Cement Industry Valuations Look Attractive
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
While there are concerns that rising raw material costs could erode COGS-to-sales ratios at constructors, we consider such worries as being somewhat overblown, noting that raw materials represent a relatively small portion out of total construction costs. We continue to favorably view the domestic cement industry, in light of: 1) rising cement demand; 2) ASP hikes; and 3) cost-savings effects from installations of alternative fuel systems. Following a recent correction, cement industry valuations look attractive.
Impact of raw material cost hikes on constructors’ cost-to-sales ratios to be limited
We note that construction of apartment consumes about 1.0 tons of cement per 3.3m² and 0.3 tons of rebar per 3.3m², with overall apartment construction costs running at around W5mn per 3.3m². Recently, cement prices have upped from W75,000/ton to W78.800/ton. However, given that the increase in cement prices amounts to only 0.2% of total apartment construction costs (per 3.3m²), we believe that the effects of raw material cost hikes on constructors’ margins will be limited.
According to 2020 data collected by the Construction Association of Korea, raw materials represent 24% of total construction costs on average. By construction type, last year’s raw material cost portions stood around 22% for civil engineering, 25% for architecture, 36% for industrial facilities, and 24% for landscaping.
On a 12-month moving sum basis as of Apr 2021, domestic construction orders amounted to W215tn (+31% y-y), an all-time high level. And, pre-sale volume as of Jun 2021 (including planned pre-sale events) was 180,000 units, a level similar to that observed during the 2015~2016 housing market boom. We believe that overall conditions are turning favorable for the cement industry, as: 1) rising pre-sale volume should lead to higher cement demand in the future; and 2) the installations of alternative fuel systems are to help cement companies to reduce their costs. Despite a recent share price correction, we expect cement companies to regain valuation merit moving forward in light of anticipated solid earnings improvement momentum over 2021~2022.
Key construction/real estate news from last week
The Ministry of Land, Infrastructure and Transport (MOLIT) and the Financial Services Commission (FSC) are taking different stances on the effective date of designation of regulated areas, a term which refers to areas in which housing price growth is 2x higher than inflation or a subscription ratio is more than 5:1 for housing pre-sales. The MOLIT argues that a project for which pre-sale approval has been filed before the area in which the project is undertaken is designated as a regulated area will not be subject to the rules for regulated areas. On the other hand, the FSC holds that a project for which a pre-sale notice has been made before the area in which the project is undertaken is designated as a regulated area will not be subject to the rules for regulated areas. Projects in non-regulated areas are subject to a loan to value (LTV) ratio of up to 60%, while in regulated areas, a LTV ratio of up to 30% is applied to projects under which housing prices exceed W900mn. This difference in stances between the two organizations will likely spark concerns among potential homebuyers who intend to take out loans for middle payment, and among builders who intend to cover construction costs with middle payment made.