Good News on Listing | Frost & Sullivan Assists Guanglian Engineering Holdings Limited to Successfully List on the Hong Kong Stock Exchange (1413.HK)

Guanglian Engineering Holdings Limited (hereinafter referred to as 'Guanglian Engineering') successfully listed on March 11, 2021, issuing 250 million shares at a tender price ranging from HK$0.5 to HK$0.54, raising up to HK$135 million at most. Frost & Sullivan (Frost & Sullivan, hereinafter referred to as 'Frost & Sullivan') provided exclusive industry advisory services for Guanglian Engineering's listing and hereby extends its warmest congratulations on its successful listing.

During the Hong Kong listing process, Frost & Sullivan mainly undertook the following tasks: helping the company accurately and objectively understand its positioning in the target market, using objective market data to discover, support, and highlight the company's competitive advantages, assisting the company, investment banks, and other intermediaries in completing the relevant parts of the prospectus (such as the overview, competitive advantages and strategy, industry overview, business, and other important sections), facilitating communication with the Hong Kong Stock Exchange and investors, helping investors quickly understand the market ecosystem and competitive landscape, and assisting the company in completing feedback on various industry-related issues from the Hong Kong Stock Exchange.

Definition and Classification

Foundation engineering is a process of constructing buildings that transfers the load of the building from the superstructure to the soil. Foundations can be further classified into shallow foundations and deep foundations, depending on the depth at which the load is transferred from the building to the ground. According to the Civil Engineering and Hydrogeological Services Department (CEHSD), shallow foundations usually refer to those where the depth to the bottom of the foundation is less than or equal to its minimum size. On the other hand, deep foundations typically refer to piles or columns installed in great depths or prefabricated structures that are driven into the ground through driving, jacking, or other methods, or are filled with vertical shafts by drilling or boring into the ground.

●Site leveling projectThe preparatory stage for land, designed to accommodate buildings or other facilities constructed within the area, includes but is not limited to leveling the land to the required direction, level or shape, as well as providing other temporary or permanent support services. Excavation and lateral bracing works (‘excavation and lateral bracing’) involve loosening the soil and removing materials from it, followed by providing support to the excavation area with piles and columns. During this process, proper support around the site and groundwater control are required to prepare a larger and safer space for construction. It is becoming increasingly common for project owners and/or main contractors to require foundation contractors to carry out comprehensive excavation and lateral bracing works using the top-down method. Due to the technical expertise and specialized knowledge involved, only a small number of foundation contractors in Hong Kong are able to carry out excavation and lateral bracing works using the top-down method. According to the top-down method, the first level of soil excavation is carried out to leave space for the construction of ground floor slabs, which serve as lateral support for the walls of the basement structure. After the completion of the ground floor slabs, the upper structure works of the building can proceed while further basement excavation continues. This top-down approach improves the flexibility and efficiency of planning and implementing construction development projects (especially those involving high-rise buildings), because it allows for simultaneous work on both the basement structure and the upper structure.

● Pile cap projectTo construct the pile cap, a stable and larger foundation is created to transfer and distribute the load of the building to the pile columns or a group of pile columns.

●Pile driving constructionRefers to the construction and installation of piles and columns, which are structural crossbeams typically made of steel, concrete, or wood. They are used to transfer the load of buildings to deeper foundations with sufficient bearing capacity in the soil, thereby improving the safety and utilization rate of building construction.

● Underground drainage projectRefers to the maintenance, addition, reconstruction, and removal of underground drainage systems.

● Square projectFor engineering operations involving the processing of some surface soil (including a large amount of soil and unformed rock).

market scale

The total value of foundation works increased from approximately HK$18.6 billion in 2014 to approximately HK$23.9 billion in 2019, with a compound annual growth rate of about 5.1%. Although the total value of real estate investment and local fixed capital formation decreased during the social unrest in the second half of 2019, this did not significantly affect the existing foundation works market as ongoing projects were still underway. With the alleviation of social unrest, it is expected that more construction development will resume or enter the later stages, so the impact on the foundation works market may be temporary. The market demand for foundation works highly depends on the start of development projects and construction works. The strong growth is mainly attributed to the rapid overall housing development in Hong Kong and the healthy growth of the construction industry.

Thanks to the planned infrastructure development projects and increased land supply, as well as the expected completion of new private residential properties, the total value of foundation works is expected to grow at a compound annual rate of about 3.2% over the next five years, reaching approximately HK$257 billion by 2024. In particular, the foundation works in the private sector of Hong Kong increased from about HK$133 billion in 2014 to about HK$165 billion in 2019, with a compound annual growth rate of about 6.9%. Given the continuous increase in the supply of private residential housing, foundation works in the private sector of Hong Kong will grow at a compound annual rate of about 3.1% from 2020 to 2024.

● Increased land supplyIn view of the high demand for the development of residential buildings, according to the 2019 Policy Address, the Government has formulated several policies to increase land supply in the coming years. In addition, the Government has simplified and accelerated the process of changing land uses, enabling a more effective increase in Hong Kong's land supply in the short term. On the other hand, new development area projects such as the Kwun Tong North/Fung Ling North New Territories Development Plan, Hung Shui Kiu/Xiamen Village New Territories Development Area and Yuen Long South Development Plan are currently underway, and these projects are expected to release more than 1,200 hectares of land into the Hong Kong market in the future. The Government's expected increase in land supply in the coming years is expected to actively boost the demand for foundation works.

● Accelerate the development of private residencesIn the face of the imbalance between supply and demand in the Hong Kong housing market, the government has been implementing policies to simplify and accelerate land planning and development processes, and is studying the possibility of increasing land supply by changing land uses and developing new development areas. As stated in the 2020-2021 land sale plan, 15 residential sites will provide about 7,530 units, and 6 commercial sites can offer about 833,700 square meters of floor area. In addition to the 15 sites available for sale, railway property development projects will continue to be a source of private housing land supply in 2020-2021. Property development projects owned by the Hong Kong Railway Corporation located at Wong Chuk Hang Station and Sun Yat-sen City are expected to provide about 4,050 units in total. According to the Development Bureau's data, the total potential private housing land supply in Hong Kong for 2020-2021 is estimated to generate about 15,730 units. Private residential projects are expected to support the demand for foundation works.

● Urban reconstruction projectsThe statutory body responsible for accelerating the redevelopment of Hong Kong buildings, the Urban Renewal Authority (URA), has launched several urban renewal projects since its establishment in 2001. According to URA data, by 2046, there will be more than 326,000 residential apartments with a building age of at least 70 years. Multiple projects are underway in different areas, with notable examples including larger projects such as the Kwun Tong Central Urban Renewal Project, which involve more than 53,000 square meters. Therefore, it is expected that foundation contractors will play an increasingly important role in urban renewal projects.

● Rapid development of infrastructureThe Government has invested billions of Hong Kong dollars in infrastructure development to maintain the competitiveness and quality of life of the city. According to the 2020-2021 budget, annual capital works expenditure will average about HK$100 billion, with an annual total construction output of HK$300 billion. Key large-scale infrastructure projects include the Lantau Development Plan in the Lok Ma Chau area, as well as site preparation and infrastructure works for the Pak Fung Lam South Heng Chau and Yau Tong public housing development plans. Several projects are under planning by the Civil Engineering Development Department, such as the remaining infrastructure works for the Kai Tak Development Plan - former runway and south apron development plan, the Kai Tak Development Plan - Kai Tak Ming Kip Improvement Phase II Works, the Admiralty Road Development Plan, the further development plan of Tseung Kwan O - the first phase of landfill infrastructure works at Tseung Kwan O and the single-track connecting northwest and northeast New Territories. The Government is also promoting a budget of HK$22 billion for mixed-use government land, such as building related community facilities and shared users' buildings on the former Admiralty Road quarry land, the Tseung Kwan O Town Centre and Sha Tin Mountain Road. Such infrastructure works are expected to increase the demand for foundation works in Hong Kong in the future.

According to the Housing Department's data, as of February 17, 2021, the number of registered specialized contractors for foundation works reached 152. Large-scale practitioners in the foundation industry are usually main contractors with a distinguished track record and sufficient funds, and they are included in the tender lists of major property developers and the government. Main contractors further subcontract various aspects of projects to specialists, such as site preparation works, excavation and lateral bracing, pile cap works, and piling construction, in order to effectively deploy resources. The foundation engineering subcontracting industry is more fragmented. Subcontractors usually do not compete directly with main contractors in the Hong Kong foundation industry. According to the Construction Industry Council's data, as of February 17, 2021, there were 414 foundation and piling subcontractors in Hong Kong.

Multi-level subcontracting is a common practice in the construction industry in Hong Kong, especially for large-scale development projects, due to the manpower and machinery required, as well as the specialized fields involved in the projects. Mature foundation engineering subcontractors focus on several aspects of foundation engineering, maintaining close relationships with the main contractor to ensure a stable source of projects.

During the long-term cooperation with clients, contractors have served as important business partners for continuous foundation engineering. Some foundation contractors have provided services to the same client for over five years. Based on past project references, foundation contractors have established stable working relationships with clients and can offer customized services and application experience to manage foundation engineering projects. This partnership has developed a certain degree of mutual dependence and reciprocity in terms of cost-effectiveness and service quality. Therefore, it is industry practice for clients to concentrate on the foundation industry.

In 2019, the Group was ranked as the fourth-largest foundation contractor in Hong Kong based on its revenue from foundation works, accounting for approximately 1.7% of the total market share.

● High capital requirementsFor foundation engineering contractors, having strong start-up capital to purchase equipment and maintain strong operating cash flow is very important. Purchasing a fleet of own main machinery and construction equipment, including excavators, loaders, crawler cranes, and forklifts, requires substantial capital expenditure. Especially in tender evaluations for construction projects in the private and public sectors, environmental compliance has become one of the main criteria. Main contractors are increasingly encouraging sub-contractors at all levels to deploy machinery that meets recognized environmental standards, such as the Quality Manual for Motor Vehicles issued by the Environmental Protection Department and the emission levels specified in the Non-Road Mobile Machinery Regulations. In addition, foundation engineering contractors usually generate net cash outflows such as upfront costs in the early stages of a project. The upfront costs incurred by foundation engineering contractors usually include but are not limited to payments made to material suppliers and subcontractors. Therefore, strong capital requirements have become one of the hurdles to entering the foundation industry in Hong Kong.

● Good relationships with property developers and supervision contractorsA good relationship with property developers and supervising contractors is also crucial for the success of market practitioners. Only leading foundation contractors are on the bidding lists of major property developers and supervising contractors, while most small foundation contractors are unable to even receive tender invitations for such projects. Large foundation contractors have a strong track record, the ability to take on a large number of orders in the short term, strong cash flow, and sufficient manpower, making them the preferred choice for property developers and supervising contractors. Therefore, it is expected that new participants will face challenges in sorting out their working relationships.

● A good track recordA good track record is a key competitive factor in the foundation industry. Reliable past performance records regarding project quality, effective labor division, and timely delivery within budget control are key indicators for companies conducting foundation work. Property developers and supervision contractors in Hong Kong favor cooperation with foundation contractors who have a good record of relevant project experience. New participants who have not established a good reputation with industry stakeholders through past collaborations and lack experience in delivering foundation work may limit the overall competitiveness of companies in the foundation industry.

Frost & Sullivan has extensive research experience in the construction industry, assisting well-known enterprises in successfully listing on capital markets. Successful listing cases include Raffles Interior (1376.HK), New Wei Engineering (8676.HK), Yinglan Group (1162.HK), Jianzhong Construction (0589.HK), Shengxing Holdings (1472.HK), Weny Group (1802.HK), Deyi Holdings (9900.HK), Tailink Construction (6193.HK), Fengcheng Holdings (8216.HK), WMCH Global (8208.HK), Huaji Global (2296.HK), Wanya Enterprise Holdings (8173.HK), Home Control (1747.HK), China Tianbao (1427.HK), Yuanda Residential Construction (2163.HK), Anle Engineering (1977.HK), Pujiang International (2060.HK), Lejias Holdings (1867.HK), Weihong Group Holdings (3321.HK), Hon Corp (8259.HK), Aobang Construction (1615.HK), Renhe Technology (8140.HK), Wanshun Group (1746.HK), Tangji (8305.HK), Rongfeng Group Asia (8526.HK), Deyi Holdings (8522.HK), Aoneng Construction (1183.HK), Yingde Holdings (8535.HK), Hengyu Group (2448.HK), Xianeng Group (1730.HK), WT Group (8422.HK), Jianpeng Holdings (1722.HK), Hebei Construction (1727.HK), Shouyi Holdings (2227.HK), Yikangtai (8445.HK), Wantong Garden (8199.HK), Progressive Development (1667.HK), ECI Technology (8013.HK), Shanle International (1660.HK), Li's Enterprise Holdings (2266.HK), Zhisheng Group (8370.HK), Aisuo Holdings (8341.HK), Aidewei Construction (6189.HK), Yonghan Development (8423.HK), Fengsheng Electromechanical (0331.HK), Red Star · Midea (1528.HK).