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Eric Ng

Honghua Group, one of the world's largest land-based oil and gas drilling rig makers and the mainland's largest exporter of such rigs, has seen the market bust and boom since listing in Hong Kong in 2008.
That year, oil prices dived 77 per cent from a record high within five months.
From a net profit of 512 million yuan in 2008, Honghua, which is based in Sichuan province, plunged into losses in 2009 and 2010 before recovering in the past two years.
Honghua had budgeted 2 billion yuan to build a manufacturing base in Jiangsu province to facilitate its entry into the offshore equipment and engineering market.
Revenue from that operation has almost tripled since 2011 but it amounted to less than 3 per cent of the firm's revenue. It remains a loss-making operation.
Honghua last month obtained its first preliminary order for an offshore oil rig worth US$320 million and another order to build six crude oil carriers for more than US$200 million.
Ratings agency Moody's Investors Service said Honghua's lack of experience in these businesses meant there were significant uncertainties over whether it could deliver products on time and within budget.
Honghua chairman Zhang Mi aims to generate revenue equally from land-based rigs, offshore engineering and oilfield services.
Zhang owns about 17 per cent of Honghua but has control over 48 per cent of its shares together with his associates.
Zhang graduated from the Sichuan Petroleum Administration Vocational University with a diploma in machinery manufacture, design and equipment. He earned a degree in economics and management from the Party Institute of Sichuan Provincial Committee.
The South China Morning Post caught up with Zhang last month following a meeting with analysts to discuss the company's interim results, which showed a 16.5 per cent year-on-year fall to 199.7 million yuan (HK$252 million) as profit margins were squeezed amid cost-cutting by customers.

How did you enter the oil and gas drilling equipment industry?
I was pretty much destined to be working in the oil and gas industry. My parents worked for PetroChina as doctors, and my sisters and brothers also worked for the company. I attended a university operated by PetroChina. When Honghua's operation was first set up in 1993, it was then state-owned and part of PetroChina. It was later turned into an enterprise collectively owned by its employees, whose interests were later consolidated under the control of about two dozen shareholders over the years.
What was your first job in the industry? 
After graduation, I became the lead oil rig operator, and later focused on rig repair and maintenance work. It was during this period that I found out about the various problems with the rigs. By studying these problems, it helped our company's development of our own rigs. Innovation played a key role in product development in our industry.
Did you have the chance to learn from foreign firms to speed up your development work? 
No. In those days we had to rely on our own effort. It took us 15 years to reach a leading level of expertise in the country. Now, we have some products that are world class.
How do you attract talent to join your company? 
We provide share options to 400 to 500 key technical and management staff. The rest of the more than 7,000 staff are incentivised by a bonus system. We also provide subsidies for our staff to further their education and qualifications in domestic institutions.
Beijing has encouraged state firms to cooperate and co-invest with private firms. How do you see the role of private enterprise changing in the oil and gas sector? 
I think they will play an increasingly important role. Our country is already the largest producer of onshore oil rigs. As the industry becomes more open to the private sector, we should see more opportunities for oil and gas field services.
Will Honghua actively seek such opportunities to co-invest with state firms? 
The current picture is still not clear. We will wait until we are certain that the terms of cooperation will be conducted on a clear, equal and fair basis. A key is the level of management influence we can have in such joint operations. Another is that the managers of such operations must be able to receive market-oriented compensation commensurate with international industry levels so that they do not have to seek their fair share through corruption.
Are you confident that you can deliver Honghua's first offshore drilling rig on time and within budget, given your promise to deliver within 30 months as opposed to the industry norm of 36 to 42 months, and to charge 20 to 30 per cent less than the normal rate of US$400 million to US$500 million? 
Yes. Our confidence is partly based on our investment in offshore facilities and on our human resources reserve. Our offshore products team is led by two experienced senior managers who have gained their expertise from South Korea or Singapore, where the oil rig industry is highly developed. When production starts, we will hire more talent to fill key positions. We now have 100 technical staff and 100 manufacturing and project management staff.
What about the payment terms of this offshore rig?
Since this is our first offshore rig, our bargaining power is relatively low. We won't demand too high a percentage as down payment. The actual terms will be finalised when the contract is signed.
How will your customer finance the rig? 
Most customers for Chinese-built offshore rigs are investors rather than end users. They normally pay 10 per cent of the rig's cost upfront, and the rig builders will finance the rest. To manage our risk, we will buy insurance from China Export & Credit Insurance Corp. Since parts supplied by us and by third parties will be delivered in the last year of the job, the bulk of our financing pressure will be felt in the last 12 to 18 months. We are comfortable we will not have a problem funding the project by our own cash flow and bank loans.
Why did your company enter into a preliminary agreement to build six crude oil tankers for a South Korean firm for more than US$200 million?
We have the facilities and the capacity to build offshore vessels, and we want to take the opportunity to train up our team so that we can prepare for any opportunity that may arise for us to build liquefied natural gas vessels. We have started research and development work and have done some preparation with the help of American technical partners.
Given Honghua is a novice in the offshore rig and oil tanker market and is competing quite aggressively on price, will the firm have to bear a period of losses before it can make a profit? 
Our profit margins will be fairly low, but I don't think we will be making losses, especially in the semi-submersible offshore rig business. Our competitive advantage is quite apparent.
China National Offshore Oil Corp was a strategic investor in Honghua's initial public offering in 2008 and it still holds a 5.2 per cent stake. It was hoped at the time the investment would bring offshore rig orders to Honghua. Are you disappointed this has not been the case? 
It is true that CNOOC has not bought offshore equipment from us, but it has been our customer for onshore rigs, with annual orders of 100 million to 200 million yuan. It is not possible for large state firms to buy a private firm's debut offshore rig, since they would insist that the supplier have proven supply experience. But once we succeed in the market, I believe they will one day buy our rigs.


Honghua prepares to enter offshore equipment market

Zhang Mi aims to generate revenue equally from land-based rigs, offshore engineering and oilfield services. 

Zhang Mi officiates at Honghua Group's listing in March 2008.

Business

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Maker of land oil and gas drilling equipment branching into new market amid questions over whether it can deliver on time and within budget


Honghua Group, one of the world's largest land-based oil and gas drilling rig makers and the mainland's largest exporter of such rigs, has seen the market bust and boom since listing in Hong Kong in 2008.


Honghua prepares to enter offshore equipment market

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Maker of land oil and gas drilling equipment branching into new market amid questions over whether it can deliver on time and within budget

Maker of land oil and gas drilling equipment branching into new market amid questions over whether it can deliver on time and within budget