Maintain Hold: Orders boost expectations, but long-term growth and margins still require validation

Overview

This report reviews Jereh Oilfield Services' 2Q26 results and progress in its gas turbine business serving U.S. AI data centers. The company's joint venture with FTAI has won an order from a major cloud service provider, improving order and delivery expectations for 2027–2028; however, HSBC believes that core gas turbine supply, competition and margins in the used gas turbine business, and long-term business-transformation capabilities remain insufficiently validated.

Core views

In the short term, AI data center-related gas turbine packaging is expected to drive rapid earnings growth, and the company has begun to receive auxiliary equipment orders. Over the medium to long term, the analyst does not believe the company has secured preferential access to core gas turbines from global OEMs. Meanwhile, competition among packagers is intense, and margins from FTAI's business of refurbishing retired aircraft engines may not remain above those of OEMs over the long term. Unless the company expands into integrated AI data center solutions such as microgrids, liquid cooling, and energy storage, growth sustainability in 2029–2031 will remain limited.

Analysis framework

The report incorporates announced contracts, gas turbine delivery assumptions, a profitability breakdown for the joint venture, the outlook for oil and gas operations, and revisions to market consensus to forecast earnings, and uses discounted cash flow valuation to determine the target price.

Methodology notes

• Valuation methodsDiscounted cash flow method

  Evaluating enterprise value by discounting future cash flows

  The report continues to use the discounted cash flow method and adjusts the target price based on earnings forecasts and long-term operating assumptions.

• Earnings forecastsScenario-based order and delivery forecasts

  Projecting revenue and profit based on announced contracts and capacity-supply constraints

  Forecasts are based on announced gas turbine contracts, while maintaining prudent assumptions for OEM core-engine supply, delivery timing, gross margin, and minority interests.

• Valuation methodsPrice-to-earnings comparison

  Comparing forecast P/E multiples with historical valuation levels

  The company's share price implies 24.2x 2027 forecast P/E, above the historical average of 17.6x since 2021.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Jereh Oilfield Services (002353.SZ)

  Covered company

  Strengths

  Has secured orders from a major cloud service provider; possesses U.S. local gas turbine packaging capabilities; has certain advantages in the China supply chain; and long-term industry trends continue to support its oil and gas business.

  Weaknesses

  No clear evidence of preferential OEM supply of core gas turbines; limited capabilities in maintenance and modification of used industrial gas turbines; core capabilities in microgrids, liquid cooling, and energy storage remain to be validated; and margins on auxiliary equipment may be constrained as a system integrator.

  Comparison

  The analyst is more optimistic than the market on gas turbine generator-set deliveries in 2027–2028 but more cautious on margins; its 2026, 2027, and 2028 revenue forecasts are respectively 13% below, 27% above, and 29% above consensus, while net profit forecasts are respectively 19% below, 7% above, and 9% below consensus.

  Risks

  Oil price volatility, RMB exchange rates, competition in oil and gas equipment, deterioration in working capital, insufficient new gas turbine orders, and disruption to project deliveries in the Middle East.

Key data

• Investment ratingHoldRating maintained.
• Target priceRMB142.80Previously RMB131.80.
• Current price and implied returnRMB166.09; -14.0%Current price as of 2026-08-17.
• 2Q26 revenueRMB4,356m, up 3.4% YoYAffected by delayed Middle East deliveries and unrecognized revenue from certain gas turbines.
• 2Q26 net profitRMB608m, down 21.6% YoYDragged by foreign-exchange losses and modest gross-margin performance.
• FTAI joint-venture orderUSD1,465mFrom a well-known cloud service provider, announced on 2026-07-23.
• 2026–2028 net profit forecast revisions-22.2%, +18.1%, +23.5%Reflecting lower 2026 guidance and improved expectations for the U.S. packaging business in 2027–2028.
• Expected earnings CAGR, 2025–202843.7%Above the 14.0% recorded in 2021–2025.
• Long-term valuation assumptionsCost of equity 10.9%; perpetual growth rate 2%Key parameters of the discounted cash flow model.

Impact & implications

The major cloud service provider order reinforces the company's ability to enter U.S. AI data center power infrastructure and could materially improve earnings flexibility in 2027–2028. However, the current valuation already reflects high growth expectations, while earnings delivery depends on gas turbine supply, delivery execution, and gross margins. Investors should focus on whether the company can evolve from gas turbine system integration into a comprehensive AI data center solution provider with core capabilities.

Risks

• A decline in crude oil prices could weaken upstream oil and gas capital expenditure and equipment demand.
• RMB appreciation against the U.S. dollar could compress margins on overseas U.S.-dollar-denominated sales.
• Intensifying competition in shale gas and oil and gas equipment industries could lead to price cuts and margin pressure.
• Key customers are state-owned oil companies, and rising accounts receivable could worsen working capital.
• Subsequent orders for AI data center gas turbine generator sets could fall short of expectations.
• Tight global OEM supply of core gas turbines or inability to secure stable allocations.
• Middle East conditions and project-execution constraints could affect equipment deliveries and EPC implementation.

What to watch

• Follow-on contract awards, delivery volumes, and margin performance for FTAI joint-venture orders.
• Whether the company secures new contracts for core gas turbine supply from OEMs such as GE, Siemens, Kawasaki, or Baker Hughes.
• Progress on auxiliary equipment, microgrid, liquid-cooling, and energy-storage orders from U.S. AI data center customers.
• 2026 gas turbine delivery guidance and the pace of revenue recognition.
• The resumption of Middle East project deliveries and recovery in oil and gas equipment orders.
• Changes in accounts receivable, operating cash flow, and minority interests.