Report summary
Company Overview
The company is an environmental health service provider in Hong Kong. Based on 2018 revenue and market share, the company is the largest environmental health service provider in Hong Kong, headquartered in Hong Kong.
The company provides environmental hygiene services to government and non-government clients. It has accumulated over 39 years of experience in the industry, serving all major regions of Hong Kong. The company provides building cleaning services (accounting for 32.0% of FY2019 revenue), park and recreation centre cleaning services (23.7% of FY2019 revenue), street cleaning services (21.9% of FY2019 revenue), college cleaning services (7.3% of FY2019 revenue) and other cleaning services (accounting for 15.1% of FY2019 revenue)
FY2017-19 reported revenue of HK$1,204 million, HK$1,286 million and HK$1,433 million respectively, with a CAGR of 9.1%; gross profit of HK$886.99 million, HK$95.552 million and HK$103,526 million respectively, with a CAGR of 8.0%; net profit of HK$443.38 million, HK$359.31 million and HK$21.807 million respectively. Of these, FY2019 included listing expenses of HK$12.173 million. Excluding the impact of listing expenses and changes in the fair value of financial assets, the adjusted profit for FY2017-19 was HK$407.21 million, HK$294.45 million and HK$33.701 million, respectively. The gross margins for the period were 7.4%, 7.4%, and 7.2% respectively, and the gross margin was stable. Net interest rates were 3.4%, 2.3%, and 2.3%, respectively. Since FY18, the company adopted a new bonus system and increased executive remuneration, etc., which led to an increase in administrative expenses and a drop in net interest rates by 1 percentage point.
Status and prospects of the industry
The environmental hygiene services market in Hong Kong grew from HK$10.384 billion in 2013 to HK$15.538 billion in 2018, with a CAGR of 8.4%, benefiting from increased hygiene awareness and increased government waste management spending. Future expectations will increase from HK$16.4 billion in 2019 to HK$22.924 billion in 2023, with a CAGR of 8.7%.
Hong Kong's environmental health services market is highly competitive. The number of environmental sanitation service providers in Hong Kong increased from 1,030 in 2013 to 1195 in 2018, with a CAGR of 3.0%. Based on 2018 earnings, SC Johnson Holdings ranked second in the Hong Kong market, with a market share of 9.2%, and ranked first among environmental health service providers headquartered in Hong Kong.
Advantages and opportunities
The “SC Johnson” brand is a well-known environmental health service provider brand in Hong Kong.
Establish long-term and stable relationships with key clients in the government and non-government sectors
Capable of undertaking large-scale projects
Weaknesses and Risks
Competition in the industry is fierce, which may result in lower contract prices, leading to lower gross margins
The five major customers account for a high proportion of revenue and are highly dependent on the five major customers
Labor-intensive industries, rising labor costs, labor shortages and strikes affect investment valuations
According to prospectus pricing (HK$1.00-120), the company's FY 2019 adjusted net profit was HK$33.701 million, with a market capitalization of HK$50,000-600 million after issuance. The fully diluted adjusted price-earnings ratio of the corresponding company FY2019 was 14.8-17.8 times. We think the price-earnings ratio of the company is similar to that of its Hong Kong-listed counterpart Baguio Green 1397. HK. The company's financing scale is small. The cornerstone investors (Hong Kong's Nanyang and Mr. Chen Xiangeng, a subsidiary of Shanghai Industrial Group) will invest HK$55 million, accounting for 37% to 44% of the financing scale. Stock price performance will fluctuate easily after listing. The performance of the Western Stock Exchange International Sponsorship Program rose and fell two times on the first day of listing in 2019. We believe that the company's stock price may show an upward performance on the first day of listing, giving it an IPO-specific rating of “5.”