Group Green Build HQ 10.2015Singapore delegation with Green Build Technology management at one of the Group's two HQ buildings in Harbin, Heilongjiang, PRC. L-R: Elle Shi, Phillip Capital Portfolio Manager | Benny Tan, The Edge Senior Writer | Lai Gene Lih, Maybank Kim Eng Investment Analyst | Peter Ng, Phillip Securities Investment Analyst | Roy Chen, CIMB Securities Investment Analyst | Zhao Li Zhi, Green Build Non-executive Chairman | El Lee, Financial PR Associate Director | Wu Xue Ying, Green Build CEO | Wang Hong, Green Build Vice President | Kevin Li, Green Build Financial Controller. (Shares Investment reporter Tan Jia Hui was present but not pictured)

Photos and video by Sim Kih

GREEN BUILD TECHNOLOGY'S building insulation projects are bustling with activity. This was what NextInsight found at a recent visit with a group of 3 analysts, a fund manager and 2 other reporters to inspect the project consultancy's construction sites in Harbin, Heilongjiang, PRC. Here is a summary of the takeaways from the trip.

Income Surge from Expansion of Green Tech Business
Upgrade of building insulation
1) The Group recognized government grants and related related income amounting to Rmb 26,453,000 for work on 160,000 sqm of built-up area at Hebai in FY2014. This year, the management plans to complete 
780,000 sqm, almost 5 times of last year's built-up area. Based on the same grant rate, related income from grants are estimated at Rmb 128.7 million for FY2015.

Underground utility tunnel project
2) The tender for this project was secured in October. The Group expects to receive government grants of about Rmb 884 million for its construction.

Work in progress to add thermal facade cladding.
After the green technology business was injected into food packaging company Youyue International last year, the Group was renamed Green Build Technology. Its packaging business that contributed Rmb 113 million to 1HFY2015 revenue will be hived off. This leaves Green Build with the following business segments.

(1) Building insulation upgrade - Adding thermal facade cladding and installation of heating systems with solar power and natural gas elements.
(2) Underground utility tunnel.

Zhao Lizhi 10.2015On 26 October, its Non-executive Chairman, Zhao Li Zhi (above), reduced his interest by 25.12% (60 million shares) for S$18 million, or 30 cents apiece. Post-placement, the Chairman remains the Group’s largest shareholder with a 40.83% interest.

A 18.84% interest was placed to PRC business associate, Li Ming Yang, making him the second largest shareholder. Mr Li is a strategic partner who played a key role in helping the Group secure the underground utility tunnel project.

Building Insulation - High barrier to entry

There are three main reasons for the high demand for upgrading of old residential buildings in Northeastern China.

Firstly, the residents of old buildings with inadequate climate protection desire an improvement in lifestyle. Secondly, the market value of a building goes up once the insulation cladding is added and its heating system made environmental friendly and energy efficient. Thirdly, the building upgrade extends its life span by 20 years.

Wu Xueying 10.2015CEO Wu Xue Ying believes that enterprises that set industry standards are superior to companies with a strong brand presence.

As the government has stopped issuing licenses for energy saving refurbishment construction companies, the barrier to entry will be very high for other companies, because they will not be entitled to tax exemption benefits and this significantly affects profitability.

Without the tax benefits, it is not worthwhile for construction players to accept such projects because the margin is too thin. A second deterrent is the long receivables cycle: the government subsidy is disbursed over 10 years. The tax benefit is as follows: first 3 years tax-free, years 4 to 6 @ 50% tax rebate, years 7 to 10 fully taxable, applicable at project level.

Underground Utility Tunnel - area oligopoly

Analysts 10.2015The management gave a corporation presentation at its headquarters, followed by a Q&A session with the visitors.Securing the underground utility tunnel project this month was a milestone event that is expected to add multiple streams of income.

Other than government grants for construction work, entrance fees from telecommunications companies, water utilities companies, electric companies and other players who need to run pipes and cables through the the underground utility tunnel will add to the income stream. The rate payable by 3rd party service providers has yet to be determined, but a ballpark measure could be the Rmb 39 million entrance fee included in the Rmb 510 million government subsidy.

Green Build competed with 21 tenderers for the project, of which 18 were state-owned enterprises. The award criteria was not based on lowest-priced tender. Other than pricing, consideration was given to track record and project manager reputation at corporate and team member level.

It certainly helped that Mr Zhao is a reputable expert in energy efficiency for construction of buildings, with infrastructure insulation patents to his name. He has about 2 decades of experience in the construction and civil engineering industry.

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