Honghua Group announced its 2018 results, achieving full-year operating income of RMB 4.21 billion, a sharp increase of 93.2% over the previous year; realized net profit of RMB 80 million, successfully turned a loss into a profit; and achieved earnings of RMB 0.02 per share. In 2018, the company's gross margin was 25.7%, down 3.5 percentage points year on year; net profit margin was 2.3%, positive year on year. The company does not plan to pay a year-end dividend for the end of '18. Revenue and order size have increased significantly. The recovery trend is clear. The company's land drilling rig sector revenue in 2018 was 2.33 billion yuan, up 455.4% year on year; drilling rig sales increased from 8 units in '17 to 24 units in '18; the parts sector's revenue was 1.56 billion yuan, down 1.3% year on year; and the oil and gas engineering services sector's revenue was 320 million yuan, up 89.9% year on year. The company's orders increased significantly. In 2018, 34 new orders for land drilling rigs were signed, worth about US$450 million; oil and gas engineering services received orders of US$87 million. As of March 8, 2019, the company has on-hand orders of 5.73 billion yuan for land equipment and 390 million yuan for oil and gas engineering services. Complete the divestment of the offshore business, go to the market lightly, and focus on core business advantages. At the end of 2018, the company passed the approval of the offshore business sales project and completed the release of the offshore business divestment. After completing the divestment, the company's total liabilities were reduced by 61 million yuan, net asset value increased by 0.7 billion yuan, and the 18-year results turned a loss into a profit. In the future, the company will launch light duty, focus on core business advantages, and expand and strengthen the land-based transportation sector and the oil and gas service sector. Shareholders' support is strong, and the synergy effect is obvious. After the state-owned aerospace science and industry joined in, the company's operations improved markedly. In 2018, for the first time, the company received more than 450 million credit lines from the Science and Industry Group, and the bank financing balance increased by 300 million yuan; it replaced high-interest foreign debt and reduced financial expenses. Through the customer advantages of state-owned enterprises, the company successfully entered the Sichuan shale gas market. Valuation and ratings We believe that the company will significantly benefit from the operating environment after the divestment of the loss-making business. Orders and profitability are expected to continue to rise. We raised the company's EPS forecast for 19-20 to 0.04/0.07 yuan (originally 0.03/0.06 yuan), and introduced a 21-year EPS forecast of 0.09 yuan. According to the DCF valuation, the company's target price was raised to HK$0.90, and the rating was raised to “buy”. Risk warning: risk of domestic policy changes, risk of overseas geological situation, risk of exchange rate fluctuations