Analysis of new stocks in the US stock market | Net profit declined by 40%, will Junyu Engineering (PGHL.US) have difficulty attracting attention in the US market for financing?

After more than a year of submission, the building services provider Primega Group Holdings Ltd (referred to as "Jingyu Engineering") from Hong Kong finally successfully listed on Nasdaq. The IPO price of the company was $4 per share, and it dropped nearly 10% on the day after listing. As of August 6th, the trading volume was only 200,000 shares, with low market attention. The construction industry is one of the main sectors in China's energy consumption and carbon emissions. In May 2024, the State Council issued the "Energy Saving and Carbon Reduction Action Plan for 2024-2025," accelerating the promotion of energy saving and carbon reduction in the construction materials industry. In the prospectus disclosed by Jingyu Engineering in this listing, the term "environmental protection" was also mentioned. This naturally arouses curiosity among investors about the business model of Jingyu Engineering and the credibility of this environmental label. Increased revenue without increased profits, heavy dependence on major clients According to publicly available information, Jingyu Engineering is a provider of Carriage Services Inc. from Hong Kong, using environmental practices to promote the reuse of building materials and reduce construction waste. The company generally provides services to other construction contractors in Hong Kong as a subcontractor. Specifically, Jingyu Engineering's main business includes earth and stone transportation, diesel trading, and construction engineering (mainly ELS engineering and bored piles). According to the prospectus, large amounts of earth and stone materials are generated in construction, renovation, and demolition projects, a significant part of which eventually becomes construction waste. According to relevant regulations of the Hong Kong government, construction contractors are responsible for sorting and disposing of such construction waste at government-designated waste disposal facilities, and these facilities charge processing fees based on the weight and type of construction waste. Among the construction materials generated in construction activities, only a small portion is inert materials, such as soil, rocks, and concrete, suitable for reuse and/or recycling to create marketable products, such as in reclamation or land leveling projects. Materials like asphalt, tiles, bricks, and glass cannot be processed and recycled into saleable products. Jingyu Engineering's earth and stone Carriage Services Inc. is mainly provided to construction contractors to handle excavation materials (mainly earth and stone) generated during the excavation phase of infrastructure projects. In the process of handling, loading, and transporting such construction waste, the company reuses suitable materials for recycling repeatedly and sells them back in the market. Moreover, the company owns a diesel truck with a storage capacity of 15,000 liters to purchase biodiesel from petroleum wholesale trading companies, sell it on-site during construction, and deliver it to customers. The main customers of this business are construction contractors operating engineering machinery using biodiesel. Finally, the company's ELS business uses steel sheet piles inserted into the soil during deep foundation construction to establish support structures for subsequent excavation or infrastructure projects. It can be seen that the company's business is a relatively simple construction industry service provider with low technical added value. In terms of performance, although the company's revenue increased slightly in the 2023 fiscal year, net profit showed a year-on-year decline. It is understood that in the 2022 and 2023 fiscal years (with fiscal year-ends on March 31), the company's revenue was approximately $10.4831 million and $11.1431 million, with net profits of approximately $1.9936 million and $1.1673 million, respectively, showing a year-on-year decline of about 41%. In the six months ending September 30, 2023, the revenue from the earth and stone transportation business of the company decreased, falling by 26% compared to the same period in 2022; there was no revenue from diesel trading as the previous diesel project had been completed. In the construction engineering business, revenue increased from $139,200 in 2022 to $1.9682 million in 2023. The company's main customers are subcontractors for ground leveling of Hong Kong property development and civil engineering projects, posing a risk of concentration from major clients. According to financial reports, in the 2022 and 2023 fiscal years, the combined revenue from major clients (those contributing more than 10% of revenue) accounted for 65% and 88.26%, and for the six months ending September 30, 2023, this proportion was approximately 87.61%. Due to the company's revenue depending primarily on successful bidding or accepting non-recurring quotes for earth and stone transportation and without signing any long-term service agreements with customers, not being able to obtain projects from existing or new clients in the future could impact the company's business operations and performance. Financial reports show that a significant amount of accounts receivable comes from important customers, and in the 2022 fiscal year, 2023 fiscal year, and the six months ending September 30, 2023, the proportion of accounts receivable from major clients was 77.89%, 91.29%, and 68.17% respectively. If these clients face financial changes or liquidity difficulties in the future, it could lead to increased bad debts and negatively impact performance. Additionally, Jingyu Engineering admitted in the prospectus that, being in the construction industry, it also faces risks such as safety incidents, rising energy costs, delays in project progress, and delayed customer payments. For this listing, Jingyu Engineering plans to use approximately 35% of the net proceeds for expanding existing businesses by acquiring additional machinery and equipment, including dump trucks and excavators, and hiring additional staff; approximately 20% for upgrading information technology systems to track the location and deployment of trucks, improving resource allocation and efficiency; the remaining funds will be used for working capital and other general corporate purposes. Real estate market recovery drives construction industry sentiment up After the easing of control measures following the pandemic, the construction industry in Hong Kong has seen some recovery and remained relatively stable in 2023. Overall in 2023, the nominal total value of construction projects completed by major contractors was HK$271 billion, an increase of 8.8% year-on-year. Excluding the impact of price changes, the real 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%, with the industry showing signs of recovery from the pandemic.In 2020, the market experienced a sharp decline of about 17.3% due to the pandemic, but in recent years, it has slowly started to recover.By the first half of 2024, as the measures that heated up the property market were fully withdrawn, the Hong Kong property market is now showing a prosperous scene. Data monitored by institutions show that in the first half of this year, the overall transactions of residential properties priced over 20 million Hong Kong dollars in Hong Kong increased by 1.3 times, reaching a new high in the past two and a half years. The increase in property transactions has also boosted the construction industry. Data released by the Hong Kong government's Census and Statistics Department shows that in the first quarter of 2024, the total nominal value of construction projects completed by major contractors in Hong Kong was 68.7 billion Hong Kong dollars, an increase of 8.7% compared to the same period in 2023. By analyzing the main purposes of construction, the total nominal value of residential building construction projects completed in Q1 was 20.1 billion Hong Kong dollars, an increase of 48.4% compared to the same period last year; and the total nominal value of transportation projects completed was 11 billion Hong Kong dollars, an increase of 10.4%. However, as we enter the second half of the year, the positive sentiment brought by the withdrawal of the heating measures gradually fades, and the real estate market in Hong Kong continues to remain sluggish. The latest research by Centaline Property shows that in the second quarter of 2024, over 60% of newly built private residential units remain unsold, which is in sharp contrast to the past few years. Due to the absorption of market purchasing power in the first half of the year, the large number of unsold properties will pose challenges to the property market in the second half of the year. Wang Meifeng, Managing Director of Centaline Mortgage, stated that in the second half of the year, especially in the fourth quarter and into the next year, with more positive factors arising in the property market, such as the interest rate cuts initiated by the US in September, the expected easing of interest rates in Hong Kong in the fourth quarter, and gradual improvements in bank mortgage policies, it is expected to increase market confidence. Buyers who take advantage of the low prices will help boost market sentiment, and property prices are expected to stabilize within the year. In conclusion, from a business logic standpoint, although Junyu Engineering mentioned the term "environmental protection" in its prospectus, the company's business model essentially only involves some construction services related to building material recycling. As a traditional construction company without the high added value of a technology company, and with performance that is not outstanding, being cold-shouldered by investors after going public is understandable.