Achieve steady growth in performance and improve profitability

Honghua Group achieved a continuous operating income of 4.43 billion yuan in 2019, an increase of 5.2% over the same period last year, and a net profit of 107 million yuan, an increase of 30.6% over the same period last year, which was lower than expected, mainly due to the impairment of marine engineering business. as a result, the impairment loss increased by about 100 million yuan compared with the same period last year, and the income per share was 0.02 yuan. Profitability has improved, with a gross profit margin of 29.7%, an increase of 4.0 percentage points over the same period last year, and a net profit margin of 3.0%, an increase of 0.7 percentage points over the same period last year.

Benefiting from the development of the domestic shale gas market, the dominant sectors continued to maintain a high momentum in the domestic oil and gas market in 2019, with the company's domestic market revenue of 2.24 billion, an increase of 103% over the same period last year, and overseas market revenue of 2.18 billion, down 30% from the same period last year. From the point of view of business, the revenue of land drilling rig plate was 1.27 billion, down 45.5% from the same period last year, mainly because the large orders of overseas drilling rigs had not been settled; the revenue of spare parts plate was 2.55 billion, an increase of 63.6% over the same period last year, mainly due to the development of domestic shale gas market. Electric drive fracturing equipment began to be delivered to domestic customers, and top drive and other parts products are growing rapidly. The revenue of the oil and gas engineering service sector was 600 million, up 89.4% from the same period last year, mainly due to the completion of the first drilling and completion integration project in the domestic market, the construction of all-electric fracturing equipment in Sichuan and Chongqing, and the first overseas market to obtain drilling orders from international giants.

The electric drive fracturing technology is the leader in the industry, and the domestic shale gas development is limited by the oil price. The company signed a new order of 4.84 billion in 2019, and the integrated electric drive fracturing solution has been gradually recognized by the market. In 2020, in the face of uncertainty about the trend of oil prices and the epidemic, China's oil service market has more opportunities than overseas markets. With the continued implementation of the "Seven-year Action Plan" of oil enterprises, it is expected that there is still more demand for fracturing and oil service in Xinjiang tight oil and gas market and southwest shale gas market.

Maintain a "buy" rating

The company's domestic business, which is mainly related to shale and tight gas investments, is expected to be less affected by oil prices, but overseas rig demand may be directly affected by low oil prices, and the company's progress in opening up the North American market may also be delayed by falling oil prices. We downgrade the company's 20-21 EPS forecast to 0.02 pound 0.04 yuan (the original forecast 0.06 pound 0.08 yuan), and introduce 22-year EPS forecast of 0.05 yuan. We are still optimistic about the promotion prospect of the company's electric fracturing equipment in the shale gas market. After the oil price picks up in the future, the company still has great potential for growth and maintains a "buy" rating.

Risk hints: oil price fluctuation risk, overseas market risk, exchange rate fluctuation risk