Taking Control over the High Ground
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
Defying concerns, Hyundai E&C’s 2Q22 results arrived roughly in line with consensus, helped by a lower-than-feared increase in its COGS-to-sales ratio for domestic housing. We see more positives to be in play than negatives, including both the signing of a strategic agreement with Westinghouse (US) and readiness to place a bid for the NEOM project. We maintain Hyundai E&C as our top pick among construction industry players.
Taking control over the high ground
We maintain a Buy rating and a TP of W60,000 on Hyundai E&C, continuing to offer the firm as our construction sector top pick on: 1) its strengthening position as a contractor in the overseas nuclear power plant market thanks to a strategic agreement with Westinghouse, a major US nuclear power plant design/engineering player; and 2) the anticipated winning of additional orders for the Saudi NEOM project through the National EPC Championship (NEC) with Aramco. Unlike its construction industry rivals, Hyundai E&C has established the power to supplement earnings for domestic reconstruction/redevelopment projects, which are under threat of being reduced from next year.
Via its strategic agreement with Westinghouse, Hyundai E&C has locked in another major customer (in addition to KEPCO) who can lead nuclear power plant projects. Westinghouse (not to mention the US in general) have a good opportunity to make up for their lack of construction capacity with Hyundai E&C. In addition, cooperation with Holtech of US is expected to help secure competitiveness in the dismantling of nuclear power plants, as Hyundai E&C will be able to process spent nuclear fuel. Of note, other than players in China and Russia, France’s EDF is the closest rival. But, the French company is currently struggling due both to defects found in its equipment in France and a lack of experience.
2Q22 review: Earnings prove better than feared
Hyundai E&C announced 2Q22 consolidated sales of W5.6tn (+27% y-y) and OP of W175.4bn (+24% y-y), roughly satisfying both our estimates and consensus. Cost-to-sales ratio upped 1%p q-q on higher building materials prices. However, the pace of price tag increase for major building materials (eg, rebar) has been slowing since July. Accordingly, worries towards 2H22 earnings should ease.
New orders (consolidated) received in 1H22 totaled W21.0tn (+57% y-y), led by reconstruction/redevelopment projects. Looking at 2H22, we expect the firm to win overseas orders from the Philippine Railroad Corporation, the Saudi NEOM-related Port Authority, and petrochemical project players in Saudi Arabia and Qatar.