Construction is developer Chun Wo’s bread and butter
Chun Wo Development has become one of Hong Kong's largest construction firms, but it still has to grapple with soaring costs and domination of large developers, the two brothers in charge say
Chun Wo Development was founded by the late Pang Kam-chun in 1968. It has grown to become one of the largest construction companies in Hong Kong and expanded its operations to the mainland, Abu Dhabi and Vietnam.
Pang's two sons succeeded him in 2010. His elder son, Dominic Pang Yat-ting, 40, was appointed chairman and is in charge of the property development division.
The younger son, Derrick Pang Yat-bond, 38, is deputy chairman and leads the construction division.
As infrastructure projects have grown bigger, each construction contract now costs billions of dollars, ruling out all but large contractors. This has forced many small local contractors out of the industry.
The Pang brothers told the Chun Wo survives because it is not a typical contractor.
First construction costs are high, which dampens net profit margins.
Second, the market has been dominated by large developers. You have to offer a higher price for land acquisitions when the market is booming, otherwise you can't win the site.
If the market is in a downturn, large developers are able to cut their prices sharply and offer extra sweeteners to lure buyers. They have the tolerance to sit out downturns and hold the properties until the market recovers.
It is impossible for mid to small-sized developers to follow these two strategies.
Mid-sized to small developers have to think twice before they make the investment. And it is better to have a "Plan B".
For example, we are acquiring the ownership of Kelly Court in Lai Chi Kok. We saw the vacancy rate of office buildings in the district was not high, even after the outbreak of severe acute respiratory syndrome (Sars) in 2003. We believe the redevelopment of Kelly Court could offer a reasonable return. But in the worst case, we could retain the building for our own use.
Our project mainly provides houses, which is different from the other projects in the area [which offer flats]. There is no direct competition between the projects. It is even better if there are more projects in the same area, which could create synergy. It is better than a stand-alone project somewhere.
The mainland property market changes rapidly. Overseas laws do not provide enough protection to developers. We don't have an edge to develop in those markets. So we decided to focus on the markets of Hong Kong and Guangdong province only.
It is impossible to lower the construction cost. But it is easier for us to avoid going over budget.
We aim at maintaining a turnover of over HK$6 billion a year.
We have made good progress in the building quality of residential projects over the last two years. We will continue to do much better in the building of residential projects.
Our target is to achieve 100 per cent growth in revenue from building construction. It is expected to happen in the financial year to the end of March next year.
There will more business opportunities for us, as the government is increasing the housing supply.
You won't make big money from building construction, but you won't lose money. It offers a slightly higher profit margin.
It is our bread-and-butter business, which supports us in developing other businesses. So we will be more cautious in bidding for civil engineering business.
We won a contract for a civil engineering project for HK$325 million in 2005. Now, it costs HK$842 million to build the same project, as the cost of labour and materials increased sharply and there are more charges for environment protection.
The tender price for high-end residential sites also rose from HK$2,500 per square foot of gross floor area in 2009 to up to HK$4,200 per square foot today. Including the foundation work, the cost will reach over HK$5,000 per square foot.
There is no question that construction costs will continue to grow. The problem is how sharply they will increase.
The demand for labour is increasing, but the supply has not increased. That will boost the cost. As there is higher risk and more uncertainties, we will ask for a sightly higher profit margin for construction work.
As there are more construction works on the mainland and in Macau, Hong Kong has to compete with them for labour and construction materials. It is hard to get enough skilled workers for each building stage.
The industry lacks 4,000 formwork workers and bar-benders. It also lacks 1,500 concrete specialists, and most of the specialists are over 50 years old and nearly retired. Our industry is facing a serious problem of ageing workers.
The application procedure for importing workers is complicated, and the government is cautious about imported labour. So it is difficult for builders to import workers.