Apartment Pre-sale Market Boom Expected to Continue
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
With domestic orders expanding in 2H20, Korean construction firms are likely to enjoy a healthy growth phase next year. Key factors boding well for such construction sector growth include: 1) third new city projects (under which 1.27mn new housing units are to be supplied over the coming years in Seoul and neighboring cities); 2) SOC budget expansion; and 3) the implementation of the Korean New Deal. Of note, pre-sale plans for the new housing units to be offered under the third new city projects are to be released from this year. The SOC budget is set at W26tn for 2021, the highest level observed since 2010.
Improvement in construction industry conditions is expected to drive up cement shipments next year to around 48mn tons. The remicon price was upwardly adjusted in September, a factor that bodes well for cement price increase in 2021. In addition, investment in eco-friendly facilities (such as circulating fuel systems) is anticipated to drive cost savings at cement players.
Looking at overseas markets, we expect: 1) an easing in the reflection of one-off costs due to project delays amid Covid-19; and 2) improvement in orders for large-scale projects. We suggest Daewoo E&C and Ssangyong Cement, for which full-fledged earnings improvement is anticipated next year, as our sector top picks.
I. Pre-sale market outlook for 2021 and government budget increase
New orders for the domestic construction sector stood at W189tn as of August (12-month basis), the highest level in a decade. Under the third round of new city plans, a total of 1.27mn units are to be supplied in Seoul’s adjacent cities. In 2021, Korea New Deal policy and SOC budget of W26tn also bode well for the sector. In 2020, Korea’s housing pre-sale volume is estimated at 350,000 units, the highest level since 2017. Considering both the government’s real estate policies and real estate market conditions, the gap between nationwide pre-sale prices and housing prices should further fuel the pre-sale market boom moving ahead. Of note, unsold housing stands at 29,000 units, the lowest level witnessed since 2015.
II. Consider overseas markets for post-Covid-19 era
In 2020, while domestic companies’ overseas businesses are suffering from weak new orders and profitability amid the pandemic, global EPC companies are all experiencing the same difficulties. Nevertheless, new orders are recovering, including for the North Field LNG and Middle East general housing projects. We note, however, that among domestic constructors, only Hyundai E&C, Daewoo E&C, and Samsung Engineering are actively engaged in overseas markets.
III. Cement industry to experience improvement from 1H21
Domestic cement shipment volume is forecast to recover to more than 48mn tons in 2021, thanks to strong apartment pre-sales since 2018, third new city projects, and SOC budget expansion. In addition, noting the remicon price hike agreement in August this year, chances are that cement prices will also be hiked next year. Meanwhile, cost saving efforts are underway through the construction of recyclable resource treatment facilities and HRSG facilities.
IV. Top picks
We upgrade our investment rating on the construction sector to Positive. We recommend Daewoo E&C as our top pick among major construction firms on expected housing sales growth in 2021 (W1.5tn per quarter), strong new orders, and normalizing earnings at overseas businesses. Meanwhile, Ssangyong Cement is our top pick for the cement sector in light of full-year reflection of the benefits of its investment in recyclable resource treatment facilities, aggressive shareholder-friendly policy, and anticipated earnings improvement.