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According to the 2023 annual report of Baoyi Group and the records of the Companies Registry, the group has a total of 22 registered subsidiaries in Hong Kong, covering a number of fields including civil engineering, mechanical and electrical installation and property management. The five subsidiaries applying for liquidation this time mainly involve core engineering departments such as "Baohua Construction Co., Ltd.", accounting for approximately 38% of the group's total employees in Hong Kong (according to data from the Labour Department in 2022, the relevant companies employed a total of 1,237 local workers).
Financial Background
PYI GroupThe 2023 interim report shows that its current liabilities are HK$1.27 billion higher than its current assets, and its debt-to-asset ratio is 68.3%, which is significantly higher than the industry average (approximately 45-50%). It is worth noting that the total value of government engineering contracts undertaken by the group in the past three years reached HK$14.9 billion, accounting for approximately 12.11% of the total contracts awarded for public works projects in Hong Kong during the same period (HK$123 billion).
Project Impact Level
According to the ArchSD, among the 13 projects affected:
– Total contract value of 12 joint venture projects reached HK$8.3 billion
- The single wholly-owned project is the HK$420 million Tuen Mun Stormwater Drainage Improvement Project
– The joint-use complex project in Area 67, Tseung Kwan O (contract price HK$1.98 billion) was originally scheduled to be completed in Q2 2025, but is now being taken over by the Gammon-HipHing Joint Venture
Chain reaction in the industry
Liao Xuhui, chairman of the Hong Kong Construction Association, pointed out: "This incident reflects that the industry's long-term operating model of 'low bid price, high-risk contracting' has reached a critical point." According to data from the Census and Statistics Department, although the nominal wage index of the construction industry in Q3 2023 increased by 4.3% year-on-year, the real wage only increased slightly by 0.8% due to the impact of inflation.
Government response
The Development Bureau revealed that the existing "Project Subcontracting Risk Buffer Mechanism" will be activated, including:
1. Fund support from the engineering emergency fund of 5% (approximately HK$615 million)
2. Initiate the sub-contractor takeover procedure according to the Public Works Contractor Management Manual
3. The Labour Department has set up a special task force to handle relevant applications for the Protection of Wages Fund
China Railway Construction Corporation Limited
Although there was no positive response from China Railway Construction (Hong Kong) (stock code: 1186), according to information disclosed by the Stock Exchange, the company has hired 328 local construction personnel in recent months and applied to the Electrical and Mechanical Services Department to upgrade the contractor list level to the highest level "Group C". This move was interpreted by the industry as preliminary preparations for expanding its Hong Kong business.
Facts
1️⃣ Baohua and China Railway Construction Cooperation Network
– According to the 2023 annual report of Baoyi Group, it has established at least 5 joint ventures (consortiums) with China Railway Construction in Hong Kong, and the cooperation models include:
✓ Tung Chung East Station and other MTR projects
✓ Public housing projects (accounting for 15% of the Housing Authority’s annual projects, according to statistics from the Legislative Council documents in 2023)
✓ Road infrastructure (historical projects include the Red Cross Tunnel maintenance project)
2️⃣ Liquidation event timeline
– 2023Q4: HA/HS terminates five public housing projects of Po Wah Housing (total estimated cost of HK$7.8 billion)
– Q1 2024: China Railway Construction Corporation’s China Civil Engineering Corporation seamlessly takes over three of the projects
– Key data: Before the liquidation of the subsidiary of Baohua, the salary system of the MTR project had been transferred, involving more than 500 workers whose salaries were directly paid by MTR
3️⃣ Industry structure transformation
– Changes in market share of international contractors:
✓ 2010: French Dragage and other foreign companies undertook 32% government engineering projects
✓ 2023: The winning rate of Chinese enterprises (including joint ventures) will reach 67% (Annual Report of the Development Bureau)
– Typical case: China Railway Group’s official website shows that it has completed 48 infrastructure projects in Hong Kong, including:
✓ Hong Kong section of Guangzhou-Shenzhen-Hong Kong High Speed Rail (HK$12.6 billion)
✓ Shazhong Link Cross-Harbour Tunnel Project
Controversy
- Concerns about the flow of public funds: Ms. Yuan, a former Baohua employee, said that the motivation of Chinese companies to bid was related to "economic feedback". This statement needs to be compared with:
✓ Total expenditure on public works projects in 2023: HK$78.9 billion (Financial Secretary data)
✓ The amount of bids won by Chinese enterprises: an increase of 22% (compared with the 2019 baseline)
- Gaps in regulatory mechanisms: Although the Development Bureau claims that the impact is “controllable”, the industry is concerned about:
✓ Risk diversification mechanism of the joint venture model (Clause 14.3 of the current Public Works Contract)
✓ New financial review standards for contractors after the wage arrears incident (implemented in February 2024)
Historical Depth
Key milestones of PYE:
– 1946: Founded in Shanghai
– 1972: Construction of the Hung Hom Cross-Harbour Tunnel (cost HK$320 million at the time)
– 1998: Participated in the construction of The Center (the third tallest commercial building in Hong Kong at the time)
– 2020: The last wholly-owned project awarded – Lei Yue Mun Village Phase II (HK$2.4 billion)
Expert opinion
- Legislative Council members from the engineering sector questioned: "The joint venture model has become an institutional risk. In 2023, 19% of public works projects will have financial difficulties for contractors" (Legislative Council Paper No. CB(4)412/2024)
- Economists warn: "If the market share of Chinese companies exceeds 75%, it will trigger the review of "market dominance" under Article 15 of the Competition Ordinance"
Unsolved mysteries
– Chinese civil engineering projects have not been made public so far:
✓ Subsidy conditions for takeover projects
✓ Debt Settlement Agreement with Baohua
✓ Compensation arrangement for project delay (according to the standard contract, the penalty for delay is 0.15% contract amount per day)
Expert opinion
Legislative Council member Lo Wai-kwok from the engineering sector stressed: "The incident highlights that the amendment of the Construction Industry Payment Protection Ordinance is imminent. The current "progress payment" mechanism has a loophole in the maximum payment period of 120 days, which puts significant pressure on contractors' cash flow." According to a study by the Construction Industry Council, the average profit margin of engineering projects in Hong Kong has dropped from 5.2% in 2018 to 2.8% in 2023, which is lower than the international industry warning line of 3.5%.
This incident is expected to accelerate the legislative process of the Construction Industry Reform Bill, the core content of which includes mandatory performance bond insurance and an electronic progress monitoring system. The relevant draft bill is expected to be submitted to the Legislative Council for deliberation in Q2 2024. The result will affect the allocation of more than HK$90 billion in public works projects in 2025-26.
Paul Y. Engineering Group Limited, referred to asPaul Y. Engineering Group,as well asPaul Y. Construction（English:PAUL Y. ENGINEERING GROUP LIMITED, 0577 before the delisting of the Hong Kong Stock Exchange), was established in 1946 byChe BingrongCreated, belongs to aHongkongInternationalprojectService company, parent company isITC, including project management,architectureManagement and property management, the Group has several divisions including building construction, civil engineering, foundations and special engineering and building materials. existHongkong,ChinaandSoutheast AsiaWe have business in all regions. Paul Y. Engineering is currentlyBlue River Holdings,as well asLOUIS XIII GROUP LIMITEDShareholder, holding 49% and 51% shares. The former chairman of Paul Y. ConstructionJames B.andJacob Zhaoengineer, former Vice ChairmanLiu Gaoyuan.
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