Preview of US Stocks: Can Mingcheng Group, which started from the "mud and water business," break free from its dependence on major clients?

Recently, Ming Shing Group Holdings Limited (hereinafter referred to as "Ming Cheng Group") has updated its prospectus. The company submitted its initial public offering (IPO) application to the U.S. Securities and Exchange Commission (SEC) in June this year, planning to list on NASDAQ at a price of $4 per share, with a total fundraising of $15 million. Since 2023, although the number of Chinese concept stocks listed in the U.S. has rebounded, small and medium-sized enterprises still dominate in terms of average fundraising amount, market value, and initial price-earnings ratio, reflecting both market investors and listing companies. A more conservative attitude towards IPO. At this time of "cold spring", can the fundamentals of Ming Cheng Group convince investors? Ming Cheng (Hong Kong) Engineering Limited was established in 2012 and mainly engages in civil engineering, such as plastering, tile laying, bricklaying, floor leveling, and marble works, as well as some small-scale decoration services. It is understood that the company's customers are mainly private enterprises, including private residential and commercial buildings. The owners of the company's private projects are generally property developers, while the company's customers are generally general contractors and subcontractors for civil engineering in the projects. The scale of the company's involvement in public projects is relatively small, mainly involving public housing development, infrastructure, and public facility development, and the customers of this part of the business are mainly general contractors hired by government departments and statutory bodies. According to the latest prospectus data, Ming Cheng Group recorded revenue of approximately $21.87 million in the 12 months ending March 31, 2023, a significant increase of 52% compared to the same period last year; net profit increased by 55% from $1.8 million to $2.79 million. It can be seen that from 2021 to 2023, the company's revenue and profits have continued to grow at a high rate, while the overall gross profit margin has remained relatively stable, slightly decreasing from 18.3% in the same period last year to 16%. In terms of financial condition, although the company's cash and cash equivalents increased from $217,800 in the same period last year to $324,000, the total current liabilities increased significantly from approximately $3.9597 million to approximately $6.1816 million, an increase of about 56%. As of March 31, 2023, the company's outstanding bank loans amounted to $5.3221 million, of which bank loans to be repaid within one year amounted to $3.8236 million. In terms of specific business progress, the number of projects generating revenue for the company increased from 16 in the same period last year to 20 in the fiscal year ending March 31, 2023, with a bid-winning rate of approximately 21.2%, slightly higher than the 20.5% in the same period last year. Among them, the number of projects contributing revenue exceeding $1 million increased from 3 to 8. In addition, during the reporting period, the company recorded government grants of approximately $772,500, an increase of approximately 954.6% compared to the same period last year. During the reporting period, the company's public business grew significantly, with revenues increasing by 210.8% year-on-year to approximately $6.31 million, benefiting from increased engineering volume in two large public projects during the reporting period; private business grew by approximately 26.0% year-on-year, an increase of approximately $3.2065 million, with the number of projects increasing from 12 in the same period last year to 14. As for the gross profit margin, there is a stark difference in trends between the company's public and private business: the gross profit margin of public business increased from 17.2% in the same period last year to 37.4%, while the gross profit margin of private business decreased from 18.5% to 7.3%. In terms of costs, the company's general and administrative expenses increased by 66.9% year-on-year to $855,600, mainly due to increased employee costs and other expenses (such as vehicle expenses and expected credit loss provisions for accounts receivable and contract assets). It is understood that from a business model perspective, Ming Cheng Group mainly obtains new business through customer bidding, so projects and scales may have recurring fluctuations, which may affect the company's revenue and profit margins. In terms of customer concentration, in the 2022 and 2023 fiscal years ending March 31, the company's top five customers accounted for approximately 92.8% and 93.4% of the revenue, respectively, and one of the largest customers contributed 23.6% and 42.1% respectively. The significant reliance on a single customer exposes the company to the risk of significant decline in business in the future. In response to the risk of future business fluctuations, Ming Cheng Group stated in the prospectus that it will enhance the company's brand influence and market share through increased marketing efforts. The planned marketing activities include establishing dedicated promotional websites, placing advertisements in industry publications, sponsoring industry-related commercial and charitable activities, and distributing promotional materials. As for the outlook for the second half of 2023, the change in the market for building materials such as cement, concrete, and aggregates depends on the changes in demand in the downstream real estate and infrastructure industries. Analyzing the main businesses of Ming Cheng Group in Hong Kong, despite a 6.4% rebound in Hong Kong property prices in the first five months of 2023 (according to Centaline), the recovery of the real estate market is lower than expected. The key lies in the changes in demand from the downstream real estate and infrastructure industries. Looking at the overall market trends, taking cement as an example, the price of cement in the first half of the year showed a rising trend in the first quarter due to the strong performance of domestic infrastructure, but in the second quarter, it was affected by insufficient new project start-ups, the traditional rainy season, and typhoon season, leading to a significant decline in cement prices. From January to June 2023, the national cement production was 9.53 billion tons, a year-on-year increase of 1.3%, but a year-on-year decrease of 2.4% on a comparable basis, reaching a new low since 2012. Looking ahead to the second half of 2023, the changes in the market for building materials such as cement, concrete, and aggregates will depend on the changes in demand from the downstream real estate and infrastructure industries. Overall, Ming Cheng Group's decision to list in the U.S. amid the cautious attitude of the market and investors towards IPO reflects their confidence in the company's growth potential and ability to overcome risks in its industry.Urban Leading Index shows some optimistic signals, but Hong Kong's economic recovery progress has been slower than expected in the second half of the year due to uncertain global economic factors.According to the Buildings Department's data, it is understood that in July 2023, a total of four projects in Hong Kong saw the completion of 128 private residential units, a decrease of nearly 62% compared to the 334 units completed in June. In the first seven months of this year, a total of 30 projects involving 7,684 private residential units were completed, accounting for approximately 38.5% of the Civil Engineering and Development Department's annual forecast for Hong Kong, and a decrease of nearly 42% compared to the same period last year, marking the lowest record in four years. Regarding the private residential market, Knight Frank stated in its review and outlook for the Hong Kong real estate market in the third quarter of 2023 that the third quarter witnessed less than 9,200 transactions, a decrease of 25% and 21% on a quarterly and annual basis respectively, due to factors such as continued interest rate hikes and pressure on the stock market. Prospective buyers in the residential market are showing strong wait-and-see sentiment. In terms of the second half of the year, in the current market downturn, policy directions will be an important factor influencing market trends. Recent reports have suggested that the Hong Kong government has begun considering relaxing policies such as the Buyer's Stamp Duty (BSD), Ad Valorem Stamp Duty (AVD), and Special Stamp Duty (SSD) in order to stimulate the property market and promote economic recovery. In the public sector, various public housing construction plans in Hong Kong have progressed smoothly in recent years, including the rapid construction of simplified public housing and planning for the development of the northern metropolis. According to the Policy Address released in October 2022, relevant departments expect to rapidly build approximately 30,000 units of simplified public housing within 5 years, and the latest data shows that a total of 128,800 public housing units can be supplied from 2023/24 to 2027/28, along with the 30,000 units of simplified public housing, bringing the total to over 158,800 units, representing an increase of more than half compared to previous periods. As a construction industry company, apart from the cost of raw materials and market demand for the construction industry, Ming Cheng Group will also be affected by labor costs. In this regard, the Hong Kong government previously announced plans to introduce an "industry-specific labor importation scheme" for the construction and transportation industries, with a quota limit of 20,000, including 12,000 for the construction industry. This policy is expected to help reduce labor costs for companies. In conclusion, taking into account various factors such as the entire industrial chain, the economic recovery, and the rebound in the property market have led to a cautiously optimistic outlook for the company's future performance. However, attention should still be paid to factors such as raw material costs and labor costs, which may further drag down the company's profit levels.