Based on Abundant Cash Flow
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
Business diversification is underway at construction companies based on ample cash liquidity secured via strong housing business over the past five years. During lulls in real estate-related news flow, keeping such business diversification in mind should help to balance out one’s investment strategy.
Business diversification underway based on abundant cash flow
Large construction companies are diversifying their business portfolios to include sewage treatment, waste management, renewable energy, and hydrogen under the keyword ‘environment’. Notable sewage/wastewater treatment businesses include SK E&C’s EMC Holdings, GS E&C’s GS Inima (Spanish water treatment company), and Taeyoung E&C’s TY Holdings. For waste management, we highlight IS Dongseo’s Insun ENT and Koentec. In addition, Samsung Engineering plans to expand related construction and equity investment through experience in ultrapure water and sewage/wastewater treatment facilities construction with Samsung Electronics. For renewable energy, we note that domestic offshore wind power projects are in progress with Hyundai E&C, Kolon Global, Hanhwa E&C, and SK E&C. For fuel cells, SK E&C (collaboration with Bloom Energy) is constructing facilities and participating in equity investment. Hydrogen-related businesses (centered on liquefaction plants and ammonia production facilities) are being operated by Samsung Engineering, DL E&C, and Hyundai E&C.
Such moves by construction companies are thanks to abundant cash inflow from housing businesses and construction experience in related projects since 2015. In addition to strengthening ESG aspects, the new businesses are to reduce firms’ portion of housing and overseas businesses, which are sensitive to economic fluctuations. This year, positive events related to real estate policy, such as the by-election and presidential election, are to be highlighted. At the same time, if attention is paid to companies expanding their ESG businesses, such a strategy should help to offset risks that may arise when real estate-related developments take a breather.
Key construction/real estate news released last week
With the campaign for Seoul mayor officially kicking off, candidate Park Young-sun is making aggressive real estate-related pledges. Regarding reconstruction and redevelopment (the main concern), she is targeting an increase in private participation—a stance which contrasts with the government’s position of emphasizing public development as a principle means of securing profits. Regarding deregulation of the 35-floor height restriction, she has pledged to lift the limit if views of the Mt. Namsan area skyline are unharmed. In addition, after a 6km section of the Gyeongbu Expressway is moved underground, she plans to build an ecological park and a ‘half-price apartment’ worth W10.0mn/3.3m2 on the site. Such policy objectives stand in contrast to those of the current government in terms of approving reconstruction and redevelopment and easing restrictions on buildings over 35 floors.