Forecast that 2019 earnings will grow by at least 20% year-on-year, lower than expected

Honghua Group issued a profit warning and expects profits to grow by at least 20% in 2019 compared with the same period last year, which is lower than our and market expectations. We estimate that the net profit of homing in 2019 is at least 99 million yuan, corresponding to at least 38 million yuan in 2H19 (down 38% from the previous month or 81% from the same period last year).

We believe that the lower-than-expected profit is mainly due to the decline in the profit margin of rig sales and the potential impairment loss at the end of the year.

Pay attention to the main points

The profit margin of rig sales may be lower than expected. At the 1H19 results conference, management expected the company to sign orders for large-scale drilling rigs from the Middle East and Central Asia in the second half of the year. However, the company did not announce any drilling rig orders as scheduled in the second half of the year. Therefore, we do not expect the 2H19 drilling rig sector to have large overseas orders with high gross margins, and the sector may be profitable or lower than previously expected.

There may be an impairment loss on 2H19. The company maintains prudent accounting principles, so we do not rule out the possibility that the company will make an impairment loss at the end of the year. However, we expect 2H19 impairment losses to be reduced month-on-month.

The sales of electric drive fracturing equipment and oil field service revenue are expected to meet the guidelines. In view of the rapid growth of China's shale gas exploration and development industry, we expect the company to sell 7-8 sets of 6000 water horsepower electric fracturing equipment in 2019, completing the guidance at the beginning of the year. In addition, we expect the company's oilfield services sector 2H19 to perform well, such as signing a contract with Petrochina Company Limited to provide shale gas fracturing services in Changning, Sichuan Province, and providing all-electric fracturing services to China Petroleum & Chemical Corp's shale gas well site in Fuling, Chongqing, etc., and plate revenue is expected to reach the median of 6-1 billion yuan in 2019.

Valuation and suggestion

Maintain the earnings forecast and target price of HK $0.90, corresponding to 12 times 2020 price-to-earnings ratio, which has 88% upside from the current share price. Maintain an industry rating that outperforms. Currently, Honghua Group trades at 6.2 times 2020 p / e.

Risk

Oil prices fluctuated sharply; orders were lower than expected.