Expected to Gain Traction Toward Year-end
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
2Q22 OP in line with market consensus despite KRW140bn in costs
— GS E&C announced preliminary 2Q22 revenue of KRW3.0tn (+36.6% YoY, +28.3% QoQ), OP of KRW164.4bn (+31.6% YoY, +7.1% QoQ) and NP (attributable to controlling interests) of KRW142.7bn (+157.1% YoY, +0.5% QoQ).
— Revenue far exceeded market expectations but OP was in line with the market consensus because of reflection of costs in Plant + ECO (KRW140bn in combined cost: additional cost of KRW100bn from Karbala project, KRW40bn loss from Daegu project) despite a decline in Building/Housing COGS ratio.
— Building/Housing revenue rose 66.2% YoY, driven by: 1) Xi C&A (previously S&I) incorporation into consolidated revenue (KRW540.8bn in 2Q22 revenue; KRW120bn in March revenue in 1Q22 reflected) and 2) revenue from the Xi site in Gaepo, Seoul, and in-house project in Songdo, Incheon.
— An FX transaction gain of KRW76.3bn was reflected as non-operating income.
1H22 cumulative domestic housing supply at 11,116 units (40.4% of annual target)
— 1H22 cumulative housing supply: 11,116 units (40.4% of 27,491 annual target)
— 2022 presale guidance is at 27,491 units; by quarter, 2,317 units in 1Q22, 8,799 units in 2Q22, 13,300 units in 3Q22E and 3,075 units in 4Q22E.
— Presales began in earnest in 2Q22. Housing supply should be in line with guidance.
1H22 cumulative new order wins at KRW7.77tn (+61.9% YoY; KRW6.5tn domestic, KRW1.27tn overseas) vs. annual target of KRW14.6tn
— 1H22 domestic order intake was KRW6.5tn (61% of KRW10.7tn annual target).
— The strong performance was attributable to KRW5.5tn in housing orders, which were mostly redevelopment/reconstruction projects.
— Annual order guidance increased (KRW13.2tn→KRW14.6tn) with incorporation of Xi C&A into consolidated revenue.
For 2023, expect earnings improvement despite burdensome 2H22 housing costs
— Despite the large KRW140bn loss in 2Q22, OP was in line with market expectations on the back of Building/Housing’s strong revenue and OPM improvement.
— Building/Housing OPM in 2Q22 was favorable on realization of expected COGS ratio; however, in 2H22, the margin should narrow on higher commodity/labor costs, limiting company-wide OP improvement.
— We have a positive 2023 outlook, as Building/Housing OPM should improve YoY with 30,000 units completed, or move-in ready (vs. 11,000 homes this year).
— Revenue from the Vietnam project should add to OP improvement YoY.
— Toward year-end, the stock should gain traction given potential for strong earnings growth in 2023, though it is less attractive in the short term because of cost issues in 2H22.