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Interview

with Zhang Mi, Honghua Group

26.04.2012 / Energyboardroom

Honghua went public in Hong Kong in 2008 as the second largest onshore drilling rig manufacturer in the world, and the first company in its niche to go public in China. The organization raised $409Mn in the IPO, a very successful debut that enunciated the confidence that the market had in your future. Mr. Zhang, you have led Honghua since 1997—can you describe the main strategies that drove the company’s growth in its first decade, and juxtapose this first stage of growth with your identity as a publically-listed company today?

Before going public, Honghua laid a foundation in the land-rig manufacturing sector through its technological innovations. Targeting the international high-end market, Honghua’s technology and products were well received in regions like North America. In 2006 and 2007, the U.S. started to explore shale gas intensively and thus had great demand for rigs. Capitalizing upon this opportunity, Honghua achieved strong growth abroad before going public. This sudden success was actually a matter of serendipity, rather than a purposeful effort!

After going public, Honghua primarily utilized the funds it raised to develop two business areas. First, we allocated approximately 2/3 of our new capital to develop our offshore capabilities. Honghua began to expand from onshore to offshore. Our second area of investment was in unconventional gas—shale gas especially. I believe that offshore and unconventionals are the future of the oil and gas industry. Both are full of challenges and opportunities.

What competitive advantages does Honghua bring to the offshore and unconventional niches, which are quickly becoming saturated with numerous international competitors?

Though offshore is a brand-new area to Honghua, I think we have some advantages in this niche. Firstly, we can learn from the successful experiences of other companies. Secondly, we can build upon and utilize Honghua’s edge in land rig manufacturing. Combining these factors, Honghua is a rising star in the sector. Honghua’s technology boasts low costs, high efficiency, and a short processing cycle. Our work in offshore applications symbolizes the nation’s own transition from ‘Made in China’ to ‘Created in China.’

Another of our advantages lies in our ability to deliver a holistic solution to offshore clients, from design to shipping to drilling, which can save a great deal of time and cost.

Honghua also streamlines the exploration and production processes for unconventional gas, by offering comprehensive services from design to equipment production. As the major power for shale gas exploration, diesel is expensive and difficult to transport. Meanwhile, the current well sites and equipment take up too much space. Honghua offers advanced equipment with higher efficiency to solve these problems. We use the gas byproduct from the oil field as fuel for oil extraction. Power stations and a power grid are constructed, and a central power station is built to provide power for the wells. This practice can save 30%-40% of the cost, compared to traditional methods. It is also energy-saving and reduces emissions. In five to ten years, the exploration of shale gas will rely on technologies such as those invented by Honghua, instead of using diesel as power. Honghua would like to lead this transition. Our new technology will ease the dependence on diesel, and will hence spur a structural transformation in resource extraction.

The development of natural gas is a clear trend in the industry. China’s current consumption of natural gas is only 1/5 of that of the U.S. In 10 to 20 years, however, there will be a complete turnaround in the sector, and China’s natural gas consumption should meet U.S. levels. Approximately 2/3 of China’s natural gas consumption will be met by unconventional gas from both domestic and international markets. Therefore, Honghua’s equipment, technology and service for shale gas solutions are very promising.

Honghua initially focused on the Chinese market, but today has offices in the U.S., Egypt, and UAE. Do you believe your clients perceive you as a global company?

Honghua is a company that is based in China, but provides products and services to clients all over the world. Last year, 90% of our revenues were derived from the international market.

Traditionally, cutting-edge oil and gas technology has originated in the West and been exported to the East. However, today, Chinese companies are themselves developing innovative new technologies for this industry, and, in an interesting turn, selling them to Western markets.

You are correct. However, I would like to note that in the oil and gas industry today, ‘new technologies’ are generally the result of tailored engineering applications, rather than breakthroughs in fundamental, theoretical research. In this context, most Chinese players in our field have already mastered such capabilities.

Honghua, as a company targeting the international market, has developed rich experience in how to integrate the advantages of both East and West. The integrated solution I earlier mentioned combines sophisticated Western technologies with our own inventions. Honghua aims to integrate the best technologies from all over the world. Only in this way can we gain recognition from the global market and become a first-class service and equipment provider.

How would you appraise the company’s financial performance over the last fiscal year?

We achieved 3.5Bn RMB in revenues in 2011. While this was a steep increase over our result of 1.9Bn RMB in 2010, our income has exceeded 4Bn RMB in the past—a figure we reached in 2008. Our low performance in 2010 is attributable to the global economic recession, and was a cost of our internationalization. In 2011, we began a swift recovery.

Our goal for 2012 is to exceed our historic peak and achieve sustainable growth. Last year, Honghua’s new orders were valued at more than 1 billion USD, and hence we have favorable conditions to achieve this year’s targets. Based on our stable development in our traditional businesses and our approach to new areas like offshore and unconventional gas, Honghua has a bright future.

What do you believe it implies about the future of the Chinese economy that, in an oil & gas sector traditionally controlled by state-owned enterprises, a company from the private sector has been able to find such success?

If we take a broader perspective, China is only one part of the global market. Irrespective of the NOCs’ domestic dominance, Honghua faces a more open market abroad. For our company, it is vital to fully take advantage of the international arena. As the NOCs are less willing to meet challenges overseas, Honghua can take the opportunity to develop globally.

Furthermore, with increasing demand for oil and gas within China, a greater burden rests on the shoulders of the NOCs and the government. The authorities now encourage both state-owned and private organizations to work together to improve energy structure. This opens a door for Honghua to develop its domestic business. In 2-3 years, when China starts to intensively develop its shale gas resources, Honghua’s experience and influence on the international market will in turn help its domestic development.

Honghua’s strategy is to first develop the international market and then the domestic market. When Honghua becomes a first-class international company, the threat of China’s NOCs will no longer be a problem.

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