11 Sep-16

Aug-09 Aug-14 May-13 ForwardMay-08 PB Average Average +1SD Forward EV/EBITDA Average Average +1SD Average -1SD Average -1SD ROE Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

Figure 26: COSL comparable companies analysis

Source: Company data, Deutsche Bank estimates

Page 12 Deutsche Bank AG/Hong Kong 1 August 2017 Oil & Gas China Oilfield Services

Model updated: 31 July 2017 Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E 2019E Running the numbers Financial Summary Asia DB EPS (CNY) 1.67 0.58 -0.72 -0.02 0.40 0.74 Reported EPS (CNY) 1.57 0.23 -2.40 0.01 0.40 0.74 China DPS (CNY) 0.48 0.07 0.05 0.07 0.20 0.26 Oil & Gas BVPS (CNY) 9.9 9.8 7.4 7.3 7.5 8.0 Weighted average shares (m) 4,760 4,772 4,772 4,772 4,772 4,772 Average market cap (CNYm) 71,818 43,121 26,172 27,430 27,430 27,430 China Oilfield Services Enterprise value (CNYm) 91,474 65,046 52,200 52,993 52,194 50,222 Reuters: 2883.HK Bloomberg: 2883 HK Valuation Metrics P/E (DB) (x) 9.0 15.6 nm nm 14.3 7.7 Buy P/E (Reported) (x) 9.6 40.2 nm 570.6 14.3 7.7 P/BV (x) 1.08 0.55 0.84 0.79 0.76 0.72 Price (31 Jul 17) HKD 6.66 FCF Yield (%) 3.4 3.4 2.6 5.9 8.5 13.9 Target Price HKD 8.57 Dividend Yield (%) 3.2 0.8 0.9 1.2 3.5 4.5 EV/Sales (x) 2.8 2.8 3.4 3.0 2.6 2.2 52 Week range HKD 5.87 - 8.48 EV/EBITDA (x) 7.2 8.5 36.6 10.0 7.3 5.5 EV/EBIT (x) 10.3 19.1 nm 63.6 18.3 10.4 Market cap (m) HKDm 31,779 USDm 4,068.6 Income Statement (CNYm) Sales revenue 33,217 23,417 15,239 17,521 20,393 23,323 Company Profile Gross profit 27,262 18,847 11,122 13,898 16,481 19,098 China Oilfield Services Limited provides drilling services, well EBITDA 12,683 7,615 1,425 5,290 7,184 9,057 services, marine support and transportation services, and Depreciation 3,770 4,213 4,520 4,456 4,326 4,245 geophysical services to the oil field industry in the offshore China Amortisation 0 0 0 0 0 0 market. EBIT 8,914 3,401 -3,095 834 2,858 4,812 Net interest income(expense) -433 -595 -917 -1,022 -783 -804 Associates/affiliates 341 170 17 15 17 20 Exceptionals/extraordinaries -493 -1,682 -8,004 120 0 0 Other pre-tax income/(expense) 194 102 192 200 200 200 Profit before tax 8,522 1,396 -11,807 147 2,292 4,228 Price Performance Income tax expense 1,002 288 -348 100 367 677 12 Minorities 28 35 -3 -1 6 11 Other post-tax income/(expense) 0 0 0 0 0 0 10 Net profit 7,492 1,074 -11,456 48 1,920 3,541 8 DB adjustments (including dilution) 493 1,682 8,004 -120 0 0 6 DB Net profit 7,985 2,756 -3,452 -72 1,920 3,541 4 Jan '16 Jul '16 Jan '17 Jul '17 Cash Flow (CNYm)

China Oilfield Services HANG SENG INDEX (Rebased) Cash flow from operations 10,160 6,556 2,741 4,105 5,380 7,256 Net Capex -7,717 -5,105 -2,053 -2,500 -3,050 -3,450 Margin Trends Free cash flow 2,443 1,451 688 1,605 2,330 3,806 Equity raised/(bought back) 4,573 0 0 0 0 0 60 Dividends paid -2,052 -2,290 -324 -334 -960 -1,239 40 Net inc/(dec) in borrowings -3,832 6,301 -4,378 -911 -1,670 900 20 Other investing/financing cash flows -5,301 -5,363 -3,155 -820 -575 -595 0 Net cash flow -4,169 98 -7,170 -460 -875 2,872 -20 Change in working capital -1,245 -419 1,026 -1,205 -1,437 -1,125 -40 14 15 16 17E 18E 19E Balance Sheet (CNYm) EBITDA Margin EBIT Margin Cash and other liquid assets 5,432 12,574 6,071 5,611 4,736 7,607 Tangible fixed assets 55,338 60,388 57,457 55,554 54,275 53,477 Growth & Profitibility Goodwill/intangible assets 4,507 3,864 427 374 377 380 40 40 Associates/investments 2,098 913 624 637 647 658 Other assets 19,500 15,786 15,965 16,680 17,690 18,730 20 20 Total assets 86,874 93,525 80,544 78,856 77,724 80,851 0 0 Interest bearing debt 27,137 35,325 32,633 31,722 30,052 30,952 Other liabilities 12,415 11,371 12,614 12,125 11,698 11,612 -20 -20 Total liabilities 39,552 46,696 45,248 43,847 41,750 42,564 -40 -40 Shareholders' equity 47,273 46,741 35,206 34,920 35,880 38,182 14 15 16 17E 18E 19E Minorities 49 87 90 89 94 105 Total shareholders' equity 47,322 46,829 35,296 35,009 35,975 38,287 Sales growth (LHS) ROE (RHS) Net debt 21,705 22,751 26,562 26,111 25,316 23,345

Solvency Key Company Metrics 150 25 125 20 Sales growth (%) 20.7 -29.5 -34.9 15.0 16.4 14.4 100 15 DB EPS growth (%) 11.6 -65.5 na 97.9 na 84.5 75 10 EBITDA Margin (%) 38.2 32.5 9.4 30.2 35.2 38.8 50 5 EBIT Margin (%) 26.8 14.5 -20.3 4.8 14.0 20.6 25 0 Payout ratio (%) 30.6 30.2 nm 694.8 50.0 35.0 0 -5 ROE (%) 17.7 2.3 -28.0 0.1 5.4 9.6 14 15 16 17E 18E 19E Capex/sales (%) 23.2 21.8 13.5 14.3 15.0 14.8 Capex/depreciation (x) 2.0 1.2 0.5 0.6 0.7 0.8 Net debt/equity (LHS) Net interest cover (RHS) Net debt/equity (%) 45.9 48.6 75.3 74.6 70.4 61.0 Johnson Wan Net interest cover (x) 20.6 5.7 nm 0.8 3.6 6.0 +852 2203 6163 [email protected] Source: Company data, Deutsche Securities estimates

Deutsche Bank AG/Hong Kong Page 13 1 August 2017 Oil & Gas China Oilfield Services Appendix 1

Important Disclosures *Other information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure China Oilfield Services 2883.HK 6.66 (HKD) 31 Jul 2017 13 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg, and other vendors. Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/ DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm/db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. Important Disclosures Required by Non-U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 13. As of the end of the preceding week, Deutsche Bank and/or its affiliate(s) owns one percent or more of a class of common equity securities of this company. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr ? Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Johnson Wan

Page 14 Deutsche Bank AG/Hong Kong 1 August 2017 Oil & Gas China Oilfield Services

Historical recommendations and target price. China Oilfield Services (2883.HK) (as of 07/31/2017) 12.50 Current Recommendations Buy Hold 10.00 Sell Not Rated 1 8 Suspended Rating 2 7 9 4 7.50 ** Analyst is no longer at 5 6 Deutsche Bank 3 5.00 Security price

2.50

0.00 Sep '15 Jan '16 May '16 Sep '16 Jan '17 May '17 Date

1. 09/23/2015 Hold, Target Price Change HKD 8,88 David Hurd, CFA** 6. 08/29/2016 Hold, Target Price Change HKD 5,25 Johnson Wan 2. 12/04/2015 Downgraded to Sell, Target Price Change HKD 5,67 7. 10/31/2016 Downgraded to Sell, Target Price Change HKD 5,05 Johnson Wan Johnson Wan 3. 01/19/2016 Sell, Target Price Change HKD 3,65 Johnson Wan 8. 02/01/2017 Sell, Target Price Change HKD 5,44 Johnson Wan 4. 04/28/2016 Sell, Target Price Change HKD 5,35 Johnson Wan 9. 03/21/2017 Sell, Target Price Change HKD 5,09 Johnson Wan 5. 06/16/2016 Upgraded to Hold, Target Price Change HKD 5,55 Johnson Wan

§§§§$$$$$§§§§§

Equity Rating Key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock. Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Newly issued research recommendations and target prices supersede previously published research.

Deutsche Bank AG/Hong Kong Page 15 1 August 2017 Oil & Gas China Oilfield Services

Additional Information

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Page 16 Deutsche Bank AG/Hong Kong 1 August 2017 Oil & Gas China Oilfield Services

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor who is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements. ? ? Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities, and as such, investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the amount of funds initially deposited. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options”, at http:// www.optionsclearing.com/about/publications/character-risks.jsp. If you are unable to access the website please contact your Deutsche Bank representative for a copy of this important document. ? Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs, whose values are affected by the currency of an underlying security, effectively assume currency risk. ? Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. Aside from within this report, important conflict disclosures can also be found at https:// gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

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Deutsche Bank AG/Hong Kong Page 19 David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Michael Spencer Steve Pollard Global Chief Operating Officer Head of APAC Research Head of Americas Research Research Global Head of Economics Global Head of Equity Research

Anthony Klarman Paul Reynolds Dave Clark Pam Finelli Global Head of Head of EMEA Head of APAC Global Head of Debt Research Equity Research Equity Research Equity Derivatives Research

Andreas Neubauer Spyros Mesomeris Head of Research - Germany Global Head of Quantitative and QIS Research

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