1H15 results in line with our expectation
Honghua reported 1H15 revenue at Rmb2.23bn, down 42% YoY , with a net loss of Rmb30mn (vs. a net profit of Rmb200mn in 1H14), in line with our expectation.
The EBIT of onshore rigs and parts met Rmb167mn and Rmb3mn while offshore and engineering services recorded net losses of Rmb104mn and Rmb62mn, respectively .
The company's total backlog orders reached ~Rmb8bn, including ~Rmb1.4bn for onshore rigs, ~Rmb1.2bn for parts, ~Rmb5.0bn for offshore and ~Rmb353mn for oilfield services.
Trends to watch
Lack of orders. Only nine additional orders for land drilling rigs in 1H15, a significant slowdown compared with the 21 orders signed in 1H14. In addition, the orders for offshore engineering still face a high risk of cancellation or delay .
Turnaround unlikely in the near term. With lower crude oil prices and inevitable further cuts in global E&P activities, we do not expect the sector to recover in the short term and Honghua may have to be cautious in capex decisions and pay more attention to higher cash flow pressure.
Earnings revisions
We cut our 15/16e EPS forecasts by 5%/5% to -HK$0.03 and HK$0.01 (-Rmb0.02 and Rmb0.00)
Valuation and recommendation
The oilfield services sector’ s valuation was stuck in a downturn amid slumping oil prices and investors’ worries about the stressful CF are still growing. We maintain HOLD but cut TP by 33% to HK$0.6, implying 0.3x 2015e P/B.
Risks
Cancellation and delay of orders; decline in global E&P activities.