Honghua Group announced that revenue for the first half of 2018 increased by 63.6% year on year to RMB 1.15 billion, and net loss was reduced by 69.8% year on year to RMB 118 million, in line with expectations. Benefiting from a strong recovery in oil prices and improved order quality, gross margin increased 4.2 percentage points to 16.2% year over year. The company's order flow is abundant, and the divestment of offshore assets is imminent. We think the company is likely to turn a loss into a profit in the second half of '18. Based on this, we maintain our 18/19/20 paving earnings per share forecast of RMB 0.02/0.07/0.13. Affected by market weakness, the target price was lowered from HK$0.79 to HK$0.63, corresponding to a price-earnings ratio of 21.0/7.0 times in 18/19. The current price has room to rise 14.6% from the target price, and we maintain our excess rating. Steady growth in performance. Benefiting from the recovery in oil prices, sales of land rigs increased 293% year over year to 649 million yuan, and oil field service revenue increased 130% year over year to 125 million yuan, driving a 63.6% year-on-year increase in total revenue for the first half of 2018. As of June 30, 2018, the company had land equipment business orders worth 5.87 billion yuan, marine equipment sector orders worth 286 million yuan, and oil service business orders worth 754 million yuan. The total order value reached 6.9 billion yuan, driving future performance growth. Currently, the average single order amount is over 100 million US dollars. The order targets are mainly high-margin high-end drilling rigs (30%-35% gross profit) and oil service turnkey projects (25%-35% gross profit). Improved business performance. We noticed an increase in the efficiency of the company's operations in the first half of '18. Management expenses in the first half of '18 accounted for 17.6% of total revenue, down from the same period last year (24.3%). Sales expenses accounted for 7.7% of total revenue, down from the same period last year (23.8%). However, the improvement in operating efficiency was not enough to drive operating profit to turn a loss into a profit. The company recorded an operating loss of RMB 56.14 million. Although the company's balance ratio increased by 5 percentage points to 61% year over year, interest expenses in the first half of 2018 fell 57% year on year due to the central enterprise background of the majority shareholder Science and Engineering and changes in the RMB exchange rate. Offshore sector for sale. We expect the offshore sector to complete its divestment no later than the end of '18. The offshore sector calculated operating losses of 200 million yuan and impairment provisions of 600 million yuan in 2017. After divesting the offshore sector in '18, we believe this strategic sale will benefit Honghua in the long term. This sale not only freed the company from its offshore assets, which accounted for 66.7% of net losses on the parent in '17, but the cash obtained from the sale accounted for 155% of the cash balance at the end of '17, which will greatly boost liquidity. Maintain an increase in holdings. Driven by favorable factors such as a strong recovery in oil prices and an increase in the company's ongoing orders, Honghua has huge potential for future growth, and we remain optimistic about the company's future development. We maintain our 18/19/20 paving earnings per share forecast of RMB 0.02/0.07/0.13. Affected by market weakness, the target price was lowered from HK$0.79 to HK$0.63, corresponding to a price-earnings ratio of 21.0/7.0 times in 18/19. The current price has room to rise 14.6% from the target price, and we maintain our excess rating.