The Group is one of the leading comprehensive interior decoration contractors in Hong Kong and Macau, specializing in providing professional interior decoration projects for residential properties and hotel projects. The Group has been operating interior decoration business in Hong Kong since 1996 and further expanded its interior decoration business to Macau in 2005. According to the Ipsos report, in 2014, the Group was the largest interior decoration contractor in Hong Kong and Macau by income, accounting for about 6.1% and 15.5% of the market share in Hong Kong and Macau respectively. The Group acquired Caine Shing, a general building contractor, in October 2010 to expand its capacity as a general building contractor to provide construction, interior decoration, repair, maintenance and alteration and addition works for residential properties, hotels, factories and commercial projects. The Group carries out several large-scale interior decoration projects in Hong Kong and Macau. During the track record period, the Group has completed 16, 11, 14 and 12 interior decoration projects and 7, 13, 12 and 11 alteration and addition and construction projects respectively.

We recommend speculative subscription for the stock.

Company advantage

(1) with a good reputation and outstanding achievements, he started the interior decoration business in 1996 and has accumulated nearly 20 years of experience in the interior decoration industry in Hong Kong. According to the Ipsos report, in 2014, the Group was the largest interior decoration contractor in Hong Kong and Macau by income, accounting for about 6.1% and 15.5% of the market share respectively; (2) establishing long-term relationships with major property developers and hotel owners in Hong Kong and Macau; and (3) professional knowledge in construction optimization and prefabrication technology for large-scale interior decoration projects. (4) competitive advantages of material costs and arrangements provided by internal or reliable suppliers and subcontractors.

Industry overview

The interior decoration project basically follows the growth of the construction industry in order to make the interior space more suitable for use. In Hong Kong, most interior decoration works are carried out for private properties such as hotels and high-end residential properties. According to the Ipsos report, revenue from Hong Kong's interior decoration industry increased from HK $7 billion in 2010 to HK $12.9 billion in 2014, a compound annual growth rate of 16.5 per cent, mainly due to an increase in the number of completed hotel and high-end residential properties. Revenue from Hong Kong's interior decoration industry is expected to continue to grow, from HK $15 billion in 2015 to HK $28.2 billion in 2019, with a compound annual growth rate of 17.1%, mainly due to the continued construction of new hotels, residential properties and retail shopping malls.

According to the Ipsos report, the estimated average cost of each interior decoration project in Hong Kong increased from HK $27.9 million in 2010 to HK $40.9 million in 2014, mainly due to rising raw material prices and labour costs. For example, the average wholesale prices of latex paint, cement and concrete bricks, the main raw materials of the interior decoration industry in Hong Kong, rose from HK $38.0 per litre, HK $612.7 per tonne and HK $60.0 per square metre in 2010 to HK $52.0,HK $720.4 per tonne and HK $76.9 per square metre in 2014, with compound annual growth rates of 8.2 per cent, 4.1 per cent and 6.4 per cent respectively. The estimated average cost of each interior decoration project in Hong Kong is expected to increase from HK $43.1 million in 2015 to HK $57.6 million in 2019, representing a compound annual growth rate of 7.5%.

Due to the booming gaming and tourism industry in Macau, the market demand for high-end hotels, casinos and residential buildings is increasing, benefiting interior decoration contractors, especially those who specialize in providing interior decoration works in luxury properties. In addition, more international retail brands have opened retail stores in Macau, bringing additional business opportunities to interior decoration contractors. As a result, revenue from the interior decoration industry in Macau increased from 2340.0 patacas in 2010 to 8030.2 patacas in 2014, with a compound annual growth rate of 36.1 per cent.

The significant increase in 2014 earnings marks the end of the high growth cycle of Macau's interior decoration industry in recent years and the end of the peak of construction activity in new hotels, serviced homes and casinos, which is likely to enter a downturn. According to the Ipsos report, it is estimated that the trend of total output value of building construction projects in Macau continues, and revenue from the interior decoration industry in Macau is expected to decrease from 6202.3 patacas in 2015 to 5030.8 patacas in 2016, taking into account the recent slowdown in the gaming industry in Macau, reaching another cyclical trough, which negatively affects investment in hotels and casinos, which in turn reduces interior decoration projects. Revenue from the interior decoration industry in Macau is expected to rise again from 5030.8 patacas in 2016 due to the expected completion of several casinos and resorts and residential buildings in Coastal Macau and the increase in the number of Macau visitors related to the scheduled completion of the Hong Kong-Zhuhai-Macao Bridge in 2017 to 5768.8 patacas in 2017. it is expected to remain relatively stable in 2018 and 2019.

According to the Ipsos report, the estimated average cost of each interior decoration project in Macau increased from 19.3 million patacas in 2010 to 42.8 million patacas in 2014, representing a compound annual growth rate of 22.0 percent, mainly due to rising raw materials and labor costs. For example, the average wholesale prices of latex paint, cement and concrete bricks, the main raw materials for the interior decoration industry in Macau, rose from 24.8 patacas per liter, 641.8 patacas per ton and 310.5 patacas per square meter in 2010 to 28.4 patacas per liter, 816.0 patacas per ton and 666.0 patacas per square metre in 2014. the compound annual growth rates were 3.4%, 6.2% and 21.0%, respectively. The estimated average cost of each interior decoration project in Macau is expected to increase from 47.8 million patacas in 2015 to 65.9 million patacas in 2019, representing a compound annual growth rate of 8.4 percent.

In recent years, the Hong Kong Government has issued a series of policies to encourage the inspection, repair and maintenance of old buildings, such as Operation Building Renewal and the Building Inspection Scheme. In the 2014 ╱ 2015 Policy address, the Hong Kong Government re-emphasized its plan to revitalize old and dilapidated buildings through the implementation of voluntary redevelopment projects and demand-led redevelopment projects. As a result, the number of residential buildings refurbished and maintained increased from 766 in 2010 to 876 in 2014, while revenue from alteration and addition works in Hong Kong increased from HK $7.3 billion in 2010 to HK $10.7 billion in 2014, representing a compound annual growth rate of 10.0%. PSDEV advised that there would be about 5900 buildings not less than 50 years old in 2015, and the number was expected to increase by 580 per year. In addition, the number of buildings not less than 30 years old was about 20000 in 2015 and is expected to reach 30000 by 2025. In addition, according to the information published by the Hong Kong Institution of Engineers in 2013, there were about 3000 private buildings not less than 50 years old at the end of 2013. Buildings in Hong Kong are generally built with reinforced concrete with a service life of about 50 years. Therefore, alteration and addition works are needed to extend the life of buildings and slow down the ageing of urban areas, and the demand for these works is expected to increase with the increase in the number of old buildings. It is expected that the demand for conversion and addition works will continue to increase, which will provide a source of continuous projects for conversion and addition contractors.

Profitability and financial figures

Based on the track record of the past three years, the Group's revenue increased from HK $1753.0 million in fiscal year 2012 to HK $2336.7 million in fiscal year 2014, representing a compound annual growth rate of 15.5%. Net profit increased from HK $110.1 million in fiscal year 2012 to HK $177.9 in fiscal year 2014, representing a compound annual growth rate of 27.1%. Income and net profit increased by 164.2% and 268.4% respectively in the first eight months of the 2015 fiscal year. The gross profit margin of the Group's conversion and addition and construction business increased from 3.6% in 2012 to 12.2% in 2013, mainly due to the high gross profit margin achieved in 2013 for the alteration and addition and construction project of a five-star hotel in North Point, Hong Kong. as a result of the substantial completion of the project in 2013, the gross profit margin of the alteration and addition and construction business fell to 5.1% in 2014. The gross profit margin of the group's manufacturing, procurement and distribution of interior decoration materials increased from 25.1% in 2012 to 28.4% in 2013, mainly due to the sale of wood products to Yantai avatar on two hotel projects in Russia, which have a higher gross profit margin. The group stopped selling wood products to Yantai avatar in November 2013, resulting in a reduction in gross profit margin for the manufacturing, procurement and distribution of interior decoration materials to 2.0% in 2014.

Fund-raising purpose

HK $626.4 million (calculated at the issue price of HK $1.38 per share) will be used for the following purposes: about HK $306.9 million or about 49% of the net proceeds will be used for interior decoration projects extended to Hong Kong, this will include the start-up cost of the new project (such as subcontract fee prepayment and material cost) About HK $181.7 million or about 29% of the net proceeds will be used to expand the alteration and addition and construction business in Hong Kong, which will include the procurement of equipment and start-up costs of new projects (such as subcontract prepayments and material costs) About HK $62.6 million or about 10% of the net proceeds will be used for interior decoration projects extended to Macau, which will include the start-up costs of new projects (such as subcontract fees and material costs); about HK $12.5 million or about 2% of the proceeds will be used to hire additional staff for business expansion About HK $6.3 million or about 1% of the proceeds will be allocated to Dongguan Chengda to purchase improved equipment and machinery and enhance its R & D capacity for construction optimization and prefabrication; and about HK $56.4 million or about 9% of the net proceeds will be used as the general working capital of the Group.

Valuation

The Group did not provide a net profit forecast for fiscal year 2015, which is approximately 14.216.3 times historical price-to-earnings ratio based on a net profit of HK $177.9 million for the fiscal year 2014. The price-to-earnings ratios of 1683.HK and 8125.HK are 19.0 and 292.3 times respectively. The Group has achieved satisfactory growth during the performance period, mainly from several projects in Macau. Affected by the current anti-corruption campaign, the downward trend of the gaming industry in Macao is not over, and the expansion of various casinos may be delayed. On the other hand, the Group is project-oriented, its revenue and profit margin depend on the tender price of individual projects, and its profitability fluctuates greatly. However, the group's valuation is reasonable compared with its peers, and we recommend speculative subscription to the stock.

Risk factors.

(1) the payment made by the customer in the form of progress payment and the reservation of the guarantee deposit does not guarantee that the progress payment will be paid on time and in full by the group, nor can it guarantee that the guarantee payment will be paid on time and in full upon the expiration of the defect liability period; (2) based on the project, the income portfolio and profit margin may fluctuate. (3) estimate the time and cost to determine the tender price, if it is not accurately estimated that it may lead to cost overruns or even losses of the project; (4) the contract is non-recurrent in nature, future business depends on the continued success of project tendering; (5) rely on subcontractors to complete most of the projects. (VI) relying on a small number of major customers, the revenue from the top five customers accounted for about 67.6% of the total continuing business revenue in 2014 figures.