Action
We maintain HOLD but cut our TP by 47% from HK$0.6 toHK$0.32.
Reasoning
New orders and ASP falling. We expect the new orders andASP for land drilling rigs to reamin weak given the oilfieldcompanies’ pervasive low utilization rates due to the capex cutsby oil companies amid slumping crude oil prices.
Workload and prices still in downtrend. The oilfield servicessegment likely see further shrinkages in workloads and risks ofcancellation or delay. The offshore engineering segment maysuffer from lower dayrates given the sluggish demand andoversupply from a new delivery cycle in the next 1~2 years.
Significant cash flow pressure. As the end of 1H15,Honghua’s net debt-to-equity stayed as high as 73%, generatingRmb54mn net finance costs against the Rmb19mn EBIT andRmb47mn OCF. We expect Honghua may have to bare highercash flow pressure in 2016/17 with the dim profit outlook.
Earnings forecast and valuation
Given the continuous worsening sector outlook, we maintain2015e EPS at –Rmb0.02 and cut 2016e from Rmb0.01 to-Rmb$0.02, and estimate 2017e EPS at Rmb0.03. Wemaintain HOLD but cut our TP by 47% from HK$0.6 to HK$0.32,which is 0.20x 2016e & 0.19x 2017e P/B.
Risks
Volatility in oil prices, price declines, capex cut in E&P sector,cash flow pressure, etc.