After skyrocketing for four days, WK GROUP (02535) experienced two consecutive days of decline. Is the frenzy just a flash in the pan?

Recently, the new stock market of Hong Kong stocks has once again attracted attention, with both new stocks soaring on the first day of listing. Among them, WK GROUP (02535) has attracted the most attention. On the first day of listing, WK GROUP opened at 0.65 Hong Kong dollars, 160% higher than the offering price. Subsequently, the stock price fluctuated, briefly rising over 192%, but then narrowing its gains. By the close, the stock surged 136% to 0.59 Hong Kong dollars, with a total turnover of 96.68 million shares and a turnover of 58.95 million Hong Kong dollars. As of the close on March 13, the company's stock price was 0.69 Hong Kong dollars, nearly 180% higher than the offering price. However, with the company's stock price opening high and falling on March 14, the stock price trend gradually declined, and as of now, the company's stock price has fallen for two consecutive days. As a new stock with the second highest first-day gain in the past year after WELLCELL HOLD (02477), is the stock price surge of WK GROUP just a temporary phenomenon? Performance fluctuations, fluctuating bid rates, fundamental strength is not ideal It is understood that WK GROUP was established in 1999 and is a steel structure engineering contractor focused on supplying, manufacturing, and installing structural steel for construction projects in Hong Kong. Steel structure engineering involves the fabrication and shaping of steel structures, usually serving as pillars in the initial construction phase of buildings and infrastructure. The company primarily focuses on playing a project management and supervisory role in project development, and appoints subcontractors to carry out most of the construction site work under the company's supervision. Currently, WK GROUP has two production facilities in Dongguan, China, and has the internal capability to process and manufacture structural steel according to customer specifications. According to industry reports, based on revenue in 2022, the company ranks third in the Hong Kong steel structure engineering industry, with a market share of approximately 3.4% in 2022. In terms of revenue performance, WK GROUP's income has shown a fluctuating upward trend, with revenues in the first nine months of 2020, 2021, 2022, and 2023 of approximately 324 million, 229 million, 336 million, and 235 million respectively, with a compound annual growth rate of 1.85%. In terms of business segments, the company is involved in public and private sector projects in Hong Kong. For public sector projects, the clients are typically main contractors appointed by various Hong Kong government departments, institutions, and statutory bodies. During the reporting period, the company's revenue from public sector projects was 143 million, 152 million, 285 million, and 196 million respectively, with the revenue from this business segment continuing to rise and its revenue share increasing from 44.1% in the 2020 fiscal year to 83.2% in the first nine months of 2023. Specifically, the revenue growth of this segment is mainly attributed to the growth in the company's infrastructure and public facility revenue, which has increased from 118 million in the 2020 fiscal year to 274 million in the 2022 fiscal year, with the revenue contribution from this business segment increasing from only 36.2% in 2020 to 81.4% in 2022. Private sector projects, as another major business segment of the company, mainly involve private commercial, residential, and industrial development projects. In recent years, the revenue share from this business segment has steadily decreased, from 55.9% in the 2020 fiscal year to only 16.8% in the first nine months of 2023. Additionally, it is worth noting that the company's bidding rate performance has shown a fluctuating downward trend over the reporting period, at 16.7%, 8.9%, 10.1%, and 11.5% respectively. The company mainly secures new business through direct bidding invitations from customers, like most companies in the construction industry. Therefore, the company's revenue primarily comes from projects that are non-recurring in nature. WK GROUP points out that the company's bidding success rate depends on a series of factors, including its pricing and bidding strategy, competitors' bidding and pricing strategies, available resources and subcontractors, competitive intensity, and customer evaluation standards. The company cannot guarantee that it will secure new contracts in the future, and if it fails to secure new contracts or the number of bidding invitations or contracts significantly decreases in the future, the company's business, financial condition, and prospects could be significantly adversely affected. However, fortunately, the company's profitability has continued to fluctuate upwards in recent years. The company's gross profit margins were approximately 16.97%, 15.48%, 19.90%, and 19.99% in the reporting period, with corresponding net profits of 36.706 million, 17.336 million, 39.265 million, and 15.115 million respectively. Intense industry competition, increasing dependence on major customers In addition to the fluctuating performance and bid rate, the company's increasing dependence on major customers is also a cause for concern. WK GROUP's clients mainly consist of construction contractors in Hong Kong (i.e., main contractors appointed by project owners). Revenues from the top five clients in the reporting period totaled approximately 297 million, 216 million, 316 million, and 230 million Hong Kong dollars, with percentages of the company's total revenue reaching 91.5%, 94.6%, 93.8%, and 97.8% respectively. As the company's largest customer, the Aggreate Group accounted for revenues of approximately 127 million, 152 million, 238 million, and 118 million Hong Kong dollars, representing 39.0%, 66.3%, 70.7%, and 50.3% of the company's total revenue in the corresponding periods. Although the company claims that industry reports show that a high degree of customer concentration is typical in the Hong Kong steel structure engineering industry, the company's increasing reliance on major customers has led to a continuous increase in trade receivables. Contract assets of the company (net of impairment provisions) recorded amounts of 97.10 million, 82.00 million, 73.80 million, and 142.00 million respectively during the reporting period. Additionally, trade receivables (net of impairment provisions) were approximately 10.90 million, 22.10 million, 14.50 million, and 19.80 million respectively. The company openly acknowledges that if it is unable to recover most of its trade receivables within the payment term, or even if they cannot be recovered at all, it could have a significant adverse impact on the company's business, financial condition, and prospects.The company's cash flow and financial condition will be adversely affected.When looking at different industries, steel structure engineering is a part of the construction industry, due to the material's strength, seismic resistance, and adaptability, steel structure engineering is integrated into construction projects. In 2018, large infrastructure projects such as the Hong Kong-Zhuhai-Macao Bridge, the Guangzhou-Shenzhen-Hong Kong High-Speed Rail (Hong Kong section), were successively completed. In 2019 and 2020, due to multiple reasons such as the outbreak of Covid-19 and reduced industry demand, the civil construction industry in Hong Kong experienced a temporary downturn, leading to a decrease in steel structure engineering. With the gradual control of the pandemic in 2022, the market for steel structure engineering began to recover. Overall, the market size of steel structure engineering in Hong Kong increased from 94.11 billion yuan in 2018 to 99.14 billion yuan in 2022, with a compound annual growth rate of 1.3%. However, as projects such as the expansion of Tung Chung New Town and the development of the third phase of the Central Harbourfront Event Space are launched in the future, it will drive the demand for steel structure engineering in the Hong Kong construction market. In addition, the environmental nature, flexibility in usage, and superior spatial benefits have made steel structure engineering more popular in Hong Kong. In recent years, the Hong Kong government has promoted the use of steel structures in many major infrastructure projects, including the Hong Kong-Zhuhai-Macao Bridge. With the growth in market demand, it is expected that the market size of steel structure engineering in Hong Kong will grow at a compound annual growth rate of 4.8% from 2023 to 2027, reaching 12.58 billion yuan in 2027. As for the competitive landscape, the competition in the Hong Kong steel structure engineering market is fierce, with over 500 market participants estimated to be in the industry. According to revenue, in 2022, the top five participants in the Hong Kong steel structure engineering market contributed 17.0% of the entire market. Although WK GROUP ranks third in the industry, its market share is only 3.4%. Overall, WK GROUP not only has fluctuating performance but also faces multiple pressures such as dependence on major customers and credit risks. Additionally, while the company's industry has a promising future, the industry's growth rate is not too fast, and the market size is not too large. The Securities and Futures Commission of Hong Kong has warned investors to be cautious when it comes to small-cap IPOs that barely meet the minimum market capitalization threshold, have high price-earnings ratios compared to peers, and have exorbitant underwriting and other IPO expenses. In light of the above situations, it is advisable for investors to exercise caution when dealing with such new stocks.