INDUSTRY OVERVIEW SOURCE OF INFORMATION

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1 The information that appears in this section has been prepared by Euromonitor International Limited and reflects estimates of market conditions based publicly available sources and trade opinion surveys, and is prepared primarily as a market research tool. References to Euromonitor International Limited should not be considered as the opinion of Euromonitor International Limited as to the value of any security or the advisability of investing in our Company. Our Directors believe that the sources of information contained in this section are appropriate sources for such information and have taken reasonable care in reproducing such information. Our Directors have no reason to believe that such information is false or misleading or that any material fact has been omitted that would render such information false or misleading. The information prepared by Euromonitor International Limited and set out in this section has not been independently verified by our Group, the Sponsor, the [REDACTED], the [REDACTED], the [REDACTED] or any of our or their respective affiliates, advisers, agents, directors, officers, employees or representatives or any other party involved in the [REDACTED] and neither they nor Euromonitor International Limited give any representations as to its accuracy and the information should not be relied upon in making, or refraining from making, any investment decision. SOURCE OF INFORMATION We commissioned an independent professional market research company, Euromonitor, to assess the industry development trends, market demand and competitive landscape of concrete service industry in Hong Kong, at a fee of approximately US$50,000 and our Directors consider that such fee reflects market rates. Established in 1972, Euromonitor is a global research organisation in strategy research for both consumer and industrial markets. With offices around the world and analysts in 80 countries, Euromonitor s products and services are held in high regard by the international business community and they have 5,000 active clients including 90% of the Fortune 500 companies. The information contained in the Euromonitor Report is derived from the data gathered from different sources such as: (i) desk research; (ii) interview with a sample of leading industry participants and industry experts for latest data and insights on future trends and to verify and cross-check the consistency of data and research estimates; (iii) published sources including national statistics and official sources such as the Census and Statistics Department of Hong Kong, specialist trade press and associations such as the Construction Industry Council, company reports including audited financial statements where available, independent research reports, and data based on Euromonitor s own research database; and (iv) the projected data from historical data analysis plotted against macroeconomic data with reference to specific industry-related drivers. Nevertheless, we cannot assure you regarding the accuracy or completeness of the factors, forecasts and statistics in this document obtained from sources such as government publications, market data providers and the Euromonitor Report. 49

2 Forecasting bases and assumptions Euromonitor has developed its forecast based on the following assumptions: The Hong Kong economy is expected to maintain steady growth over the forecast period. The Hong Kong social, economic, and political environment is expected to remain stable in the forecast period. There will be no external shock, such as financial crisis or raw material shortage that affects the demand and supply of concrete services in Hong Kong during the forecast period. Key market drivers such as increase in number of construction projects are expected to boost the development of the Hong Kong concrete services market. Key drivers including increased building and civil market is likely to drive the future growth of the Hong Kong concrete services market. The research results may be affected by the accuracy of these assumptions and the choice of these parameters. The market research was completed in May 2016 and all statistics in the Euromonitor Report are based on information available at the time of reporting. Euromonitor s forecast data comes from analysis of historical development of the market, the economic environment and underlying market drivers, and is cross-checked against established industry data and trade interviews with industry experts. Our Directors confirm that, after taking reasonable care, there is no adverse change in the market information since the date of the Euromonitor Report which may qualify, contradict or have an impact on the information in this section. MACROECONOMIC ENVIRONMENT IN HONG KONG Hong Kong s economy grew by a CAGR of approximately 5.6% from 2011 to In 2015, Hong Kong s economy grew modestly by approximately 2.4% in real terms, a slowdown from approximately 2.6% GDP growth rate recorded in A broad range of initiatives were announced in the 2016 Policy Address by the Government in January 2016 to stimulate and develop the economy, enhance education and improve the health care system in Hong Kong. In particular, a strong emphasis was placed on the participation and facilitation of the National 13th Five-Year Plan and the Belt and Road Initiative to create new opportunities for Hong Kong. The uncertainties and challenges of the global economy are also expected to exert a downward pressure on Hong Kong s economic growth over the next few years. As such, the Government forecasts the economy to grow by 1-2% for It is expected that the GDP in Hong Kong will grow consistently with the range from approximately 2.1% to approximately 3.0% annually from 2016 to

3 MACRO ENVIRONMENT FOR THE CONSTRUCTION SECTOR IN HONG KONG There are mainly five types of construction establishments in Hong Kong, namely (i) building construction; (ii) civil engineering; (iii) demolition and site preparation; (iv) building services installation and maintenance activities; and (v) building finishing and other specialised construction activities. The announcement of the Ten Major Infrastructure Projects in Hong Kong in 2007 have been driving the development of the entire construction sector in Hong Kong thereafter. The gross value of construction performed in Hong Kong had been increased by a CAGR of approximately 15% from approximately HK$179.8 billion in 2010 to approximately HK$314.9 billion in The increase was mainly driven by the growth in the construction of buildings, and building services installation and maintenance activities, which represented an annual growth of approximately 28% and approximately 25% respectively. OVERVIEW OF CONCRETE SERVICES INDUSTRY IN HONG KONG The concrete services industry plays an important role in the construction industry in Hong Kong, as concrete is the most widely and commonly used material for projects. Therefore, the demand for concrete services has a positive correlation with the demand for construction projects. A wide range of construction work such as commercial buildings, stadiums, bridges, pump stations, car parking building blocks, residential buildings and houses, waste water plants and architectural applications requires concrete to be cast in place, as a part of the entire construction project. As a segment of construction industry, the industry revenue attributable to the concrete service industry accounted for approximately 0.4% of the revenue of the overall construction industry in There is a clear segregation of duties between concrete suppliers and concrete services providers in Hong Kong. There are no companies in Hong Kong that are engaged in both supplying concrete and providing concrete services. The concrete supplier is responsible for the production and delivery of the concrete by a concrete mixer truck to the construction site. After that, the concrete would be placed by the concrete services providers to the destinated position requested by the main contractor. The concrete services provider would then use a concrete vibrator manually to ensure that trapped air and excess water are released and the concrete settles compactly in the formwork. The finishing of the concrete surface would also be performed. Lastly, the concrete services provider would also responsible for the curing and protection of finished concrete. In general, the cost of using machines shall be lower than labour in concrete placing. Typically, boom pumps, stationary pumps, truck-mounted concrete pumps, placing booms and concrete vibrator are used by concrete services providers in performing their works and these machines involve an investment of a considerable amount. Small-scale concrete services providers normally rent the equipment from third parties instead of purchasing them to avoid large capital commitment. With regards to the technology and practice for the concrete services industry, it has remained consistent over the years with some minor improvements in the equipment field. For example, the service radius of the truck-mounted concrete pump is increasing, therefore minimising the manual manpower to place the 51

4 concrete to the position of high level. In recent years, there has also been a growing practice of using higher strength concrete in Hong Kong, especially for high-rise buildings, and this requires concrete pumps with higher power output. Growth of concrete services industry revenue at a CAGR of approximately 13.9% from 2011 to 2015 The revenue of the concrete services industry in Hong Kong increased from approximately HK$ million in 2011 to approximately HK$ 1,512.6 million in 2015, representing a CAGR of approximately 13.9%. The healthy growth of the industry was mainly attributed to the increase in public infrastructure such as the Ten Major Infrastructure Projects. The growing demand from private sectors such as commercial and residential construction projects also drove the growth in market size. Set out below is the revenue attributable to the concrete services industry in Hong Kong between 2011 and 2015: HKD million 1, , , , , , , Industry revenue attributable to the concrete services industry Source: Euromonitor from desk research and trade opinion survey with concrete services providers and main contractors The concrete services industry is expected to grow at a CAGR of 10.5% from approximately HK$1,512.6 million in 2015 to approximately HK$2,492.4 million in MARKET DRIVERS The major market drivers for the concrete services industry in Hong Kong are highlighted below: Strong momentum for public infrastructure Government investment in infrastructure has been increasing steadily over the years. From 2009 to 2015, it increased from approximately HK$48 billion to approximately HK$70 billion. Such spending is anticipated to be maintained at a high level, providing the construction industry with opportunities. 52

5 In particular, the Ten Major Infrastructure Projects announced in the Policy Address in 2007 will increase the connectivity between Hong Kong and the western Pearl River Delta, which will drive Hong Kong s economy by creating demand in construction and related jobs. In addition to the Ten Major Infrastructure Projects, the Government has commissioned other infrastructure work such as the construction of the third runway of the Hong Kong International Airport and Operation Building Bright and Revitalizing Historic Building. The Urban Renewal Authority ( URA ), which was established in May 2001 to undertake, encourage, promote and facilitate the regeneration of the older urban areas of Hong Kong has also induced demand for construction projects. The URA has several residential developments such as the one in Kai Tak, under the subsidised sale flat scheme units. They are also focused on redevelopment and rehabilitation of buildings in Hong Kong. In the 2016/2017 budget, the Government emphasised that despite the unpredictable investment environment, the investment in infrastructure is to remain strong. In the long run, the Government also intends to upgrade the tourism infrastructure, with Disneyland opening a new themed area in 2016/2017 and the first hotel in Ocean Park opening in There will also be tourism related projects in Kai Tak and Lantau which are currently in the planning stage. There are also some major projects that are targeted to be completed in the next few years such as the South Island Line and West Kowloon Cultural District. Given the continuous demand for public infrastructure, the projects will be able to provide the concrete services industry with a sustainable demand for the next couple of years and create more jobs for concrete service workers. Robust demand for the public and private property market According to the Census and Statistics Department, the Hong Kong population is expected to reach approximately 8.15 million by Therefore, the growth in population will drive the demand for residential housing in Hong Kong. From the 2016/2017 budget, the Government is forecasted to supply approximately 280,000 public housing units for ten years (2016/2017 to 2025/2026). As for private housing, the Government estimates that 20,000 private units will be produced given the housing demand in 2015/2016. Furthermore, the growth of the concrete services industry in Hong Kong has been facilitated by the Land Sale Program established by the Government to increase land supply for housing as well as to maintain a stable property market. Total land sale area has increased from approximately 59,700 sq. m. in fiscal year 2009/2010 to 233,200 sq. m. in fiscal year 2015/2016, at a CAGR of approximately 25%. Twenty-nine (29) residential sites were made available for sale in the 2016/2017 Land Sale Program, which provided approximately 19,200 housing units as well as 8 sites for commercial or business use. This created a total of approximately 536,000 sq. m. of floor space and approximately 2,100 hotel rooms. The increase in land sale area could potentially lead to more concrete service projects and support the growth of the concrete services industry in Hong Kong. 53

6 The demand for office buildings in Hong Kong continues to grow Within commercial property, the office segment is expected to enjoy heathy growth. The office market in Hong Kong continues to benefit from the expansion of Chinese firms in Hong Kong and from generally strong corporate merger and acquisition activity in the market. There were 1,091 mainland companies with business operations in Hong Kong, which increased by approximately 14% from The demand for office would drive development of the office building constructions, which also need the concrete service. THREATS Insufficient experienced and skilled labour In recent years, there has been an outflow of skilled labour to China for large-scale construction projects, hence there is considerable demand for experienced and skilled concrete services labour in Hong Kong. The situation is further exacerbated by an aging workforce and the decline in new labour. The stringent labour regulations and insufficiency of experienced and skilled labour may increase the delay of construction projects and hence hinder the growth of the concrete services market. The implementation of the Designated workers for designated skills regulation from April 2017 may also act as a barrier for new labour to enter into the construction industry as workers must be registered as Registered Skilled or Semi-Skilled workers of designated trade divisions to carry out construction works of those trade divisions on construction sites, unless they are under specified conditions. It is expected that the requirement and classification of skilled labour might have a cost implication for the concrete services companies as the wages of registered skilled labour may increase. Replacement of environmentally friendly equipment will increase concrete services companies cost There is a growing concern about environmental protection and conservation. To improve air quality and protect public health, the Environmental Protection Department ( EPD ) has introduced The Air Pollution Control (Non-road Mobile Machinery) (Emission) Regulation ( Regulation ) which was implemented since 1 June Under this Regulation, all non-road mobile machinery (such as the concrete pump in the concrete services industry) are required to comply with the prescribed emission standards. Since 1 September 2015, all machines sold or leased for use in Hong Kong must be approved or exempted with a proper label issued by EPD. Recently, as of 1 December 2015, only approved or exempted non-road mobile machinery with a proper label are allowed to be used in specified activities and locations including construction sites. Therefore, with the new Regulation, old machinery may not be able to comply with the new rules. Concrete services companies may have to bear additional cost to upgrade or replace their machinery. 54

7 HISTORICAL KEY COSTS COMPONENTS IN CONCRETE SERVICES INDUSTRY The chart below shows the average daily wage for workers engaged in concrete services industry between 2011 and 2015: HKD 2, , , , , % 1, , % 2, , % 10% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% % Average daily wage of concretor Growth (real) of average daily wage of concretor Source: Hong Kong Concretor Contractors Association Limited Note: The year period is from 1st June to 31st May of next year The average daily wage for a concretor rose from HK$1,200 in 2011 to HK$2,300 in 2015, representing a growth of 91.7%. The significant rise in labour cost is due to the shortage of skilled and new labour while the industry is experiencing an ageing workforce. There is a low tendency for the young generation to enter the industry due to the demanding nature of the work. According to the Construction Industry Council, the proportion of workers over the age of 50 has increased from 36.6% in 2009 to 43.8% in Fortunately, the pressure of the rising cost of labour is alleviated by the falling prices of diesel oil. Diesel oil is an essential cost component for operating all kinds of construction equipment. 55

8 The chart below shows the index number of the costs of diesel oil used in public sector construction projects (April 2003 = 100) between 2011 and 2015: Source: Census and Statistics Department of Hong Kong Diesel oil is used in the robin engine which was used to operate concrete vibrator. The price of diesel has declined globally due to the increase in supply from major oil exporting countries. The cost index of diesel oil has dropped significantly from approximately in 2014 to approximately in 2015, a decline of 13%. Unlike the fluctuation in cost of labour and diesel oil, the price of bend tubes and robin engines used in concrete service projects have remained stable over the past two years. The average price range of bend tubes and robin engines are HK$ and HK$1,500-3,000 respectively in COMPETITIVE LANDSCAPE OF THE CONCRETE SERVICES INDUSTRY IN HONG KONG The concrete services industry in Hong Kong is fairly consolidated and consists of around 30 players as at May 2016, and most of them are small-medium enterprises incorporated in Hong Kong. The top five concrete services providers, all involved in providing concrete services which include placing/pouring concrete and finishing/smoothing liquid concrete, in Hong Kong accounted for approximately 50.0% of the total market share, while the remaining concrete services providers accounted for approximately 50.0% of the total market share of overall concrete services industry by revenue in Hong Kong in

9 Set out below are the top five concrete services providers in terms of revenue receipts (Note 1) in Hong Kong in 2015: Company Name 2015 Share % Our Group (Note 2) 23.3% Company B 10.7% Company C 6.9% Company D 6.5% Company E 2.6% Others 50.0% Total 100.0% Source: Euromonitor estimates via a fieldwork program from trade interviews and desk research Notes: 1. While audited data was available for some of the companies, they typically do not break down the revenue numbers into the relevant categories which were covered in this study. For these companies as well as those companies that are included in the ranking table, Euromonitor estimated the market ranking based on estimates provided by various trade sources (i.e. not just the companies themselves) while seeking a consensus on these estimates as much as possible. The ranking and shares were based on estimates of companies total revenue in The revenue of our Group is calculated by reference to the weighted average of its revenue for the two years ended 31 March Our Group ranked first among concrete services providers in Hong Kong with a market share of approximately 23.3% in terms of the total revenue of the concrete services industry in Hong Kong in We believe this is attributed to a combination of factors including our Group s reputation, good quality of work, possession of a strong fleet of concrete placing machinery and stable relationship with customers. 57

10 ENTRY BARRIERS Building relationships with customers The existing concrete services providers have already been working with the main contractors in the industry for a certain period. It would be hard for a new entrant to gain immediate trust from these main contractors. Besides, projects are more likely to be awarded to concrete services companies which they have cooperated with before. It is important for new entrants to build good relationships with real estate developers and main contractors to build their reputation in the industry so that they are able to receive referrals and recommendations, as well as invitations to tender. Availability of skilled workers Concrete services companies are highly reliant on the supply of experienced and skilled workers. Over the past few years, there has been a shortage of new labour and ageing workforce. As a result, the cost of hiring skilled workers has been escalating, placing greater pressure on the business. New entrant will find it difficult to compete in the market if they cannot hire competent workers. The situation will be further exacerbated with the implementation of the designated workers for designated skills regulation from April Machines required for concrete work Machines are generally required for concrete placing works. Most concrete services companies normally rent the machines from third parties instead of purchasing them to avoid large capital commitment. New entrants would not conduct concrete placing work effectively if they did not possess their own machine and heavily rely on rental from third parties. 58