U.S. Stock IPO Outlook | Industry Valuations Under Pressure, Can Yingfeng Mud Engineering Tell a "Small but Beautiful" Story?

Recently, a construction subcontractor from Hong Kong submitted a prospectus to the U.S. Securities and Exchange Commission, intending to list on the Nasdaq market.

Public information shows that Masonglory Limited (盈丰泥水工程有限公司， referred to as "Masonglory") (MSGY.US) plans to issue 1.5 million shares at a price of $4 to $6 per share, aiming to raise up to $8 million, with the stock code proposed as "MSGY".

In the current challenging environment for the construction industry, does Masonglory have the strength in its fundamentals to attract investors after going public? The company's prospectus may provide some answers.

Annual Revenue Exceeds Ten Million, Dependency on Major Clients Difficult to Resolve

Public data indicates that Masonglory is headquartered in Hong Kong and has been operating as a subcontractor providing wet work services and other supporting services since 2018. The company offers comprehensive wet work engineering solutions to clients, mainly including: (1) plastering of floors, ceilings, and walls; (2) tiling of interior and exterior walls and floors; (3) bricklaying; (4) floor leveling; (5) marble work.

In the past two years, Masonglory has seen significant growth in both revenue and profit. For the six months ended September 30, 2023, and 2024, the operating revenues were approximately $9.5157 million and $11.6139 million, respectively, representing a year-on-year increase of 22%; the corresponding net profits were approximately $531,300 and $743,700, reflecting a year-on-year increase of 40%.

The company stated that the increase in revenue was mainly due to the expansion of project scale and scope. During the six months ended September 30, 2023, and September 30, 2024, the company submitted 5 and 6 bids, respectively, with success rates of 40% and 16.7%.

During the reporting period, the company's service fees increased from $8.8272 million in the first half of the 2023 fiscal year to $10.6455 million, a growth of approximately 20.6%.

According to Zhito Finance APP, due to the increase in the scale of public projects, the overall gross profit margin of the company rose from 7.2% in the first half of the 2023 fiscal year to 8.3%. However, affected by higher subcontracting costs, the gross profit margin for public projects decreased from 10.9% to 8.6%, while the gross profit margin for private projects increased from 6.8% to 8%. Due to the implementation of a higher pricing strategy, the profit margin for the company's private sector projects significantly improved during the six months ended September 30, 2024.

During the reporting period, the cash generated from operating activities slightly decreased, from $1.7232 million for the six months ended September 30, 2023, to $1.6986 million for the same period in 2024, mainly due to increased changes in accounts receivable, accounts payable, and contract assets. As of September 30, 2024, the company's bank cash was $526,100, a significant decrease from $3.1715 million in the same period last year During the reporting period, the company had a high degree of reliance on major customers. According to the prospectus, the company has close cooperation with three well-known real estate development groups listed on the main board of the Hong Kong Stock Exchange. These three major customers contributed more than 93% of the company's total revenue for the fiscal years ending March 31, 2023, and 2024, and the accounts receivable they provided accounted for 70% of the company's total assets during this period.

The Construction Industry Faces Overall Pressure, Policies Expected to Continue to Strengthen

In 2024, the domestic real estate market is still operating at a low level, with industry data showing weak performance. On the supply side, the scale of land supply and demand has significantly contracted, the new housing sales market is relatively weak, and real estate companies are investing cautiously; on the demand side, factors such as changes in population structure, slowing economic growth, and uncertainty in residents' income growth have combined to create a strong wait-and-see sentiment in the market.

According to data from the National Bureau of Statistics, from January to November 2024, national real estate development investment reached 936.34 billion yuan, a year-on-year decrease of 10.4%; the construction area of real estate development enterprises was 726.014 million square meters, a year-on-year decrease of 12.7%; the sales area of newly built commercial housing was 861.18 million square meters, a year-on-year decrease of 14.3%, with residential sales area down by 16.0%.

According to Zhitong Finance APP, based on statistics from United Ratings, in the first three quarters of 2024, the national construction industry achieved a total output value of 21,741.053 billion yuan, a year-on-year increase of 4.40%, with the growth rate down by 1.40 percentage points compared to the same period last year; in terms of contract signing, from January to September 2024, the new contract amount signed by the national construction industry was 22,317.651 billion yuan, a year-on-year decrease of 4.74%, with the growth rate hitting a new low since 2021.

The pressure on the downstream real estate market has also dragged down the overall performance of listed companies related to construction and engineering. In terms of profitability, in the first three quarters of 2024, the total operating revenue of construction enterprises decreased by 5.61% year-on-year, with 90 enterprises experiencing a year-on-year decline in operating revenue, an increase of 45 enterprises compared to the same period last year, intensifying the revenue growth pressure on construction companies; the median profit of construction enterprises decreased by 22.77% year-on-year, with private enterprises experiencing a larger decline in total profit compared to central enterprises.

From the perspective of debt indicators, as of the end of September 2024, the median asset-liability ratio and the median total debt capitalization ratio of construction enterprises increased by 0.50 percentage points and 0.67 percentage points, respectively, compared to the end of September 2023, indicating an overall increase in debt burden.

In the context of weak industry growth, the market concentration of the construction industry has further increased. In the first three quarters of 2024, the new contract amount signed by the eight major central construction enterprises accounted for 46.13% of the new contract amount signed in the national construction industry.

However, a series of favorable policies have been introduced, providing momentum for the industry to stabilize and rebound on both the supply and demand sides.

Public information shows that in 2024, relevant departments have introduced a series of supportive policies focusing on "destocking" and "ensuring delivery," including optimizing real estate regulation policies, lowering mortgage rates, and adjusting down payment ratios. In May, the central bank issued a "triple release" of mortgage policies, reducing the threshold and cost of home purchases from the demand side; the "924 package policy" released in September further lowered existing mortgage rates and extended the validity period of related financial policies, while supporting the acquisition of existing land by real estate companies; in November, the Ministry of Finance, the State Taxation Administration, and the Ministry of Housing and Urban-Rural Development clarified multiple tax incentive policies to support the development of the real estate market, including optimizing housing transaction deed tax.

Dongxing Securities released a research report indicating that overall, the higher the urban level, the stronger the resilience of housing prices, and the momentum for stopping the decline and stabilizing is earlier and more evident. It is expected that first-tier cities and core second-tier cities will see housing prices stabilize first.

In the local market where Yingfeng Mud and Water operates, due to the continuous introduction of economic revitalization measures from the central government from the end of the third quarter to the fourth quarter, the "Policy Address" relaxing the upper limit of property mortgage ratios, allowing investment immigrants to purchase luxury properties, and consecutive interest rate cuts in Hong Kong, the overall property registrations in Hong Kong recorded 19,043 in the fourth quarter, an increase of about 37.7% compared to 13,834 in the third quarter.

Wang Pindi, director of the research department at Hong Kong Property, stated that along with the comprehensive withdrawal of tightening measures announced in the "Budget" at the end of February 2024, the overall property registration volume for the entire year of 2024 is expected to reach nearly 68,000, an annual increase of about 17.1%, setting a three-year high.

Recently, the Chief Executive of the Hong Kong Special Administrative Region pointed out in his third "Policy Address" since taking office that there is a need to continue land creation and promote infrastructure, driving the expansion of Tung Chung New Town and the development of the Northern Metropolis. The accelerated development and construction of residential and commercial areas are also expected to promote continuous growth in the local wet work engineering market.

Due to the ongoing pressure in the downstream market, the current construction sector is in a historically undervalued range. Looking ahead, with a series of favorable policies in support, the fundamentals of the construction sector are expected to achieve marginal improvement and welcome opportunities for valuation recovery.

From the perspective of Yingfeng Mud and Water's fundamentals, although the company's performance continues to grow, its small business scale and tight cash flow limit its future growth potential. In the current environment of low overall prosperity in the construction sector, it may lack some persuasive power to attract investor interest