How China Aerospace will turn struggling Honghua’s fortune around

Honghua is banking on its new state-owned giant shareholder to bail it out of losses through clinching new orders from Chinese oil giants and financial support from Chinese banks

PUBLISHED : Wednesday, 14 June, 2017, 7:22pm
UPDATED : Wednesday, 14 June, 2017, 10:59pm

For smaller and floundering Honghua Group, its strategy to return to profit was simple: secure the backing of a state-owned giant.

Now that it is integrated into the folds of China Aerospace Science and Industry Corp (CASIC) – one of the nation’s two main state-owned aerospace and defence equipment makers, Honghua, China’s largest onshore oil rigs exporter, says it is confident its fortunes will be turned.

For starters, the previously privately-held company would be able to secure orders from the state oil and gas producers which had shunned private sector suppliers in the last few years amid Beijing’s anti-corruption drive.

“Honghua has good products and technology which have been exported overseas for years, but in the domestic market it has been limited by the state oil giants’ tendency of internal procurement and avoidance of doing deals with the private sector during the anti-corruption drive,” said Chen Yajun, Honghua’s newly-minted chairman after the company’s shareholders’ meeting on Wednesday.

Beijing’s anti-graft campaign over the past four years has put dozens of Chinese oil sector senior executives under probe or arrests, and saw the giants keep equipment and services procurement largely in-house.

“Strategic cooperation agreements signed early this year by CASIC with China National Petroleum Corp and China Petrochemical Corp will help re-open doors for business in the domestic market,” he said.

Chen said equipment and services for the extraction of natural gas from shale rock formations was the prime market segment for business being discussed with the oil giants. The agreements cover the trading of oil and gas equipment and satellite applications among others.

CNPC is the parent of listed PetroChina, the nation’s largest oil and gas producer, and China Petrochemical is the parent of oil and gas major China Petroleum & Chemical (Sinopec).

Chen also double hats as the vice general manager of CASIC’s vehicle production unit, China Aerospace Automotive, in addition to leading Honghua’s operation since late March.

Strategic cooperation agreements signed early this year by CASIC with China National Petroleum Corp and China Petrochemical Corp will help re-open doors for business in the domestic market
Chen Yajun, Honghua chairman

He said CASIC would also help secure China Development Bank’s backing for oil projects in economic crisis-struck Venezuela, where Honghua in 2015 had won 2.3 billion yuan of production enhancement services orders that are still waiting to be executed.

Honghua, in March and last month, sold a total of 1.61 billion new shares to CASIC at HK$0.77 each, raising HK$1.24 billion to retire debt and fund operation.

CASIC is the largest shareholder with a 29.9 per cent stake, ahead of the 29.2 per cent held by former chairman Zhang Mi and other Honghua senior managers.

Honghua shares tumble after being folded into China Aerospace

Honghua posted a net loss of 610 million yuan last year, widened from a loss of 252 million yuan in 2015, as revenue slumped 45 per cent to 2.3 billion yuan on the back of global cutbacks of oil and gas drilling spending.

Honghua is not the only private firm to be subsumed into a state-owned giant under Beijing’s policy to encourage “mixed ownership” economic development.

State-owned China National Building Material Group, the world’s largest construction material maker and the nation’s sixth largest glass maker, will use Hong Kong-listed China Glass as its platform for executing Beijing’s overhaul of the mainland’s fragmented and troubled glass industry. It became China Glass’ largest shareholder last December.

China National Building Material to turn Hong Kong’s China Glass into global giant

Chen said although some CASIC subsidiaries also make oil and gas related equipment, such as tools and monitoring equipment deployed in oil and gas wells, as well as equipment that liquefies natural gas for easier distribution, it had no current plan to inject them into Honghua.

China Aerospace is well-known for its launch vehicles, manned spaceships, missile weapon communication satellites.

Its 12 listed vehicles include Shanghai-listed small satellite manufacturer Shanghai Spacesat and vehicle and machinery transmission maker Shaanxi Aerospace Power Hi-tech, besides Hong Kong-listed satellite broadcasting and telecommunications services provider ATP Satellite.