[Into the Stocks] SY, Beneficiary of Revised Building Act Restricting Flammable Materials... Strong Appeal of Steel Stocks

Mandatory Use of Flame-Retardant Materials in Building Act Amendment to Take Effect This December
Panel Market Restructuring Expected to Benefit Urethane and Glass Wool
Color Steel Sheet Market Booming... Additional Sales Expected to Reach 50 Billion Won

[Asia Economy Reporter Park Jihwan] Esway, the nation's top sandwich panel manufacturer, is emerging as the biggest beneficiary of the revised 'Building Act' scheduled to be enforced this December, which restricts the use of combustible building materials. The core of the amendment is the mandatory use of fire-resistant materials, and thanks to hundreds of billions of won invested in large-scale equipment ahead of others, the company is now capable of producing competitively priced and high-quality products. Recently, Esway has also started selling color-coated steel sheets, adding to expectations for performance growth through business diversification.

Mandatory Use of Fire-Resistant Building Materials Under Revised Building Act to Take Effect at Year-End...Emerging as Top Beneficiary

Following the fatal fire accident at the Icheon logistics center construction site in April last year, the government announced the 'Construction Site Fire Safety Measures' in June of the same year. The announcement mandates securing fire resistance performance of at least quasi-noncombustible standards when using sandwich panels as finishing materials. Before the fire safety announcement, fire-resistant sandwich panels were only required for external finishing materials and insulation in buildings of three stories or higher or over 9 meters, and for internal finishing materials, only warehouses over 600m2 and factories over 1000m2 were required to use them.

Starting this December, the revised Building Act will enforce stricter fire safety standards for building materials. The main point is to prohibit the use of highly combustible materials in principle. The use of materials with quasi-noncombustible performance (capable of withstanding 700℃ for 10 minutes) or higher is now mandatory for interior and exterior finishing materials, insulation, and composite materials. Quasi-noncombustible sandwich panels must be applied to all sizes of factories and warehouses for both interior and exterior finishing materials, and internal insulation materials must also secure fire resistance performance. This means that general expanded polystyrene (EPS) sandwich panels, which have dominated the building market with their low price and excellent insulation but are vulnerable to fire, will be phased out.

Sandwich panels are classified into EPS panels, glass wool (G/W) panels, and urethane panels depending on the type of core material. About 70% of the total market is occupied by the low-priced EPS panels. However, with the recent emphasis on fire safety, the importance of enhancing insulation and fire resistance of sandwich panels has increased, and existing EPS panels are rapidly being replaced by fire-resistant EPS panels, urethane panels, and G/W panels.

Esway holds a 25% market share in the domestic urethane and G/W panel markets, so it is expected to benefit from the restructuring of the sandwich panel market toward fire-resistant and quasi-noncombustible materials. Kim Seunghoe, a researcher at DS Investment & Securities, said, "With the mandatory use of quasi-noncombustible sandwich panels, companies dealing only with general EPS panels are expected to lose competitiveness and be eliminated. The market is likely to be reorganized around companies capable of producing both G/W panels and urethane panels with excellent fire-resistant and quasi-noncombustible performance."

Currently, Esway's G/W panels have passed the quasi-noncombustible certification and are already used in Samsung Electronics semiconductor factories. Development of urethane panels with quasi-noncombustible functions is also underway. The equipment investment for developing technology to upgrade urethane to quasi-noncombustible materials alone amounts to hundreds of billions of won. By the end of the first quarter, the proportion of G/W and urethane panels in total sandwich panel sales rose to 56.6%, and it is expected to exceed 60% by year-end. Researcher Kim said, "The unit price of G/W and urethane panels is about 2 to 3 times higher than that of general EPS panels. The increased demand due to the mandatory use of quasi-noncombustible materials is expected to contribute not only to top-line growth but also to profitability improvement."

Metal panel installation at Jincheon National Training Center.

Performance in Expansion Phase

Esway's performance has shown clear improvement this year due to the closure of loss-making business sites and restructuring of subsidiaries. On a consolidated basis for the first quarter, sales were 72.2 billion won, down 6.3% year-on-year, but operating profit turned positive at 2.5 billion won. This was thanks to an improved product mix focusing on high-value-added products such as G/W and urethane panels. Cost reduction effects from subsidiary restructuring were also evident. The closure of Esway Coning (building materials, etc.) and Esway Chemical (urethane adhesives, etc.), established for raw material internalization, has been completed. The number of employees decreased from 386 in 2017 to 280 last year. Labor costs also dropped from 44.8 billion won in 2018 to 26.1 billion won last year.

This year, record-high operating profit is expected. The initial annual sales target was about 310 billion won, similar to the previous year, but recent growth from internalizing and externally selling color-coated steel sheets has increased the likelihood of record operating profit. Esway has started external sales of color-coated steel sheets, which were previously produced only for internal use. This is due to domestic steelmakers reducing production of color-coated steel sheets for building materials in response to increased demand in front-end sectors such as home appliances, automobiles, and construction.

Currently, Esway's two color-coated steel sheet production lines with an annual capacity of 150,000 tons are operating at full capacity. With the color-coated steel sheet market booming, profits of over 200,000 won per ton are expected. Monthly sales of color-coated steel sheets are around 4 to 5 billion won, which is expected to lead to an annual sales increase of over 50 billion won. Researcher Kim emphasized, "Cost reduction through in-house production of color-coated steel sheets and margin improvement from external sales will directly contribute to performance, leading to even greater profitability improvement."