New share prospect | Wing Lee Construction: Annual revenue of about 500 million Hong Kong dollars, Hong Kong civil engineering contractor cash flow "roller coaster"

Another contractor in Hong Kong is attempting to IPO on the Hong Kong Stock Exchange. According to the Hong Kong Stock Exchange's disclosure on June 28th, Rongli Construction Holdings Limited (hereinafter referred to as Rongli Construction) has submitted an application for listing on the main board of the Hong Kong Stock Exchange, with Human Financing Limited as its exclusive sponsor. The prospectus shows that Rongli Construction Holdings Limited is a scale Hong Kong contractor engaged in civil and mechanical and electrical engineering as well as renewable energy projects. The company's civil engineering focuses on site leveling and road and canal works, while its mechanical and electrical engineering focuses on cable trenching, laying and interconnecting. According to industry reports, Rongli Construction is the largest subcontractor for cable and domestic pipeline installation in Hong Kong in 2023, with a market share of approximately 13.6% based on the company's revenue for the 2023/24 fiscal year. Since 2019, the company has also been involved in the design, installation, and maintenance of CECEP Solar Energy photovoltaic systems under the renewable energy department. Prior to the IPO, Rongli Construction was 100% owned by Rongli Green Development, which is owned by Yao Hongli, Yao Honglong, and Chen Lumin with 68%, 17%, and 15% equity respectively. Yao Hongli is the younger brother of Yao Honglong. Annual revenue is approximately 500 million yuan Significant fluctuations Rongli Construction's various business segments are involved in several major infrastructure projects in Hong Kong. In terms of the company's site leveling projects, it is one of the subcontractors involved in the third runway infrastructure project at Hong Kong International Airport; in terms of its road and canal works, the company is the main contractor for the rural sewage collection project in Mei Wo by the government, with a contract amount of approximately 99.1 million Hong Kong dollars; in terms of its mechanical and electrical engineering, the company has a direct contract with CLP Group (a company that provides electricity to more than 80% of Hong Kong's population), providing cable trenching, laying and interconnecting engineering and emergency and cable fault repairs under General Agreement A, covering the Sham Shui Po and Wong Tai Sin districts. The company also acts as a subcontractor for Kam Sing Construction (one of CLP Group's main contractors), providing cable trenching, laying and interconnecting engineering and emergency and cable fault repairs under General Agreement B, covering the Tsuen Wan district. In terms of financial performance, for the fiscal years 2021/22 to 2023/24 (hereinafter referred to as the reporting period), Rongli Construction's revenue shows significant fluctuations, with revenue of 520 million yuan, 361 million yuan, and 526 million yuan respectively; and net profits of approximately 59.05 million yuan, 40.56 million yuan, and 76.907 million yuan respectively. In terms of profit margins, during the reporting period, the company's gross profit margin was approximately 17.99%, 20.91%, and 23.11% respectively, showing a steady increase; while the net profit margin was approximately 11.35%, 11.23%, and 14.62% respectively. Looking at the business segments, during the reporting period, the revenue from the company's civil engineering segment was 278 million yuan, 175 million yuan, and 365 million yuan respectively, accounting for 53.5%, 48.6%, and 69.5% of the total revenue; the revenue from the mechanical and electrical engineering segment was 128 million yuan, 125 million yuan, and 113 million yuan respectively, accounting for 24.5%, 34.7%, and 21.5% of the total revenue; and the revenue from renewable energy was 32.907 million yuan, 38.043 million yuan, and 44.308 million yuan respectively, accounting for 6.3%, 10.5%, and 8.4% of the revenue. The fluctuation in revenue is mainly due to the fluctuations in the company's largest business segment, the civil engineering business. Specifically, in the 2022/23 fiscal year, Rongli Construction's revenue from site leveling engineering services declined by 56% year-on-year to 115 million yuan, mainly because the #0 project (with a contract amount of approximately 573 million yuan) and the #08 project (with a contract amount of approximately 189 million yuan) only started in December 2022 and July 2022 respectively. Therefore, the majority of the revenue from these two projects was not recognized in the 2022/23 fiscal year but will be recognized in the 2023/24 fiscal year. It can be seen that due to the different timing of project revenue recognition, the company's performance is not stable, which poses higher requirements for its operating liquidity. At each year-end, the company's cash and cash equivalents show significant fluctuations, with 13.343 million yuan, 5.47 million yuan, and 27.361 million yuan respectively. Approximately eighty percent of revenue comes from five major clients Slowdown in Hong Kong infrastructure development In the past, Rongli Construction mainly engaged in Hong Kong public projects. During the reporting period, public projects mainly involved site leveling engineering and road and canal works projects, generating service revenue that accounted for approximately 65.6%, 58.4%, and 73.2% of total revenue. It is understood that the nature, scope, and timing of public sector projects available depend on various factors, including Hong Kong government policies on infrastructure and public facilities development, land supply and public housing policies, and the general economic situation and prospects of Hong Kong. Currently, facing challenges of a fiscal deficit and declining reserves, the government's ability to allocate funds for infrastructure development may be limited. According to the Hong Kong Budget for the 2024-2025 financial year, the Financial Secretary of Hong Kong expects a budget deficit of 101.6 billion Hong Kong dollars for the 2023-24 financial year, nearly double the original estimate of 54.4 billion Hong Kong dollars. The Financial Secretary of Hong Kong also expects the budget deficit for the financial year ending on March 31, 2025 to increase further to around 48.1 billion Hong Kong dollars. According to Article 107 of the Basic Law, the Hong Kong government prepares budgets with the principle of keeping expenditures within revenues, striving for a balanced budget, avoiding deficits, and adapting to the growth rate of the local Gross Domestic Product. Given that the government may need to prioritize expenditure in areas such as education and healthcare and reduce overall spending, infrastructure projects may face budget cuts or delays. This could affect the construction, maintenance, and expansion of infrastructure such as roads, bridges, ports, and public transportation systems. If the number of private construction projects available significantly decreases, leading to reduced demand for civil, mechanical and electrical, and renewable energy projects, the business, financial condition, and operating performance of Rongli Construction could be significantly adversely affected. According to government statistics, the total value of civil engineering undertaken by Hong Kong main contractors had a compound annual growth rate of approximately 3.2% from 2019 to 2023. In the coming years, the construction value of projects such as the Kwu Tung North and Fanling North...Under the vision of the New Development Area and Tomorrow Isle, projects such as the Artificial Island of Chek Lap Kok and the expansion of Tung Chung New Town have been completed and launched one after another. This will sustain the demand for civil engineering, and it is expected that the total value of civil engineering in Hong Kong will grow at a compound annual growth rate of 3.5% between 2024 and 2028.From the perspective of competitive landscape, the civil engineering market in Hong Kong is relatively concentrated. It is estimated that by 2023, the market share of the top three players in the Hong Kong civil engineering industry will be around 22.4% combined. The company's revenue accounts for approximately 0.6% of the overall civil engineering market in Hong Kong in 2023, which is not high. Therefore, expanding market share has become the most important issue for the company. To expand market share, the company needs to win more projects and acquire more clients. However, looking at the client base of Romli Construction, the company heavily relies on a few major clients. During the reporting period, the revenue from the company's major clients was approximately 169 million yuan, 86.1 million yuan, and 172 million yuan, accounting for about 32.4%, 24.0%, and 32.6% of the total revenue respectively. The revenue from the top five clients was approximately 441 million yuan, 221 million yuan, and 387 million yuan, accounting for about 84.6%, 61.0%, and 72.3% of the total revenue. With more than 80% of the revenue coming from the top five clients, cash flow becomes a challenge for the company. According to the prospectus, when the right to receive payment becomes unconditional (excluding the passage of time), any amount previously recognized as contract assets will be reclassified as trade receivables. As of March 31, 2022, March 31, 2023, and March 31, 2024, Romli Construction recorded contract assets of approximately 127 million yuan, 141 million yuan, and 195 million yuan respectively. The high level of trade receivables has worsened Romli Construction's liquidity. Perhaps this is also a major reason for the company's decision to go public for financing. In conclusion, as a contractor mainly engaged in public projects in Hong Kong, Romli Construction's business development depends on infrastructure investment in Hong Kong. During the period, the company's revenue fluctuated significantly, and its liquidity was weak, serving as a constraint for further expanding market share.