COSL’s earnings grew 16% QoQ to RMB1.25bn in 3Q25. Margin improvement and lower effective tax rate were the key growth drivers. We expect its earnings to drop 17% QoQ in 4Q25 as it is likely to book more costs in 4Q of a year. We increase our 2025-27 earnings forecast by 8-10% mainly to reflect the decline in effective tax rate. We reiterate our BUY calls and raise our target price for its H shares to HK$9.70.

    Key Factors for Rating

    Although COSL’s turnover slipped 8% QoQ in 3Q25, its gross profit grew 3% QoQ as gross margin improved from 17.3% in 2Q25 to 19.4% in 3Q25 on change in revenue mix. In addition, its effective tax rate dropped from 21.0% in 2Q25 to 17.7% in 3Q25 and there was no asset impairment in 3Q25 (vs RMB86m in 2Q25). The company’s net profit grew 16% QoQ to RMB1.25bn.

    The operating days of its rigs slipped 3% QoQ in 3Q25 mainly on scheduled maintenance. However, it grew 16% YoY as the operations of its rigs in offshore China were significantly affected by typhoons in 3Q24.

    The revenue of its well services segment still dropped slightly in 9M25 as it was affected by the weak demand in the industry.

    Looking ahead, we expect the pattern in 4Q24 to repeat this year. It should see much higher turnover as projects conclude. However, we also expect it to book much higher expenses in 4Q. On net basis, we expect its earnings to drop 17% QoQ in 4Q25.

    The increase in our earnings forecasts mainly reflects the decline in effective tax rate so far this year (18.7% in 9M25 vs 27.7% in 9M24) given the much smaller loss of its operations in Norway and the absence of impact of deferred tax from the cancellation of order from Saudi Arabia seen last year. We have also removed the contributions from NH8 this year as the semi-sub still needs the approval from the Brazilian authority to start operations.

    Key Risks for Rating

    Further decline in revenue / earnings at well services segment.

    Lack of progress in developing overseas markets.

    Valuation

    We raise our target price for its H shares from HK$9.05 to HK$9.70 as we increase our target valuation from 0.85x 2025E P/B to 0.9x following the improvement in ROE after the increases in our earnings forecasts.

    We also increase our target price for its A shares from RMB18.61 to RMB19.21. We still set our target price based on its 3-month average A-H premium which has narrowed from 124% to 117% since late August.