Shenghui Cleanness Looks Like ‘Pandemic Winner’ in Runup to Hong Kong IPO

The cleaning services provider has applied for a Hong Kong IPO, aiming to spread its hygiene expertise to more places in China

Key Takeaways:

  • Sanitation specialist Shenghui Cleanness has filed for an IPO in Hong Kong, aiming to use the proceeds to accelerate its expansion
  • The company’s core cleaning services are very labor-intensive, prompting it to look for ways to lower costs through automation and other uses of technology

By Lau Ming

One man’s pandemic pain is another’s pandemic prevention gain.

That modified version of the old adage could well be the mantra of Shenghui Cleanness Group Holdings Ltd., whose environmental cleaning services are in huge demand amid heightened hygiene awareness and standards during the pandemic. Last week the company filed for a Hong Kong IPO for a second time, hoping its growing business will attract investors as both Hong Kong and China struggle with the latest Covid-19 Omicron variant.

Based in South China’s Guangdong province, Shenghui has operations in 14 provinces across China, providing cleaning services to commercial buildings, residential properties, shopping malls and public facilities. Major clients in its home province include local giants Guangzhou International Financial Center, Guangzhou Taikoo Hui Commercial Complex and Guangzhou Baiyun International Airport. The company also services Jiangbei International Airport in the Southwest China megacity of Chongqing.

Beijing’s support for the clean-up and beautification of public spaces, combined with business from property developers and improved cleaning standards, has fueled strong demand for cleaning services for large buildings and public facilities in the last decade. Research cited in Shenghui’s prospectus says the market has been growing at a compound annual rate of 10% over the past few years, and it estimates such growth will continue through 2026.

The company has gotten an extra lift from the pandemic, experiencing stable growth over the last two years, according to the prospectus. In the pandemic’s first year in 2020, its service contracts jumped by 30% to 668 from 514 in 2019, fueling revenue and profit growth of 19.4% and 54.5% that year, respectively.

Things slowed a bit in the pandemic’s second year, with contracts up 10% to 732, and revenue and profit up 21% and 27.5%, respectively. The company has raked in 91.5 million yuan ($13.85 million) in combined profits over the past three years, enough to meet the Hong Kong Stock Exchange’s profitability requirements.

Shenghui derives 90% of its revenue from contracts it secures through bidding, which speaks to its competitiveness. Combined with its diverse and strong customer base, the company has been able to enjoy predictable and stable revenue streams.

Hooked on Guangdong 

The company gets 90% of its revenue from private property cleaning services, which, like the property management business, are being affected by the real estate market’s current cooling and China’s broader economic slowdown. But the more stable market for public facility cleaning services also holds big potential, as government owners put more emphasis on improving urban environments and hygienic conditions.

The company is determined to grab more market share to expand its footprint. It said some of the money from the IPO will go to setting up offices in both established and emerging first-tier cities like Beijing, Shanghai and Hangzhou in the fourth quarter of 2022 as part of its efforts to accelerate its expansion.

But the company could still face many obstacles trying to replicate its success outside its home province. While Shenghui has maintained robust growth in Guangdong over the last 20 years, including revenue growth in the province of 21.3% and 17.4% in the past two years, its business in other areas has yet to take off.

It started to shift more resources and focus to the nearby island province of Hainan in 2017, and set up a branch in Chongqing in 2020. But its Hainan operations have floundered in the past two years, with their share of total revenue falling from 14.2% in 2019 to just 7.7% last year. And last year its Chongqing operations contributed just 3.8% of total revenue. Combined revenue from other provinces, including Anhui and Fujian, surged by 1.6 times last year but only accounted for 5% of total revenue. The company still gets more than 80% of its revenue from Guangdong.

Spiking labor costs

Another challenge confronting the company is rising costs. The cleaning industry is labor-intensive, meaning half of the company’s spending alone goes to employee benefits. Even after boosting its operations over the past three years, Shenghui remains short on long-term employees and cleaning vehicles, forcing it to contract out some of its projects. As a result, some 40% of its labor costs go to subcontract-associated labor. After adding in those costs and the cost of its own employees, labor-associated costs account for a whopping 90% of the company’s total. It is also feeling pressure from the need to better protect worker’s rights as advocated by the government. That has put pressure on the company to find ways to lower costs and improve its performance, even as labor costs remain high and are growing.

That cost-lowering pressure is another driver for the IPO. Shenghui plans to use some of the proceeds to purchase things like garbage-collecting equipment, cleaning robots and upgraded information technology systems to reduce its reliance on labor.

While the current pandemic environment has spawned huge demand for cleaning services, the industry remains fragmented. That has created strong expansion opportunities for potential consolidators like Shenghui, which may be looking for cash to make more acquisitions. But lack of progress outside Guangdong means it’s far from certain the company can become such a consolidator.

In terms of valuation, Shenzhen-listed EIT Environmental Development (300815.SZ) and the Hong Kong listed Baguio Green Group (1397.HK) make good comparisons, with an average price-to-earnings (P/E) ratio of 14 times for the pair. Thus, Shenghui’s 39.9 million yuan last year means it might expect a relatively modest IPO valuation of HK$670 million ($86 million).

This is the company’s second IPO application, after its first application in April last year expired after six months. This time Shenghui has switched from the relatively unknown underwriter Ever-Long Securitiesto the larger state-owned Cinda International, whose underwriting clients have included property management company Sundy Service (9608.HK), cutting tools trading center operator Wenling MCT (1379.HK) and software company Edensoft (1147.HK). While those three all made it to market, their shares dropped below the IPO prices on their debut days. That might be motivation for Cinda to push harder for a more successful IPO for Shenghui Cleanness this time around.

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