On April 14 of last year, Shenghui Cleaning Group Holdings Limited (hereinafter referred to as Shenghui Cleaning) submitted a listing application to the Hong Kong Stock Exchange. After a year, Shenghui Cleaning submitted the form again, with Cinda International as the sole sponsor.

The Zhitong Finance App learned that Shenghui Cleaning is an environmental cleaning and maintenance service provider, as well as one of the property cleaning service providers. With more than 20 years of industry experience and a base in Guangdong Province, since its establishment in 2000, the company has steadily developed its business to provide a wide range of services to more than 700 customers and expanded its business coverage to 14 provincial regions in China. Service locations include commercial buildings, transportation hubs such as airports, residential properties, shopping malls and commercial complexes, streets, parks and other public spaces.

Judging from the nature of the business, environmental cleaning and maintenance services are relatively close to public utilities, so there may be limited room for growth. However, judging from the prospectus, Shenghui Clean's main area is in Guangdong, and covers high-end commercial properties, public transportation hubs, high-end residential properties, shopping malls, such as the Guangzhou International Financial Center, Hong Kong-Zhuhai-Macao Bridge Zhuhai Port, Shenzhen Bay 1, Yuehui City, etc. Therefore, Shenghui Clean's growth space is closely related to Guangdong's economic development level.

The industry is growing steadily and market concentration is low

According to the prospectus, China's environmental cleaning and maintenance market is mainly composed and dominated by the property cleaning and public space cleaning sectors. Sullivan expects the market size of the two sectors to increase from RMB 244.2 billion in 2017 (same unit) to RMB 579.4 billion in 2026, with a compound annual growth rate of 9.9% from 2022 to 2026. Among them, the market size of property cleaning is expected to increase sharply from 63.7 billion yuan in 2017 to 137.5 billion yuan in 2026, with a compound growth rate of 10.1% from 2022 to 2026; the market size of public space cleaning will grow from 180.5 billion yuan in 2017 to 441.9 billion yuan in 2026, with a compound growth rate of 10.9% from 2022 to 2026.

As one of China's most prosperous regions, Guangdong Province has consolidated its position as the country's largest provincial economy. The favorable economic climate in Guangdong Province is conducive to the rapid development of the real estate market, thereby continuously increasing the market size of the property cleaning sector. The market size increased from 4.1 billion yuan in 2017 to 7.5 billion yuan in 2021, with a compound annual growth rate of 12.4%.

As China's banking and insurance regulators began to restrict the inflow of bank loans into the property market, the growth rate was controlled and stabilized in real time. The overall real estate market is growing steadily, continuously creating demand for property cleaning services. The market size of the property cleaning sector in Guangdong Province is expected to increase from 8.1 billion yuan in 2022 to 12.9 billion yuan in 2026, with a compound annual growth rate of 12.3%. The market size of commercial property cleaning is expected to increase from 3.8 billion yuan in 2022 to 6.2 billion yuan in 2026, with a compound annual growth rate of 13.3%.

Looking at the current market situation, the market share of the top five environmental cleaning and maintenance markets in China in 2020 was 6.7%, with a total revenue of 22.158 billion yuan. Since local governments are the main customers in the environmental cleaning and maintenance services market, in terms of selection, priority is given to large service providers with good industry recognition. Therefore, large environmental service providers can dominate this market and obtain high-value contracts, leading to a continuous increase in market concentration.

Compared with the national environmental cleaning and maintenance service market, Guangdong Province is a key region for industry development. Its rapid growth is mainly due to the property cleaning sector. There are many large businesses that focus on property cleaning in the market, but they aim to provide nationwide services through independent third party service providers. Five industry players account for 21.3% of the industry's total market size. Among the five major market participants, Shenghui Cleaning ranked second, with estimated revenue of 372 million yuan and a market share of 5.0%.

It can be seen from this that China's environmental cleaning and maintenance market currently has low market concentration, and competition is relatively scattered, which has great advantages for leading enterprises.

Revenue and profit all achieved double-digit compound growth, but industry competition intensified

By starting a business in Guangdong and having a high market share in the province, Shenghui Cleaning has achieved significant growth in revenue and profit in the past three years. As of 2019, 2020, and the year ending December 31, 2021, Shenghui Clean's revenue was 399 million yuan, 466 million yuan and 564 million yuan respectively, with a compound growth rate of 20.3% over the past three years. In the same period, the profit margin attributable to the company's owners was RMB 202.07 million, RMB 31,312 million, and RMB 39,921 million, with a compound growth rate of 40.3% in the past three years.

By business, during the reporting period, revenue from property cleaning services was approximately $365 million, $447 million and $544 million, accounting for 93.5%, 95.9% and 96.5% of the company's total revenue, respectively. Revenue from public space cleaning accounted for 5.1%, 3.9% and 3.5% of total revenue, respectively. The increase in property cleaning service revenue was mainly driven by an increase in the number of property cleaning service projects during the year. The number of property cleaning service projects during the reporting period was 186, 238 and 252, respectively.

As of 2019, 2020 and the year ending December 31, 2021, the company's gross profit was about 61.7 million yuan, 79.92 million yuan and 89.25 million yuan respectively. The gross margins for the same period were about 15.8%, 17.2% and 15.8% respectively. The overall gross margin of the company was stable.

According to the prospectus, the company's business is a labor-intensive business, and a large part of the company's operating costs consists of employee benefit expenses and subcontracted labor costs. As of 2019, 2020, and the year ended 31 December 2021, employee benefit expenses in the company's service costs were approximately $179 million, $209 and $255 million respectively, accounting for about 54.6%, 54.1% and 53.7% of service costs, respectively. Among them, the company outsourced a number of general cleaning, aerial cleaning and waterway cleaning services to third party service providers. Subcontracted labor costs were about 129 million yuan, 150 million yuan and 189 million yuan respectively, accounting for about 39.3%, 38.9% and 39.8% of service costs respectively. Therefore, if the minimum wage standards in various cities change, there will be a lot of pressure on the company's costs.

It is worth noting that although the company's current project winning rate is high, above 70% in the past three years, there is a risk of decline. During the reporting period, the winning rates of the company's total tenders were about 36.4%, 33.8% and 28.1% respectively, while the winning rates for new contracts for existing projects were about 89.4%, 87.0% and 73.5%, respectively. Looking at gross margin, it is not difficult to find that the entry threshold for the environmental cleaning industry is low, and competition is becoming more and more intense.

Overall, in terms of the overall environment, China's environmental cleaning and maintenance market will achieve relatively stable growth in the next few years, and Guangdong Province, as one of the most prosperous regions in China, has the highest economy in the country, and its growth potential is higher than the national average. With the advantage of starting a business in the province, Shenghui Cleaning has achieved double-digit growth in revenue and profit in the past three years. However, since the environmental cleaning and maintenance market is a labor-intensive industry, labor costs are relatively high, and costs are under upward pressure. Furthermore, due to long working hours and low timely wages, the employee turnover rate in the industry is relatively high, and the company is also facing labor shortages.