Heng Xin Fung Holdings is a well-known construction subcontractor in Hong Kong, mainly engaged in the provision of muddy water works and other supporting projects related to muddy water works. According to the industry report, the company ranked fifth in Hong Kong's muddy water engineering market in 2018, accounting for about 3.8% of the market share that year. As at 31 January 2019, about 530 contractors and subcontractors were registered under the categories of "Mud finishing works" and "paving marble and granite bricks and masonry". During the track record period, the company has completed 31 muddy water projects with a total contract value of about HK $690 million. As at the latest practicable date, the company has 16 projects on hand, including ongoing projects and projects that have been granted but not yet commenced, with a contract value of about HK $340 million.
Sino-Thai point of view:
The government's increase in land supply is beneficial to the future Hong Kong mud works market: according to Frost Sullivan, with the continued development of property, the total value of Hong Kong's mud works has increased from about HK $9.1 billion in 2014 to about HK $11.3 billion in 2018, representing a compound annual growth rate of about 5.6 per cent. According to the 2018 Policy address, emphasis will be placed on the development of new development areas and the expansion of new towns (such as Hung Shui Kiu New Development area) and the development of Kowloon East Business District. As a result, the total value of muddy water works is expected to increase from about HK $12 billion in 2019 to about HK $14.8 billion in 2033, with a compound annual growth rate of about 5.4 per cent.
In terms of operating results: as of March 31, 2016-2018, Hengxinfeng Holdings realized operating income of HK $150 million, HK $250 million, HK $430 million and HK $140 million respectively. The increase in revenue was mainly due to the contribution of a number of large-scale projects. Nearly 75% of the income comes from residential construction. The gross profit margin is 10.5%, 11.4%, 12.2% and 12.4% respectively. The steady increase in gross profit margin is mainly due to the fact that the company has received a large number of bidding invitations for projects due to its good track record of high quality projects in the muddy water engineering industry. as a result, the project charges higher cost plus and the company receives additional engineering change orders, and the related fees are relatively high. The net interest rates were 7.5%, 8.7%, 9.3% and 2.3% respectively, which fell sharply in the first quarter of 2019 due to listing expenses; the winning rates were 13.8%, 14.3%, 13.6% and zero, respectively.
Valuation: based on 2.6 billion shares after the global public offering, the company has a market capitalization of HK $520 million, which is lower than its Hong Kong counterparts. The company's price-to-earnings ratio is about 12.9 times, which is higher than the industry average, and the price-to-book ratio is about 2.86 times, which is higher than the industry average. In terms of profitability, the 18-year ROE and ROA were 53.1% and 25.0% respectively, higher than the industry average. Combining the company's industry status, performance and valuation, we give it a score of 58, with a rating of "neutral".
Risk tips: (1) market competition risk (2) most of the revenue depends on the company's top five customers.