More than a year after submitting its application, Primega Group Holdings Ltd (PGHL.US), a building services provider from Hong Kong, successfully listed on NASDAQ. The company's IPO price was $4 per share, and it fell nearly 10% the next day. As of August 6th, the trading volume was only 0.2 million, with low attention from the capital markets.

The construction industry is one of the main areas in which China consumes energy and emits carbon. In May 2024, the State Council issued the "2024-2025 Energy Saving and Carbon Reduction Action Plan," accelerating the promotion of energy saving and carbon reduction in the building materials industry. In PGHL.US's prospectus for this listing, the term "eco-friendly" was also mentioned. This made investors curious about PGHL.US's business model and the value of this environmental label.

Revenue increase without profit increase, heavy reliance on large customers.

According to public information, PGHL.US is a transportation service provider from Hong Kong that uses environmentally-friendly practices to promote the reuse of building materials and the reduction of construction waste. The company generally provides services to other Hong Kong construction contractors as a subcontractor.

Specifically, PGHL.US's main businesses include earth and stone transportation, diesel trading, and construction engineering (mainly ELS projects and pile drilling).

According to the prospectus, a large amount of earth and stone materials are generated during construction, renovation and dismantling projects, and a large part of them will eventually become construction waste. According to relevant regulations of the Hong Kong government, construction contractors are responsible for sorting and treating such construction waste in waste disposal facilities established by the government, and the government waste disposal facilities charge processing fees based on the weight and type of the construction waste.

In construction activities, only a small portion of the construction and development materials are inert materials, such as soil, rocks and concrete, which are suitable for reuse and/or recycling, making them into valuable products such as reused for land reclamation or land leveling. But materials such as asphalt, tiles, bricks, and glass cannot be processed and recycled into salable products.

PGHL.US's earth and stone transportation services are mainly provided to construction contractors to handle excavation materials (mostly earth and stone) generated in the excavation stage of infrastructure projects. In the process of processing, loading and transporting such construction waste, the appropriate materials will be recycled repeatedly for reuse and re-entered into the market for sale.

In addition, the company also owns a diesel tank truck with a storage capacity of 0.015 million liters, which is used to purchase biodiesel from petroleum wholesale trading companies and sell and deliver it to customers at construction sites. The customers of this business are mainly construction contractors who operate construction machinery using biodiesel.

Finally, the company's ELS business uses a steel pile wall inserted into the soil during deep foundation pit construction to establish a support structure for subsequent excavation or infrastructure construction.

It can be seen that the company's business belongs to a relatively simple building service provider with low technical added value. In terms of performance, although the company's revenue increased slightly in the 2023 fiscal year, its net income showed a year-on-year decline.

According to the Zhitong Financial APP, in the 2022 and 2023 fiscal years (the fiscal year ending on March 31), the company's revenue was about $10.4831 million and $11.1431 million, and net income was $1.9936 million and $1.1673 million, respectively. The net income for the same period fell by about 41%.

In the six months ended September 30, 2023, the revenue of PGHL.US's earth and stone transportation business decreased, down 26% compared to the same period in 2022; the diesel trading did not generate revenue, because the previous diesel project had been completed. In terms of construction engineering business, revenue increased from $0.1392 million in 2022 to $1.9682 million in 2023.

The company's customers are mainly subcontractors for ground leveling in Hong Kong property development and civil engineering projects, and there is a concentration risk of large customers. According to the financial report, in the 2022 and 2023 fiscal years, the total income from large customers (customers contributing more than 10% of income) accounted for 65% and 88.26%, respectively, and was about 87.61% in the six-month period ended September 30, 2023.

Since the company's income mainly depends on successful bidding or accepting non-recurring earth and stone transportation quotations, and does not sign any long-term service agreements with customers, if it cannot obtain projects from existing or new customers in the future, it will affect the company's business operations and performance.

The financial report shows that a large amount of PGHL.US's receivables come from important customers. In the 2022, 2023 and six months ended September 30, 2023 fiscal years, the proportion of receivables from large customers was 77.89%, 91.29%, and 68.17%, respectively. If such customers experience financial changes or encounter liquidity difficulties in the future, it may lead to an increase in bad debts and have an adverse impact on performance.

In addition, Junyu Engineering admits in the prospectus that the company is in the construction industry and faces risks such as safety and building accidents, rising energy costs, unexpected project progress, and customer delayed payments.

According to the Wisdom Finance App, Junyu Engineering plans to use about 35% of the net proceeds from this issue for business expansion by acquiring additional machinery and equipment, including dump trucks and excavators, and hiring additional employees. Approximately 20% will be used to upgrade information technology systems to enable the company to track truck locations and deployment to improve resource allocation and efficiency. The remaining funds will be used for working capital and other general company purposes.

The real estate market recovery has driven the prosperity of the construction industry.

Since the release of control measures after the epidemic, the Hong Kong construction industry has rebounded and maintained relative stable growth in 2023. As a whole in 2023, the total nominal value of construction projects completed by major contractors was HK$271 billion, an increase of 8.8% year-on-year; after excluding the impact of price changes, and based on substantive calculation, the total nominal value of construction projects completed by major contractors in 2023 increased by 9.9% year-on-year.

Data shows that the compound annual growth rate of the Hong Kong construction industry from 2016 to 2019 was 3.41%, and it experienced a sharp decline of about 17.3% in 2020 due to the epidemic, but the market has slowly warmed up in recent years.

As of the first half of 2024, with the complete lifting of housing restrictions, the Hong Kong real estate market has shown a prosperous outlook. According to institution monitoring data, the overall transaction volume of residential properties over HK$20 million has increased by 1.3 times in the first half of this year, and has reached a new high in terms of the total number of transactions in the past two and a half years.

With the rise in housing transactions, the construction industry has also seen a recovery in prosperity. According to data released by the Hong Kong Census and Statistics Department, the total nominal value of construction projects completed by major contractors in the first quarter of 2024 was HKD 68.7 billion, up 8.7% from the same period in 2023.

Divided by the main category, the nominal value of completed building construction projects on residential premises in Q1 was HKD 20.1 billion, up 48.4% from the same period last year; and the nominal value of completed building construction projects on transport premises rose 10.4% to HKD 11 billion.

However, in the second half of the year, as the positive sentiment brought by the lifting of housing restrictions gradually subsides, the Hong Kong real estate market remains sluggish. The latest research from Centaline Property shows that in the second quarter of 2024, more than 60% of newly built private residential properties remained unsold, which is in sharp contrast to the past few years. As purchasing power in the market has been largely absorbed in the first half of the year, a large number of unsold properties will bring many challenges to the real estate market in the second half of the year.

Wang Meifeng, director and general manager of Centaline Mortgage, said that in the second half of the year, especially from the fourth quarter to next year, as more positive factors in the real estate market gradually emerge, including the US inflation seemingly slowing down, a possible rate cut in the fourth quarter in Hong Kong, and the gradual increase in bank mortgage offers, the market confidence is expected to increase, and the absorption of low-priced buyers will increase to stimulate market sentiment, and housing prices are expected to stabilize within this year.

In general, from a business logic perspective, although Junyu Engineering mentions the term eco-friendly concept in the prospectus, the company's business model is essentially just a construction service company involved in some building material recycling. Being in the traditional construction industry, and without the high added value of a technology company, and with mediocre performance, being coldly treated by investors after going public is actually to be expected.