Preview of US stocks | Industry valuation under pressure, can Yingfeng Earthwork tell a "small and beautiful" story?

Recently, a construction subcontractor from Hong Kong has submitted a prospectus to the US Securities and Exchange Commission, intending to list on the Nasdaq market. Public information shows that Masonglory Limited (MSGY.US), also known as Masonglory Construction, plans to issue 1.5 million shares of stock at a price of $4 to $6 per share, seeking to raise up to $8 million, with the stock code "MSGY". In the current challenging situation in the construction industry, Masonglory Construction has some strength in its fundamentals. Will it be able to attract investors after going public? Answers may be found through the company's prospectus. Annual revenue exceeds tens of millions, heavy reliance on major clients Public data shows that Masonglory Construction is headquartered in Hong Kong and has been engaged as a subcontractor in providing wet works and other related services since 2018. The company offers comprehensive wet work solutions to clients, including plastering of floors, ceilings, and walls; tiling of interior and exterior walls and floors; bricklaying; floor leveling; and marble works. In the past two years, Masonglory has seen significant growth in revenue and profits. In the six months ending September 30, 2023 and 2024, the operating income was approximately $9.5157 million and $11.6139 million respectively, representing a 22% year-on-year increase. The corresponding net profits were approximately $531,300 and $743,700 respectively, a 40% year-on-year increase. The company attributed its revenue growth primarily to the expansion of project scale and scope. In the six months ending September 30, 2023 and 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 expenses increased by about 20.6%, from $8.8272 million in the first half of the 2023 fiscal year to $10.6455 million. It was noted that due to an increase in the size of public projects, the company's overall gross profit margin increased from 7.2% in the first half of the 2023 fiscal year to 8.3%. However, due to 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%. As a result of implementing a higher pricing strategy, the profit margins for private sector projects significantly improved in the six months ending September 30, 2024. During the reporting period, the company's cash generated from operating activities slightly decreased from $1.7232 million in the six months ending September 30, 2023 to $1.6986 million in the same period in 2024, mainly due to an increase in accounts receivable, accounts payable, and contract assets. As of September 30, 2024, the company had cash in the bank amounting to $526,100, a significant decrease from $3.1715 million in the same period the previous year. During the reporting period, the company exhibited a high dependence on major clients. According to the prospectus, the company has close partnerships with three well-known real estate development groups listed on the Main Board of the Hong Kong Stock Exchange, which together contributed over 93% of the company's total revenue for the fiscal years ending on March 31, 2023 and 2024, with the accounts receivable provided by these clients accounting for 70% of the company's total assets during that period. Pressure on the construction industry overall, with policies expected to continue to exert force In 2024, the overall domestic real estate market remains at a low level, with industry data showing sluggish performance. On the supply side, there has been a significant contraction in the supply and demand of land, the new home sales market is relatively weak, and real estate companies are relatively cautious in their investments. On the demand side, factors such as changes in population structure, slowing economic growth, and uncertainty in income growth for residents have led to a strong sense of market watchfulness. According to data from the National Bureau of Statistics, from January to November 2024, national real estate development investment was 9363.4 billion yuan, a year-on-year decrease of 10.4%; the construction area of residential buildings by real estate development enterprises was 726.01 million square meters, a year-on-year decrease of 12.7%; the sales area of new commercial housing was 86.118 million square meters, a year-on-year decrease of 14.3%, with residential sales area down by 16.0%. According to joint credit statistics, in the first three quarters of 2024, the total output value of the national construction industry reached 21.741 trillion yuan, an increase of 4.40% year-on-year, a decrease of 1.40 percentage points in growth compared to the same period in the previous year. From the perspective of contract signings, from January to September 2024, the total amount of new contracts signed by the national construction industry was 22.317 trillion yuan, a decrease of 4.74% year-on-year, reaching a new low since 2021. Pressure on the downstream real estate market has also dragged down the overall performance of listed construction companies. In terms of profitability, in the first three quarters of 2024, the total operating income of construction enterprises decreased by 5.61% year-on-year, with 90 enterprises experiencing a decrease in total operating income compared to the same period in the previous year, an increase of 45 enterprises. Private enterprises experienced a larger decrease in total profit compared to central enterprises, with the median total profit of construction companies decreasing by 22.77%. In terms of debt indicators, as of the end of September 2024, the median asset-liability ratio and median debt capitalization ratio of construction companies increased by 0.50 percentage points and 0.67 percentage points respectively compared to the end of September 2023, indicating an increase in overall debt burden. In the context of weak industry growth, market concentration in the construction industry has further increased. In the first three quarters of 2024, the proportion of new contracts signed by the eight major central construction enterprises accounted for 46.13% of the national total. However, a series of favorable policies have been introduced to provide stable support for the industry in terms of supply and demand. Public information shows that in 2024, relevant departments have issued a series of supportive policies around "de-stocking" and "ensuring delivery", including optimizing real estate regulation policies, lowering mortgage rates, and adjusting down payment ratios. In May, the central bank issued three consecutive real estate loan policies to reduce the threshold and cost of home purchases from the demand side; in September, the "924 package policy" further reduced the interest rates on existing housing loans and extended the effective period of relevant financial policies, while also supporting the acquisition of land by real estate companies; in November, the Ministry of Finance, the State Administration of Taxation, and the Ministry of Housing and Urban-Rural Development.The Ministry of Rural Development has specified multiple tax incentives to support the development of the real estate market, including optimizing housing transaction taxes.Dongxing released a research report stating that in general, the higher the level of urban energy, the stronger the resilience of housing prices, and the trend of stabilizing prices after a decline is expected to be earlier and more prominent. It is expected that housing prices in first-tier cities and core second-tier cities are likely to be the first to "stabilize after a decline". In the local market of Hong Kong where Yingfeng Cement is located, due to the continuous implementation of economic revitalization measures by the central government from the end of the third quarter to the middle of the fourth quarter, the relaxation of the maximum property mortgage ratio in the "Policy Address", allowing investment immigrants to buy luxury properties, and consecutive interest rate cuts in Hong Kong, the overall property in Hong Kong recorded 19,043 registrations in the fourth quarter, an increase of about 37.7% from the 13,834 registrations in the third quarter. Wang Pindi, director of the Hong Kong Property Research Department, stated that along with the comprehensive abolition of harsh measures announced in the 2024 February budget, the total property registrations for the entire year of 2024 are expected to be nearly 68,000, an increase of about 17.1% year-on-year, reaching a three-year high. Recently, in the third Policy Address issued by the Chief Executive of the Hong Kong Special Administrative Region after taking office, it was pointed out to continue land reclamation and promote infrastructure development, and to promote 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 drive continuous growth in the local wet construction market. Affected by the continued pressure from downstream markets, the construction sector is currently in a historically undervalued range. Looking ahead, with a series of favorable policy supports, the fundamentals of the construction sector are expected to improve marginally, and opportunities for valuation recovery are expected. Looking at the fundamentals of Yingfeng Cement, although the company's performance is still growing, its business scale is small and cash flow is tight, which restricts the company's future growth space. In the current low prosperity of the construction sector, Yingfeng Cement may lack some convincing power to attract investor interest.