Challenging Environment
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
Maintain BUY but cut target price to KRW45,000
We maintain BUY on Hyundai E&C but cut our TP by 18.2% to KRW45,000 (0.62x 12m fwd P/B) to reflect an increase in COE (9.1%→10.0%) and decline in ROE (7.8%→7.6%).
Challenging environment, but large builders positioned to benefit once liquidity crunch dissipates
Given a deteriorating real estate financing market sparked by Korea’s Legoland issue, market sentiment toward builders with high housing exposure is unlikely to rebound soon. Among builders, however,
(1) large builders, which are responsible for construction completion, are structurally less likely to incur losses, and
(2) large builders with high credit quality are better positioned to gain market share once the current liquidity crunch dissipates. Hyundai E&C’s KRW2.9tn net cash position (end-3Q22) should be a strong buffer against unfavorable conditions. Also, the stock is trading at below 0.5x 12m fwd P/B. As such, we recommend taking a longer view rather than waiting for further declines.
3Q22 OP misses market consensus on logistics center projects, sluggish earnings at subsidiaries
Hyundai E&C reported 3Q22 consolidated revenue of KRW5.4tn (+24.8% YoY, -2.7% QoQ) and OP of KRW153.8bn (-30.2% YoY, -12.3% QoQ). Revenue came in above the market consensus, while OP fell below. Despite favorable revenue at home and abroad, OP struggled because of (1) a KRW30.0bn increase in costs for standalone domestic, non-housing projects (four logistics centers built) and (2) persistently sluggish earnings at consolidated subsidiaries.
3Q22 standalone cumulative housing supply at near 22,000 homes
As of 3Q22, Hyundai E&C supplied 21,619 homes vs. annual guidance of 30,000 homes. For 2023, we see supply aimed at ~27,000 (mainly redevelopment/ reconstruction).
3Q22 standalone cumulative overseas order intake at KRW2.7tn
As of 3Q22, Hyundai E&C won KRW2.7tn in standalone overseas orders (vs. annual guidance of KRW5.6tn). There is potential for winning the main project for the Saudi NEOM City project, the order for which will be booked in the near term.