[Into the Stocks] GS Construction Smooth Sailing with 'Xi' and New Businesses...

Momentum for Expanding Housing Supply Continues Considering Next Year's Presidential Election Schedule
GS Construction PER 10.87x...Undervalued Appeal Highlighted
Competitor Hyundai Construction at 40.82x

[Asia Economy Reporter Ji-hwan Park] GS Construction is brightening its future business outlook through solid profit foundations led by its brand 'Xi' and territorial expansion to secure future growth engines. In its core business, an upward performance trend over the next 2-3 years is becoming visible due to the government's increase in housing supply. Active expansion into various new business areas such as water treatment and data centers is also a positive factor.

The Construction Boom Approaching... Supply Increase Cycle Begins in Earnest

Experts analyze that from this year, the outlook for the entire construction sector is bright. Housing supply is also increasing due to the rise in housing orders. Nationwide apartment pre-sale volumes recorded 300,000 units in 2018 as a low point, 330,000 units in 2019, and 360,000 units last year. This year, about 430,000 new homes are expected to be supplied, which is a 19.4% increase compared to last year.

Especially this year, with the April 7 by-elections and the presidential election scheduled for March next year, policies to expand supply for real estate price stabilization are expected to be a major issue. Lee Min-jae, a researcher at NH Investment & Securities, said, "Real estate policy momentum related to elections is a positive issue across the construction industry," and "Both housing pre-sales and housing sales are clearly expected to improve."

Following the government's easing of supply regulations, there is high anticipation that the previously suppressed private reconstruction market will also stretch its wings. GS Construction, which owns the powerful brand 'Xi,' is one of the companies with the highest exposure to urban redevelopment in the industry.

GS Construction posted sales of KRW 10.1229 trillion and operating profit of KRW 751.2 billion last year. Its operating profit margin relative to sales is 7.42%, boasting the highest level in the industry. Although sales decreased by 2.8% and operating profit by 2.2% compared to the previous year, it is evaluated as a solid performance considering the management environment affected by COVID-19.

GS Construction, which supplied 27,000 housing units last year with an increase of more than 10,000 units compared to the previous year, is expected to supply more than 32,000 units again this year. Accordingly, annual sales this year are expected to reach KRW 10.4713 trillion, a 3.44% increase from last year, and operating profit is expected to increase by 20.35% to KRW 903.2 billion. Song Yoo-rim, a researcher at Hanwha Investment & Securities, evaluated, "As domestic construction orders centered on housing grow, nationwide apartment pre-sales increase, and large construction companies expand their market share, the performance of GS Construction, which owns a strong apartment brand, is more anticipated than ever."

Core Business is Basic... New Business Competitiveness is Strong

GS Construction's outlook is bright not only in its core business but also in new businesses. It is currently pursuing various new businesses including water treatment, modular housing, building material manufacturing and services such as elevators, and data centers. Next year, it is expected to generate over KRW 1 trillion in total sales from new businesses, including KRW 400 billion each from its water treatment subsidiary GS Inima and modular housing. Additionally, it plans to expand its data center business through Jibesco Asset Management. This is to prepare for the explosive increase in data processing volume as non-face-to-face contact increases in the post-COVID era.

GS Construction is also pushing for the listing of its subsidiary GS Inima, targeting the first quarter of next year. GS Inima, a global water treatment company, continues to stabilize its performance, generating annual operating profits of around KRW 70 billion. Its corporate value is currently estimated to be as high as KRW 1.4 trillion. Jang Moon-jun, a researcher at KB Securities, evaluated, "GS Construction is the most proactive company in securing profit bases through various new businesses such as water treatment, data centers, and housing modular businesses, beyond its traditional business areas."

Despite Record-Breaking Outlook, Stock Price Still Undervalued

This year, the expected return on equity (ROE) for the construction sector is 11.5%, exceeding the KOSPI ROE of 8.9%. However, the 12-month forward price-to-book ratio (PBR) of the construction sector is 0.7 times, showing a large gap compared to KOSPI (1.17 times). This indicates that the valuation attractiveness of the construction sector is high. Companies with a PBR below 1 are considered undervalued, so there is a high possibility of stock price increases in the future.

The combined net profit of the five major domestic construction companies?Hyundai Construction, Daewoo Construction, GS Construction, DL E&C, and Samsung Engineering?is expected to surpass the peak level of 2007 starting this year. On the other hand, their combined market capitalization is only about half of the peak period. Researcher Song Yoo-rim said, "The gap between current performance and stock prices is expected to narrow as good performance is realized over the next 2-3 years."

In particular, GS Construction's stock price is evaluated as undervalued even within the industry. Currently, GS Construction's price-to-earnings ratio (PER) is about 10.87 times, which highlights its undervaluation compared to Hyundai Construction, the top construction company by sales, with a PER of 40.82 times.