Honghua Group won another tender for a shale gas engineering, procurement & construction （EPC）project in Sichuan Province, worth Rmb290m with a net margin of 10%, bringing total shale gas ordersin hand to date to Rmb440m, 2.6x the firm’s oil & gas service revenue in 17A. Despite the strongrecovery in the oil & gas services segment, based on a diminishing likelihood that the firm willcomplete its planned sale of its loss-making offshore segment in 1H18, we revise down our dilutedEPS forecasts from Rmb0.06 to Rmb0.04 in 18E, from Rmb0.11 to Rmb0.10 in 19E （+150% YoY）， andfrom Rmb0.19 to Rmb0.18 in 20E （+80% YoY）。 However, we remain positive on the firm’s growthoutlook on the back of recovering oil prices and strong order inflow. We raise our target price fromHK$0.97 to HK$1.06（21.0x 18E PE, 9.0x 19E PE）。 With 19.1% upside, maintain Outperform.
Oil price spike. Brent futures topped US$80/bbl for the first time since 2014 in May 2017, asOrganization of Petroleum Exporting Countries （OPEC） members adhered to a tight supply schedule,further propped by increasing concerns about geopolitical risks in the Middle East. Driven by arecovery in upstream Capex sparked by higher oil prices, Honghua reported orders in hand worthRmb6.7bn in 18E, or 3.1x its full-year 17A revenue and we expect a higher volume as the companysecures more orders. The size of one single underbidding order generally exceeds US$100m, includingbids for high-gross margin advanced drilling machine orders （30-35%）， as well as oilfield turnkeyprojects （25-35%）。
Shale gas opportunities. Policymakers target total natural gas consumption of 360bn cubic metres by2020, a 14.9% Cagr from 2017 levels, supported by ambitious Five-Year Energy Plan targets ofproduction of 30bcm of shale gas by 2020, a 44.2% Cagr from 2017 levels. We view Honghua as a keybeneficiary of the future construction of shale gas production capacity on the back of its technicalstrength. It broke the record of drilling speed in the first and second drilling cycle in the shale gas playwhere it currently operates. Given its technical strength and fast-growing shale gas market, increasingorder inflow is foreseeable. With Rmb440m share gas orders in hand, we estimate Honghua’s marketshare in Sichuan Province at 2.9%.
Maintain Outperform. With slow progress in the firm’s sale of its loss-making offshore segment, werevise down our diluted EPS forecasts from Rmb0.06 to Rmb0.04 in 18E, from Rmb0.11 to Rmb0.10 in19E （+150% YoY）， and from Rmb0.19 to Rmb0.18 in 20E （+80% YoY）。 However, we are still positive onthe firm’s growth outlook on the back of recovering oil prices and strong order inflow. We raise ourtarget price from HK$0.97 to HK$1.06, representing 21.0x 18E PE and 9.0x 19E PE. With 19.1% upside,we maintain our Outperform rating.