Consensus Lowered for Construction Firms
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
Even with aggressive government support measures, the real estate market remains in a difficult situation. We maintain a Neutral rating on the construction sector for January, believing that construction companies’ 4Q22 earnings will arrive short of consensus. That said, we note that the pace of decline in terms of both apartment sales and jeonse price lessened w-w.
Real estate policy overlook; consensus lowered for construction firms
The government previously announced real estate industry support measures, with the main focus being the lifting of regulated areas, the relaxation of the pre-sale price ceiling, and the relaxation of resale restrictions. Then, on Jan 4, President Yoon Seok-yeol ordered related ministries to review measures such as purchasing or leasing unsold units by public institutions and re-leasing them to the vulnerable. The government is expected to take active steps for a soft landing in the real estate market. However, considering the growing housing cost burden and rapidly accumulating unsold units, the real estate market is unlikely to recover over the near term.
The 2023 combined earnings consensus for the companies under our coverage (Hyundai E&C, Samsung Engineering, IS Dongseo, Daewoo E&C, GS E&C, DL E&C) is W64.6tn in sales, W3.9tn in OP, and a cost ratio of 94.0%, with a P/E of 5.4x (as of Jan 5, 2023). Of note, 2023 sales and OP consensus figures were adjusted by +1.6% and -15.5%, respectively, compared to Jul 2022. Cost ratio, including SG&A, deteriorated by 1.2%p compared to Jul 2022.
We maintain a Neutral rating for the construction industry in January, given difficult real estate market conditions, a high construction cost burden, and likely consensus-missing 4Q22 earnings. We offer Samsung Engineering as our top pick for the month, liking its: 1) plant-oriented overseas business expansion; and 2) shift toward eco-friendly projects, including LNG and hydrogen. Housing-oriented construction players look unfavorable in terms of valuations considering both construction cost burden and rising unsold units.
Weekly apartment sales price index and jeonse price index
Over Dec 27~Jan 2, the apartment sales price index fell 0.65%, with the pace of decrease slowing 0.76% w-w. By region, the speed of decline narrowed in Seoul (-0.67%), the Seoul metropolitan area (-0.81%), 5 regional metropolitan cities (-0.60%), and 8 provinces (-0.38%), but an overall downward trend continued nationwide. The apartment jeonse (lump sum rental deposit) price index dropped by 0.82%, with the pace of decline slowing 0.92% w-w, similar to the sales price index. By region, the speed of decline slowed in Seoul (-1.15%), the Seoul metropolitan area (-1.15%), 5 regional metropolitan cities (-0.65%), and 8 provinces (-0.37%), with all continuing to display interest rate hike effects.