After the second submission of the form, the private general contracting construction enterprise Zhongshen Construction Industry (02503) is only one foot away from listing.
Zhitong Financial APP learned that according to the disclosure of the Hong Kong Stock Exchange on December 28, Zhongshen Jianye Holdings Co., Ltd. (hereinafter referred to as "Zhongshen Jianye") officially launched its IPO.
According to the prospectus, the listed company intends to offer 129 million shares globally, including 12.872 million shares in Hong Kong and 116 million shares in the international offering. Among them, the maximum offer price is HK$1.00, with a board lot of 4,000 shares and an admission fee of about HK$4,040.35. The IPO period is from December 28, 2023 to January 4, 2024, and the shares are expected to be listed on January 9, 2024.
According to the prospectus, Zhongshen Construction is a private general contractor construction enterprise, mainly acting as the general contractor or subcontractor of construction projects, providing customers with professional and comprehensive construction services. Generally speaking, the company is responsible for the overall coordination and management of construction projects, including formulating work plans, recruiting manpower, renting equipment and machinery, procuring construction raw materials, and monitoring quality and construction progress.
Since its establishment in 2017, the company has specialized in municipal public works in Guangdong Province, successfully established a solid foothold in Guangdong Province, and has gradually expanded its footprint from Guangdong Province to Henan Province, Sichuan Province, Fujian Province, Hubei Province, Zhejiang Province and Xinjiang Uygur Autonomous Region.
In fact, since the beginning of this year, in the context of the economic downturn, the overall growth rate of the construction industry has gradually slowed down, the increase in real estate and infrastructure investment has been decreasing, and the market demand has been further reduced. This can't help but make the market wonder what are the fundamentals of Zhongshen Jianye, and what kind of expectations can investors expect from the market outlook?
The growth rate of industry demand has slowed down, and market competition continues to be fierce
The construction industry has always been one of the pillar industries in China and plays a pivotal role in the development of the national economy. In particular, the central and local governments have intensively introduced incentive policies to not only enhance the level of urban and rural green development and infrastructure, but also promote the construction of a better development model with high-quality green buildings and green living.
In terms of industry chain, Zhongshen Construction mainly acts as the general contractor or subcontractor of construction projects, which is located in the middle of the industry, and its main responsibilities are to manage and execute all major aspects of construction projects, including but not limited to foundation works, building construction, curtain wall construction, decoration, renovation and fire prevention.
According to the Frost & Sullivan report, unless there are special requirements, project owners often prefer to appoint a general contractor to manage the entire construction project, rather than to appoint multiple professional contractors. As a result, projects built by general contractors account for the majority of the construction industry's market share. Taking Guangdong Province as an example, the market size of the construction industry in Guangdong Province accounted for about 8.2% of the total market in China in terms of revenue in 2022, while the market share of general contractors in Guangdong Province has increased from 79.3% in 2018 to 83% in 2022.
With the continuous development of China's construction projects, the construction output value of Guangdong Province has increased from 1.10 trillion yuan in 2018 to 1.90 trillion yuan in 2022, with a compound annual growth rate of 14.7% from 2018 to 2022. It is expected that by 2027, this value will reach 2.89 trillion yuan in construction output value, with a compound annual growth rate of about 8.7% from 2022 to 2027, and the growth rate has slowed down.
Zhitong Financial APP also noted that the mainland's leading construction companies are dominated by state-owned enterprises, but private construction companies have also successfully sought opportunities in China's huge construction market by focusing on building their own strength and competitive advantages. According to the Frost & Sullivan report, in terms of China's construction revenue in 2022, private construction companies accounted for about 35.2% of the market share, of which the five largest private construction companies accounted for about 4.2% of the market share of all private construction enterprises in 2022, which shows the fierce market competition.
Earnings are fluctuating due to increased revenues
In terms of revenue, the company ranked among the top 50 among more than 10,000 private construction enterprises headquartered in Guangdong Province in 2022, with a market share of about 0.23%.
Although the market share is not too high, benefiting from the continuous development of the industry, the company's revenue has remained stable and improving in recent years. In 2020, 2021, 2022 and the first half of 2023, the Company's revenue was RMB1,331 million, RMB1,346 million, RMB1,378 million and RMB496 million, respectively.
From the perspective of split revenue structure, the company's business can be divided into four categories: construction projects, municipal public works projects, foundation projects and professional contracting projects. Among them, construction projects and municipal public works projects are the company's two core businesses, which together bring about ninety percent of the company's revenue.
However, Zhitong Financial APP noticed that in recent years, the income from construction projects has shown a fluctuating upward trend. It is reported that the construction works mainly include structural and construction works. During the reporting period, the revenue contributed by this business reached 626 million yuan, 779 million yuan, 763 million yuan and 279 million yuan respectively, accounting for 47.0%, 57.9%, 55.4% and 56.4% of the revenue respectively, which shows that the proportion of revenue of this business is also rising.
However, the revenue of municipal public works projects, which include all urban and rural public infrastructure construction, has decreased significantly. During the reporting period, the revenue of this business was 646 million yuan, 489 million yuan, 404 million yuan and 92.85 million yuan respectively, and the proportion of revenue decreased sharply from 48.5% in 2020 to 29.3% in 2022, and further declined to only 18.7% in the first half of 2023.
In this regard, the company explained that the decline in the company's municipal utility project revenue was mainly due to the completion of many municipal projects, resulting in a decline in the company's municipal utility construction project revenue. According to Zhitong Financial APP, the number of new municipal public projects in Zhongshen Construction has dropped sharply from 42 in 2020 to only 23 in 2022. In this context, the company has gradually invested resources in large-scale construction projects, and the number of new construction projects has increased from only 9 in 2020 to 16 in 2022.
It is worth mentioning that at present, Zhongshen Construction has been awarded five first-class construction contracting qualifications, including the first-level general contracting of construction engineering, the first-level general contracting of municipal public works construction, the first-level professional contracting of foundation engineering, the first-level professional contracting of building mechanical and electrical installation engineering and the first-level professional contracting of building decoration and decoration engineering. In addition, the company has also obtained six second-level and third-level construction contracting qualifications, covering different professional fields such as petrochemical engineering construction, steel structure construction and environmental protection construction. Thanks to this, the company is able to undertake projects of different types and scales throughout the country.
At present, it seems that the company has expanded its business to provinces, municipalities and autonomous regions including Henan Province, Sichuan Province, Fujian Province, Hubei Province, Zhejiang Province and Xinjiang Uygur Autonomous Region, but in terms of revenue proportion, the company's revenue is still very dependent on Guangdong Province. Taking the first half of 2023 as an example, more than ninety percent of the company's revenue comes from Guangdong Province. It can be seen that the company is more dependent on the single market of Guangdong Province, although the proportion of the company's revenue from Henan Province has also increased to 26.1%, but in the first half of 2023, this value has dropped to only 1.5%, which shows that the company's business expansion in other provinces and regions has not yet become a climate under such a fluctuating revenue proportion.
In addition, compared with the continuous upward revenue performance, the company's net profit fluctuated slightly, and during the reporting period, the profit of Zhongshen Construction Industry during the period was 13.559 million yuan, 28.076 million yuan, 25.325 million yuan, and 10.787 million yuan respectively, of which there was a negative year-on-year growth in 2022.
Revenue depends on large customers, and accounts receivable are increasing year by year
At the same time, the company also faces the risk of being dependent on large customers. During the Reporting Period, the five major customers accounted for 67.9%, 56.5%, 56.0% and 45.9% of the total revenue respectively, with the largest customers accounting for 20.6%, 20.9%, 14.9% and 13.5% of the total revenue for the corresponding years respectively.
Zhitong Financial APP understands that among engineering contracting enterprises, the "prepayment model" is quite common. In the process of winning the bid, the payment generated by the construction is basically paid by Zhongshen Construction Industry in advance, and then Party A will deliver the relevant payment to the company. As a result, cash flow management and funding sources are often the constraints faced by the companies involved.
Under multiple pressures such as the company's lack of voice due to the characteristics of the industry and the dependence on large customers, the company's accounts receivable performance fluctuated. During the Reporting Period, the Company's trade receivables (net of impairment provisions for trade receivables) were RMB219 million, RMB268 million, RMB187 million and RMB128 million respectively. At the same time, the average turnover days of the company's trade receivables showed a fluctuating upward trend, which were 43.6 days, 68.1 days, 62.2 days and 59.5 days respectively during the reporting period.
In this regard, the company admits that trade receivables pose a credit risk to the company, especially the large and highly concentrated amount of trade receivables of some customers, which will make the company face higher risks. There can be no assurance that all trade receivables will be fully recovered from the customer within the agreed credit period, and may not be recovered at all. As a result, significant delays or non-payment by customers may adversely affect their financial condition, results of operations and cash flows.
Under the high accounts receivable, the cash flow situation of Zhongshen Construction is also unstable. During the reporting period, the net cash flow generated by the company's operating activities was 23.98 million yuan, 61.07 million yuan, -46.97 million yuan and 4.8 million yuan respectively, and the cash and cash equivalents in the company's hands were 20.7 million yuan, 41.1 million yuan, 112.2 million yuan and 98.6 million yuan in the same period.
It can be seen that under the fluctuating cash flow situation, Zhongshen Construction Industry is facing certain financial pressure, which may be one of the important reasons why the company actively goes to the capital market.
On the whole, benefiting from the growth of industry demand, Zhongshen Construction Industry, which has been established for just six years, has achieved rapid growth in performance. However, while "coveting" the beautiful performance growth rate of Shenzhen Construction Industry, we cannot ignore the potential risk factors: fluctuating profitability performance, excessive dependence on a single province for income, and persistent financial pressure. With the successful listing of Zhongshen Construction Industry, if it does not seek to improve the potential risks, it may be greatly less attractive to investors.