New Stock Preview | Allianz International: Annual Revenue of Approximately 140 Million Yuan, The Quandary Behind the Low "Gold" Content in Business Activities

On May 23, Arrano International, a company from Hong Kong, submitted its prospectus to the Hong Kong Stock Exchange, with ChinaAMC securing joint sponsorship. Five major clients contribute over ninety percent of revenue Operating activities have low "gold" content The prospectus shows that Arrano International is a Hong Kong-based security services provider with a good track record of providing quality services for large projects to different clients, including public and private sector clients. Through security personnel recruitment, training, deployment, and management, Arrano International has established a scalable workforce to meet the diverse needs of various clients, including Hong Kong International Airport operators, air cargo terminal operators, construction contractors, and non-governmental organizations, providing tailored solutions. Arrano International also offers ancillary services such as facility management services (including cleaning services, reception and simple administrative work, guest and valuables escort, operational support for infrastructure and properties, such as vehicle checks and traffic control), to provide a more comprehensive and complementary service mix for clients. Arrano International has incorporated the design and installation of technology-based security systems (such as closed-circuit television) and digital access control systems into its service range to enhance competitiveness in the security field. Arrano International has also established a strategic partnership with a technology company to promote the integration of artificial intelligence ("AI") technology (such as AISiasun Robot & Automation, facial recognition, and automated monitoring) into its business model to improve operational efficiency, reduce manual intervention, strengthen security, and achieve sustainable business growth. During the track record period and up to the last practical date (May 14, 2025), the preliminary contract amount for the company's projects ranged from approximately 300 million to 2.956 billion Hong Kong dollars. During the track record period, the company recognized approximately 113.9 million and 138.7 million in revenue for each year. Directors confirmed that no loss contracts were entered into during the track record period and up to the last practicable date. As of April 30, 2025, Arrano International had 14 accumulated projects. By the end of the year ending December 31, 2025, these projects are expected to generate revenue not exceeding 176.1 million. In terms of performance, the company is in a phase of steady growth in both revenue and net profit. For the fiscal years 2023 to 2024 (the "Reporting Period"), the revenue of the company was 114 million and 139 million, representing a year-on-year growth of 21.7%; gross profit was 29.24 million and 36.675 million; and net profit for the year was 9.792 million and 17.405 million, representing a year-on-year growth of 77.6%. It is worth noting that the net profit growth rate exceeds the revenue growth rate. In terms of client categories, most of Arrano International's revenue comes from services provided to public sector clients (such as Hong Kong International Airport operators). The company also provides services to private sector clients (air cargo terminal operators, construction contractors, property management companies, and non-governmental organizations). During the period, the revenue confirmed from services provided to public sector clients was approximately 97.8 million and 107 million, accounting for approximately 85.8% and 77.0% of total revenue for each year, respectively. Revenue from private sector clients during the same period was approximately 16.1 million and 31.9 million, accounting for approximately 14.2% and 23.0% of total revenue. It is worth noting that Arrano International has a high dependency on large clients. In the fiscal years 2023 and 2024, revenue from the top five clients accounted for approximately 113 million and 137 million, representing approximately 99.1% and 98.6% of total revenue for each year. The consequence of client dependency is a decrease in the "gold" content of operating activities. Despite the upward trend in revenue, the net cash flows from operating activities have decreased. During the period, the net cash flows from operating activities were approximately 15.39 million and 4.423 million; cash and cash equivalents at the end of each period were approximately 10.38 million and 6.38 million. The growth potential of the Hong Kong security services market is still present Non-recurring projects cast uncertainty on operations The Hong Kong security services market is primarily focused on Class 1 license work, which accounted for 82.5% of the total market size in 2023. From 2019 to 2023, the market size of Class 1 services increased from 24.4 billion Hong Kong dollars to 26 billion Hong Kong dollars, with a low compound annual growth rate of 1.6%. The slowdown in growth is mainly attributed to the impact of COVID-19, which reduced demand for manned security services in sectors such as retail and hospitality due to temporary closures of various facilities. In contrast, Class 3 license services experienced strong growth during the same period, with a compound annual growth rate of approximately 4.4%, primarily due to businesses seeking more efficient and scalable alternatives to traditional manpower-based security services, leading to an increasing adoption of advanced security technologies such as CCTV surveillance systems, access control systems, and comprehensive security solutions. Looking ahead, the market is expected to experience robust recovery, with compound annual growth rates of approximately 4.8% and 5.5% for Class 1 and Class 3 services, respectively, from 2024 to 2029. The growth of Class 1 services will be driven by economic recovery and the expansion of infrastructure, residential, and commercial projects, while Class 3 services will continue to develop due to ongoing digital transformation, increasing reliance on technology-driven security solutions, and growing demand for system integration and maintenance. The public-related project security services market mainly receives bidding support from major institutions (including government departments, MTR CORPORATION, Airport Authority, Hospital Authority, Housing Department, and Housing Society). Despite temporary setbacks caused by the outbreak of COVID-19 (which hindered historical growth), the market size of private-related project security services increased from 33 billion Hong Kong dollars in 2019 to 36 billion Hong Kong dollars in 2023, with a compound annual growth rate of 2.0% during that period. This segment benefits from continued demand for security services from existing government buildings and other public institutions. Market growth is expected to continue.Fast, it is projected to reach HKD 47 billion in 2029, with a compound annual growth rate of 5.5% from 2024 to 2029.The demand for security services in public-related projects is consistent with the strong expansion of public infrastructure projects. The total value of construction projects in public places has recorded a significant compound annual growth rate of 10.2% from 2019 to 2023, highlighting the huge investment in public infrastructure. In addition, government infrastructure spending has steadily increased from HK$66.6 billion in 2018 to HK$88.3 billion in 2023, with a compound annual growth rate of 7.3% from 2019 to 2023, mainly driven by large-scale government-led initiatives such as the Northern Metropolis Area and Tomorrowland Vision Project. In the long run, these initiatives are expected to increase the demand for security services. Focusing on Alliance International, the bid rate for the fiscal years 2023 and 2024 is approximately 25.0% and 12.5% respectively. In fact, during the past reporting period, most of the company's revenue came from the Three-Runway Concourse contracts with the Hong Kong International Airport operator. The Three-Runway Concourse project site is a construction site, so the demand for the company's services will depend on the construction progress and expected completion date. Under the Three-Runway contracts, the company's service period currently runs until December 31, 2025. In the fiscal years 2023 and 2024, revenue from the Three-Runway contracts for Alliance International was HK$97.8 million and HK$107 million, accounting for approximately 85.8% and 77.0% of total revenue for the same period, respectively. Alliance International highlights in the risk warning that the company cannot guarantee that the group will achieve the same or higher bid rate in the future as during the past reporting period. If the Group fails to obtain new contracts, or if the number of tender invitations or contracts available for bidding in the future significantly decreases, the group's business, financial condition, and prospects could be significantly adversely affected. In summary, on the surface, Alliance International's revenue, gross profit, and net profit show a growth trend, which is satisfactory. However, behind the strong performance is a continuous decline in cash flow, indicating that the company's prosperity is only on paper. In a situation where net profit and cash flow are severely diverging and the bid rate cannot be guaranteed, how will Alliance International continue to tap into the growing market demand for security services in Hong Kong?