Honghua's 1H14 revenue climbed 54% y/y to RMB3,839mn

But operating losses pulled operating profits lower.

Honghua Group's 1H14 revenue was RMB3,839mn, up 54% y/y, but down 31% h/h, with the higher revenue y/y driven by growth in all segments, particularly from larger sales of land drilling rigs (34 in 1H14 vs. 28 in 1H13).

According to a research note from Barclays, however, overall segmental operating margins fell to 9.4% (from 14.3% in 1H13 and 9.8% in 2H13) as a result of the operating losses recognised in both the offshore drilling rigs and the oil & gas engineering services segments.

Despite land drilling rig margins improving h/h to 15.6% in 1H14 from 12.2% in 2H13, the improvement was still lower than the 1H13 margin at 17.7%.

Here's more from Barclays:

The higher revenues were also partly offset by a significant increase in interest expenses, as well as a sharp increase in the effective tax rate (21% in 1H14 vs. 16% in 1H13 and 19% in 2H13).

As at 19 August 2014, the group had an existing backlog of more than cRMB6,680mn (cUS$1.1bn), as the company reported the existing backlog for three out of four of its business segments.

The backlog for the company’s land-building rig segment was RMB4.4bn (54 sets of land drilling rigs), while the oil & gas engineering services and offshore engineering equipment segments added another RMB0.150bn and RMB2.1bn, respectively.

Land drilling rigs: Segment revenue grew 56% y/y to RMB2.7bn in 1H14 as the company sold 34 units (vs. 28 in 1H13) of onshore rigs during the period and ASPs increased to RMB80mn (vs. RMB63mn in 1H13).

However, the profit margin narrowed 2.1pp y/y to 15.6%. Demand from Middle East and domestic markets (particularly to non-SOEs) remains robust while sales to South America dropped.

Offshore drilling rigs & equipment: The offshore segment recorded RMB53mn of revenue in 1H14 (up from no contributions in 1H13, but down from RMB196.6mn in 2H13), but operating losses expanded to RMB47mn.

Although the company has been successful in winning a few contracts since 2H13, from signing another two drilling packing for Tiger series for US$56mn, to entering into a US$200mn shipbuilding contract and a US$320mn semi-sub contract, the profitability of these projects remains unclear, in our view.

Parts & components: Overall sales were up 26% y/y to RMB858mn, but the segment’s operating margin dropped 7.3pp y/y to 5.1%. New trade orders YTD amounted to cUS$178mn.

Oil & gas engineering services: Amid the weak domestic oil services markets in 1H14, Honghua’s OFS segment saw an operating loss of RMB61mn (vs. a profit of RMB33mn in FY13), despite a 68% y/y increase in revenue.

As of 1H14, the company had 23 drilling services teams (no increase from 2H14), with the average revenue per team falling to RMB8.9mn/team from an average of RMB17.8mn/team in 2013.