Main points of investment

We believe that the current oil service cycle will continue to rise; at the bottom of the domestic "seven-year action" plan, three barrels of oil continue to increase investment in exploration and development, mainly for "unconventional oil and gas" such as shale gas and tight sandstone gas. this has a great demand for drilling rigs and fracturing equipment; shale gas production in the United States accounts for 70% of natural gas, ushering in the fracturing equipment renewal cycle. Honghua electric drilling rig is in the first camp in the world, electric fracturing curve overtaking; cycle uplink + scale effect, the company will usher in a stage of rapid growth.

Oil companies increase capital expenditure, oil service industry recovery is obvious.

Since ① 2016, the crude oil market has been generally tight, with an average annual gap of 68.6012 million tons between supply and demand.

The recent attack on Saudi Aramco has led to higher oil price risk premiums due to geopolitical tensions, while US shale companies' debt and cash flow problems are worsening and North American crude oil supplies will tighten. Since 2019, central banks, represented by the Federal Reserve, have stopped shrinking tables and cutting interest rates, forming better support for oil prices.

With the gradual upward shift of the center of gravity of oil prices, the oil and gas industry as a whole has warmed up, and the investment demand of domestic and foreign oil and gas markets has rebounded; Spears&Associates predicts that the global upstream oil and gas exploration and development investment will return to 472 billion US dollars in 2019, an increase of 16% over the same period last year.

Under the background of ③ energy security strategy, the domestic oil service market is about 350 billion yuan in 2019. In August, the Central Commission for discipline Inspection inspected the "three barrels of oil" and proposed that the direction, overall situation, and implementation were not enough. It is expected that the three barrels of oil will continue to expand investment in oil and gas exploration and development in the future, especially "unconventional oil and gas" such as shale gas and tight sandstone gas.

Benefiting from the opportunity of domestic shale gas development, the company has achieved a number of new breakthroughs throughout the country.

① shale gas development in the United States has changed the world energy pattern and will usher in the fracturing equipment renewal cycle. In 2018, US shale gas production was 612.226 billion cubic meters, up 19.81 per cent from a year earlier. After more than 10 years of rapid development of shale gas in the United States, the renewal demand of related fracturing equipment is more than 51.2 billion yuan.

② benefits from the large-scale development of shale gas and there is a strong demand for fracturing equipment. In 2018, China's shale gas production was 10.881 billion cubic meters, an increase of 21.08 percent over the same period last year, accounting for 6.74 percent of natural gas production and an increase of 0.66pct over the same period last year. According to the Shale Gas Development Plan (2016-2020), when the target of 30 billion cubic meters of shale gas production in 2020 is completed, the market space of incremental fracturing equipment is 19.6 billion yuan; when the target of 100 billion cubic meters in 2030 is completed, the market space of incremental fracturing equipment is 91 billion yuan.

③ Honghua electric drive fracturing curve overtaking, in the first half of 2019 to achieve 319 million yuan of income. Domestic fracturing equipment has been localized, four Machine Factory and Jerry lead the development of conventional fracturing equipment, electric fracturing only Jerry and Honghua have mature products. With the advent of the renewal cycle of fracturing equipment in the United States, as well as the high prosperity of domestic shale gas development, it will usher in a rapid volume stage.

Drilling rigs and spare parts are growing rapidly, and the volume and price of engineering services are on the rise.

The number of ① active drilling rigs in the world is maintained at more than 2000. With the large-scale development of shale gas in China, it is optimistic that the number of active drilling rigs in the Asia-Pacific region will increase; the performance-to-price ratio of domestic drilling rigs is high.

The sales of drilling rigs and spare parts of ② Company are growing rapidly, and the profitability is improving rapidly. The company can design and manufacture land rigs with 1000m-12000m drilling capacity; at present, there are nearly 1000 Honghua rigs in use all over the world. In the first half of 2019, the company's revenue from drilling rigs and spare parts was 1.736 billion yuan, an increase of 69.83% over the same period last year, and the gross profit margin was 31.10%, an increase of 12.90pct over the same period last year.

The volume and price of oil and gas engineering services of ③ Company have risen simultaneously. In the first half of 2019, the company's oil service revenue was 313 million yuan, an increase of 150.87 percent over the same period last year; a drilling footage of 40790 meters, an increase of 21.91 percent; a pump injection of 1179 segments, an increase of 307.96 percent over the same period last year; 11 drilling teams, an increase of 10.00 percent over the same period last year; and a gross profit margin of 5.60 percent, an increase of 5.00pct over the same period last year.

Coverage for the first time, giving a "overweight" rating. Benefiting from the uptrend of the global oil service industry, the shale gas fracturing equipment in the United States ushered in the renewal cycle; considering that the domestic exploration and development policy supports the bottom, the domestic shale gas fracturing equipment and service incremental market is large. The company's electric drilling rig is in the first camp in the world, electric drive fracturing to achieve corner overtaking, obvious competitive advantage, the company's performance is expected to continue to grow rapidly. From 2019 to 2021, the company's net profit is expected to be 165 million yuan, 309 million yuan and 388 million yuan respectively, corresponding to 0.03 yuan per share, 0.06 yuan per share and 0.07 yuan per share, respectively. According to the latest closing price of 0.445 Hong Kong dollars (calculated at the latest Hong Kong dollar exchange rate of 0.8981, equivalent to RMB 0.40 yuan), the corresponding PE is 13, 7 and 5 times respectively, covering for the first time and giving "overweight" rating.

Risk tips: the risk of a sharp fall in international oil prices; the risk that the recovery of the oil service industry is less than expected; domestic shale gas and other unconventional oil and gas development is not as expected; overseas market business is not as expected; order execution is not as expected; the uncertain impact of exchange rate fluctuations on the company's performance.