Company News Company News As of May 31, the cumulative production volume of shale gas produced by the Southwest Petroleum Administration of Sinopec in 2020 reached 200 million cubic meters, which is close to three times that of the same period last year. Meanwhile, on May 31, CNPC's Southwest Oil and Gas Field Changning shale gas block produced 15.02 million cubic meters of gas per day, breaking the 15 million cubic meter mark, a record high. In May of last year, the block produced only 10.06 million cubic meters per day. According to data from the Chongqing Oil and Gas Trading Center, we estimate that China's shale gas production reached 4.7 billion cubic meters in the first four months of this year, an increase of 9% over the previous year. Comment Shale gas production has not been affected by oil prices or the pandemic, which is in line with our previous expectations. We have mentioned many times in our previous reports that we are optimistic about the cyclical resistance of shale gas production. The latest production news also further validates our views, and we continue to be optimistic about Honghua Group. Sales of electric fracturing equipment may slow down, but fuel services are expected to increase in volume in the next few years. We expect that at the end of last year, the domestic fracturing market was already experiencing a relatively saturated supply and demand situation, so the company's sales of fracturing pump equipment this year may drop to about 5 sets over the same period last year. However, we believe that the company's oil service sector is expected to bring significant profit growth to the company in the next few years, mainly considering the company's business strategy where the time for oil service profits will move backwards under the “lease-for-sale” model. Traditional businesses are still under pressure. Considering the current slump in international oil prices, we predict that the company's drill rig sales, especially overseas sales, may still drag down the company's performance. At the same time, we expect that some upstream oil and gas companies may start lowering the prices of traditional oil service operations in 2Q20, such as drilling, traditional fracturing, etc., which will affect the profitability of the company's traditional oil service business. The increase in performance in 2020 may be due to innovative business and less impairment. Despite the pressure on the company's performance, we still believe that there is room for a year-on-year increase in the company's reported profit, mainly considering the company's new 517 million yuan offshore wind power order. Furthermore, we believe that the company has already calculated a large impairment in 2019 (about 270 million yuan), so the risk of impairment this year will also decrease year-on-year. Any increase in shareholders' holdings or a company buyback will need to consider whether to trigger a mandatory offer. The company's stock price has reached a record low. Some investors are concerned about whether the majority shareholders will increase their holdings and whether the company will buy back them. According to the Hong Kong Securities Regulatory Commission's “Code on Company Acquisitions, Mergers and Share Buybacks” Rule 26 “Mandatory Offer”, “when anyone obtains 30% or more of a company's voting rights through a series of transactions over a period of time”, that person is required to make a full compulsory offer. Aerospace Science and Engineering, the majority shareholder of the company, currently holds 29.98% of the shares. If further increases in holdings or the company's repurchase may trigger a mandatory offer. We think this may be one of the reasons why the majority shareholders and company management need to consider when managing the company's stock price. The valuation proposal maintains the profit forecast and target price of HK$0.90, which corresponds to 35 times the 2020 price-earnings ratio. Maintain outperforming industry ratings. The current share price is trading at 7.8 times the 2020 price-earnings ratio. Risk oil prices recovered more slowly than expected, and order execution and new signings fell short of expectations.