Pace of Housing Market Recovery Key
The author is an analyst of NH Investment & Securities. She can be reached at eunsang.lee@nhqv.com. -- Ed.
While top-line reduction appears inevitable for LX Hausys, various cost factors are easing, and B2B construction materials sales are solid. OPM improvement in 2023 is clear, but the pace of housing market recovery will determine the extent of profit growth.
Top-line decline inevitable, but OPM to continue improving
We maintain a Buy rating on LX Hausys, and raise our TP from W41,000 to W51,000, as we hike our target multiple from 3.7x to 4.5x, following a change in multiple calculation method. The firm’s top line is shrinking due to sluggish housing transaction volume, but: 1) raw material price burden is easing; 2) B2B construction material sales are sound; and 3) the automotive materials & components division is entering a period of full-fledged earnings growth.
As of the fourth week of January, PVC prices stood at US$890/ton, down 49% from their 2021 peak. Although the prices of windows, a major product, have been raised by about 9% since early 2021, margin growth is unlikely to be significant due to sluggish B2C sales. Ultimately, the recovery of housing transaction volume is key.
B2B construction materials sales should maintain a positive trend. The effects of PF board plant expansion will be fully reflected from 4Q22, and demand is sound thanks to revisions to related building laws. We expect the construction materials division to report 2023 OP of W75.1bn (+58% y-y; OPM of 3%).
Meanwhile, the automotive materials & components division should book OP of W21.4bn (TTP y-y; OPM of 2%), led by higher sales at finished car makers. We also note that asset efficiency at the division has steadily improved since 2018.
Pace of housing market recovery key
We forecast 4Q22 sales of W878.5bn (-5% y-y) and OP of W19.1bn (TTP y-y). While top line is expected to shrink, OPM should improve as cost burden from raw material prices and new agency openings has eased. Although OPM improvement in 2023 is clear, the extent of improvement will be determined by the pace of the housing market recovery. Considering the high absolute interest rate level, housing transaction volume in 2023 is estimated at 470,000 units (-8% y-y) and the firm’s OP is placed at W96.5bn (+105% y-y).