Real Estate Policies Expected to Change for the Better
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
GS E&C should be in a better position than peers to secure urban renewal orders, thanks to its strong Xi brand. We believe that the firm’s COGS-to-sales ratio will rise temporarily in 1Q22 before normalizing thereafter. Its share price is to hinge upon whether the upcoming administration devises real estate policies facilitating urban renewal projects.
If favorable urban renewal policies come out...
We reiterate a Buy rating on GS E&C with a TP of W55,000, expecting that under a new government administration, real estate policies will change for the better, facilitating urban renewal projects. Boasting its popular Xi brand, GS E&C should land orders for urban renewal projects in many parts of the country, ranging from the three Gangnam districts to first new towns and metropolitan cities. GS E&C and Samsung C&T have stuck to their single-brand strategy with their brands enjoying strong recognition, while others have released high-end brands while keeping their existing brands. Under a two-brand strategy, they will likely agonize over which brands (high-end or original brands) to use in areas where pre-sale prices are relatively low, making their positioning ambiguous and in turn leading to difficulties in winning orders in such areas.
But, we point out that policy expectations have already been reflected in the constructor’s share prices. With a new president to be sworn in this month and local elections slated for June, urban renewal policies that meet high expectations are unlikely to appear in the near future. Of note, amid rising predictions towards reconstruction/redevelopment projects since the presidential election, real estate price burden has upped. Trading at 2022E P/E of 7x and P/B of 0.8x, GS E&C shares are near the upper end of its historical valuation band.
Cost hike risk to ease towards 2H22
At the recent the conference calls, a majority of construction companies indicated that they are currently faced with risks of a rising cost-to-sales ratio due to soaring raw material prices. But, relations with project owners (including housing associations) and supply-demand conditions for raw materials (eg, cement and steel) differ by company. Backed by its strong apartment brand power, GS E&C is expected to remain largely unaffected. That said, at the domestic housing division, earnings should inevitably decline by 2~3%p due to increased cost-to-sales ratio. In line, we revise down our 2022 OP estimate by 6% from the previous one (on Apr 5, 2022).