US IPO Preview | Gross Margin Soars: What "business trump cards" does Haina Construction hold?

Title context: US IPO Preview | Gross Margin Soars: What "business trump cards" does Haina Construction hold? Text: The adjustment in Hong Kong's foundation engineering industry has shifted from cyclical fluctuation to structural contraction. In 2025, the nominal total value of private site works completed by major contractors fell 16.9% year-on-year, and the 15.9% year-on-year decline continued in the first quarter of 2026; the Construction Industry Council forecasts that the total value of private works in 2026/27 will be approximately HK$90 billion, down 43% from the 2018 peak. Although the government's annual investment of approximately HK$120 billion in basic works provides a certain floor, it is difficult to fully offset the contraction in private demand. At the same time, labor shortages are pushing up subcontracting and construction costs, and cost rigidity is particularly pronounced in labor-intensive segments such as foundation engineering, with the industry's gross margin center continuing to move downward. The combination of demand contraction and cost rigidity is simultaneously narrowing the profit buffers and capital operation space of small and medium-sized contractors, and is also making the listing arrangements of such enterprises more pragmatic. At this juncture, Hong Kong foundation engineering contractor Advance JV Group Limited ("Haina Construction") publicly submitted an F-1 prospectus to the US SEC, planning to offer 2.5 million ordinary shares at US$1.5 to US$2 per share, raising a total of approximately US$5 million based on the upper end of the offering price range. Gross Margin Rises Against the Trend The prospectus shows that the operating entity of Haina Construction is Hong Kong Haina Construction Limited, which was renamed in 2021 and focused on the foundation engineering track. Its core business covers the entire foundation engineering chain: pile foundations, excavation support, foundation reinforcement, site clearance and earthwork allocation, as well as supporting geological drilling and geotechnical investigation. The company holds three types of specialized contractor licenses issued by the Hong Kong Buildings Department for foundation construction, site investigation, and site formation, and has also obtained registration qualifications from the Construction Industry Council. Its upstream customers are mostly main contractors and subcontractors of Hong Kong building and infrastructure projects, and its end owners are mainly government departments and public institutions, while also covering small and medium-sized private projects. This is a typical Hong Kong local niche subcontractor. Its competitiveness lies not in its construction management experience in the cramped working spaces of Hong Kong's high-density urban areas, but in its ability to survive by flexibly switching between public works and private projects. This positioning determines the ceiling of its revenue scale: even in the best years, full-year revenue is only in the single-digit millions of US dollars. Based on the financial data for the six months ended November 30, 2025 (the interim period of fiscal year 2025/26), the company has fallen into a dilemma of "slight revenue decline and halved net profit"; however, a deeper breakdown of the income statement structure shows that the profitability of its core main business has not deteriorated, and gross margin has even expanded against the trend. During the reporting period, the company recorded contract revenue of US$5.6357 million, down 10.3% from US$6.2858 million in the same period last year. This decline is consistent with the macro trend of continued shrinkage in Hong Kong's private site works volume. What is worth watching is the sudden change in revenue structure. In the same period of 2024, the company's contract revenue from related parties was as high as US$694,600, while in the same period of 2025 this indicator directly dropped to zero. Excluding the related-party contribution, the company's revenue from independent third parties slightly increased from US$5.5912 million to US$5.6357 million (a slight year-on-year increase of 0.8%). On the one hand, this shows that after losing the related-party business lifeline, the company still maintained the stability of its base in the external market; but on the other hand, against the backdrop of rapid shrinkage in the industry's overall pie, lacking breakthroughs in new incremental markets, its revenue ceiling has already appeared. Despite revenue pressure, Haina Construction's performance in the upper half of the income statement is noteworthy. During the reporting period, cost of contract revenue fell sharply from US$5.0769 million to US$4.3686 million, a decline of 14.0%, faster than the decline in revenue. Driven by this, the company achieved gross profit of US$1.2671 million, up 4.8% year-on-year; more critically, gross margin climbed against the trend from 19.2% in the same period last year to 22.5%. At a time when labor shortages are pushing up industry subcontracting and construction costs, the company's gross margin rose instead of falling, reflecting two positive operating signals: first, the company has become more restrained in project selection, abandoning low-gross-margin projects secured by "bleeding for orders"; second, subcontractor management and internal cost control (such as material procurement and optimization of construction work efficiency) have achieved substantive results. This shows that Haina Construction's cost moat in its niche track still exists. The biggest turning point in financial performance appeared in operating expenses. During the reporting period, the company's general and administrative expenses (G&A) surged from US$321,500 in the same period last year to US$816,100, a year-on-year surge of 153.8%. Dragged down by this, the company's operating profit shrank sharply from US$887,400 to US$451,000, nearly halving. In terms of non-operating income and expenses, the company faces certain pressure. During the reporting period, interest expense was US$69,800, up 11.2% year-on-year. Under the Federal Reserve's high interest rate environment and high local financing costs in Hong Kong, asset-heavy and long-cycle projects such as foundation engineering tie up working capital significantly, and the rigid rise in interest expense directly erodes thin operating profit. In addition, net other expenses rose 21.4% year-on-year to US$30,300. Affected by the above factors combined, the company's income before income tax fell 51.2% year-on-year to US$420,800, and the income tax provision accordingly decreased from US$117,400 to US$50,700. Ultimately, net profit was US$370,100, down 50.3% from US$745,100 in the same period last year, and net margin narrowed from 11.9% to 6.6%. New Business "Surprise Force" Saves the Day Although gross margin rose against the trend, from a two-way breakdown of revenue and costs, Haina Construction's traditional core business is encountering significant headwinds. Fortunately, however, the new business changed the company's revenue profile in a very short period of time. As the company's long-standing absolute base, revenue from foundation engineering servicesfixed-price contractsfell sharply from US$6.2845 million in the same period last year to US$4.8785 million, a year-on-year decline of 22.4%. On the cost side, the cost of this business fell from US$5.0760 million to US$3.9620 million, a decline of 21.9%. This data directly reflects the macro reality of shrinking demand for private site works in Hong Kong. Under the fixed lump-sum model, contractors must bear all risks of schedule delays and raw material price fluctuations. At a time of labor shortages and cost rigidity, Haina Construction has clearly taken the initiative to give up some fixed-price orders that involve heavy funding pressure, thin profits, or even loss risks, in order to avoid the cash flow trap of "taking orders to court death." Against the backdrop of a sharp contraction in fixed-price contracts, the company added foundation engineering servicesunit-price contract business, recording revenue of US$370,700 and costs of US$319,200 during the period. Unit-price contracts (usually settled according to actual work volume) can effectively avoid the risk of fluctuations in material and labor costs and transfer part of the cost overrun pressure to the client. Although the initial scale is not large, this marks a pragmatic step by the company in risk exposure management. The most striking change came from foundation engineering consulting services. Revenue in this segment exploded from only US$1,283 in the same period last year to US$386,500, an increase of more than 30,000%. It was precisely this US$370,000 increment in unit-price contracts, combined with the US$380,000 increment in consulting, that forcibly kept the decline in the company's total revenue at a less ugly level. The preceding analysis noted that Haina Construction's overall gross margin climbed against the trend from 19.2% to 22.5% during the period. Combined with the business breakdown data, this should be attributed to the subsidy from high-gross-margin new businesses. During the period, the gross margin of the fixed-price contract business, which accounted for the absolute majority, did not improve but slightly declined from 19.2% to 18.8%; the gross profit it contributed fell sharply from US$1.2085 million to US$916,500. This shows that under an environment of pressure on overall industry engineering unit prices, even an established subcontractor like Haina Construction has seen its bargaining power in traditional construction segments squeezed, and absolute profit space is thinning. The company's overall gross margin was able to jump by 3.3 percentage points to 22.5%, entirely due to the astonishing 77.4% gross margin of foundation engineering consulting services. This business, with less than 7% of total revenue, contributed US$299,100 in gross profit, accounting for as much as 23.6% of the company's total gross profit (US$1.2671 million). Consulting services are a typical asset-light, high-barrier business, not involving heavy machinery scheduling or heavy labor dependence, with extremely low marginal costs. By extending its business chain upstream to investigation, design, and project management consulting, Haina Construction not only earns high value-added returns but also effectively hedges the risk of profit erosion on the construction side. Based on the above breakdown, Haina Construction's future growth space no longer depends on how many "piling" jobs it can take on, but on the depth and breadth of its business structure transformation. In the Hong Kong and US stock markets, pure construction subcontractors usually receive very low price-to-earnings ratios, while the valuations of engineering consulting and design companies are significantly superior. If Haina Construction can continue to expand the consulting services segment, it will reshape its valuation logic. However, the leap from US$1,283 to US$380,000 can be seen as "breaking the ice," but moving from US$380,000 to the multi-million-dollar level will require strong cross-disciplinary team building and external market expansion capabilities. In the short term, the business base is too small to support the company in achieving leapfrog development. In summary, Haina Construction's interim business performance demonstrates the survival wisdom of a small regional construction enterprise at the bottom of the cycle: using high-gross-margin consulting business to fill the gap in traditional construction revenue, and using flexible unit-price contracts to hedge fixed-price risks. Its future growth space depends on whether it can solidify its unexpectedly explosive consulting business into a normalized capability.