Medium-term performance to reverse losses, in line with expectations
Honghua Group announced its mid-term results in 2019, with operating income of 2.05 billion yuan in the first half of the year, a substantial increase of 78.6% over the same period last year, and a net profit of 60 million yuan, in line with expectations. The income per share is 0.01 yuan. The gross profit margin was 27.2%, up 11.0% from the same period last year; the net profit rate was 3.5%, which was due to the company's active promotion of high value-added products and stripping off the marine business sector, resulting in significant cost reduction and efficiency gains.
Seize the opportunity of the domestic shale gas market, all business sectors achieve growth. The company seized the opportunity of the domestic shale gas market. The domestic business revenue in the first half of the year was 770 million yuan, a sharp increase of 188.9% over the same period last year. The proportion of revenue rose to 38% from 23% in the same period last year; overseas business revenue was 1.27 billion yuan, an increase of 44.0% over the same period last year.
In terms of business, the company's land drilling rig sector revenue in the first half of the year was 830 million yuan, an increase of 27.7% over the same period last year. It continued to deepen cooperation with customers in the Middle East and achieved a breakthrough in drilling rig sales in Colombia. The revenue of spare parts plate was 910 million yuan, up 142.9% from the same period last year, and the top drive income of core components increased by 492% compared with the same period last year. Flexible liquid tanks for fracturing equipment obtained batch purchase orders in Xinjiang, Sichuan and other places. The revenue of the oil and gas engineering service plate was 310 million yuan, a sharp increase of 150.4% over the same period last year. We should seize the opportunity of rapid development of the shale gas markets in Sichuan, Chongqing and Guizhou, undertake high-margin directional drilling business in the Qinghai Plateau, and continue to promote drilling projects in the Middle East.
Full orders to ensure performance growth
As of June 30, 2019, the company's orders-on-hand reached 5.16 billion RMB, including 5 billion RMB for land equipment and 160 million RMB for oil and gas engineering services. In the second half of the year, the company will continue to target the advantages of the Middle East and Russian-speaking regions, give full play to the brand effect of Honghua and the advantages of high-quality products and services, and strengthen efforts to open up the market. The company will accelerate the promotion of order projects in Europe, the Middle East and domestic markets, so as to lay a solid foundation for business growth in the coming year.
Maintain a "buy" rating
We slightly downgrade the company's 19-21 EPS forecast to 0.04 EPS 0.06 pound 0.08 RMB to reflect our slightly cautious view on the short-term North American drilling rig market, but we are still optimistic about the company's performance in the domestic market and other international markets. Maintain the target price of HK $0.90 and maintain the "buy" rating.
Risk hints: domestic policy change risk, overseas geo-situation risk, exchange rate fluctuation risk