[Click eStock] Construction Next Year Is Low-High, 'Increase Weight'... Top Pick Stocks Are

[Asia Economy Reporter Lee Seon-ae] Hyundai Motor Securities forecasted that the construction and building materials industry will experience a "high-low" pattern next year. They maintained an Overweight rating on the construction and building materials sectors and presented Hyundai Engineering & Construction, Kolon Global, Kumho Construction, and Hanssem as their top picks.

According to Hyundai Motor Securities on the 27th, the housing, cement, and interior sectors are all expected to show a high-low pattern next year. Researcher Kim Seung-jun of Hyundai Motor Securities explained, "We recommend buying at the point when the market sentiment rebounds (after the presidential election), following the reflection of poor sector indicators or earnings declines due to cost burdens in stock prices."

First, the housing market is expected to remain centered on private contracts in 2022, just as it was in 2021. The increase in construction starts in 2021 was driven by private contracts rather than urban redevelopment, and the situation in 2022 is expected to be the same as the previous year. Due to the price ceiling regulation on pre-sale prices, urban redevelopment sales were delayed in 2021, and this regulation is expected to remain in place regardless of the election results in 2022. Therefore, as in 2021, the core driver of increased construction starts in 2022 will be private contracts. The background for the increase in private contracts is the rise in expected profits (due to increases in pre-sale or sale prices) and low risk (few unsold units).

Accordingly, housing stocks that can benefit from the increase in private contracts are expected to be promising. Hyundai Engineering & Construction and Kolon Global demonstrated their order-winning capabilities in private contracts in 2021 (housing orders were favorable in 2020-21). The stocks with the greatest potential for increases in housing construction starts and housing sales revenue going forward are Hyundai Engineering & Construction and Kolon Global. Kumho Construction is experiencing clear earnings growth due to the expansion of its own projects, along with increasing pre-sale performance every year. It is expected to be recognized as a beneficiary company when government-led housing supply resumes after next year's presidential election.

Cement sales revenue is expected to increase in 2022 due to clear price increases and sales volume growth, but profits are likely to decline due to cost burdens from the sharp rise in thermal coal prices. Researcher Kim said, "We believe that the cement stock prices have not yet reflected the earnings shock caused by thermal coal," adding, "It is necessary to consider trading after confirming the first half of next year's earnings."

Interior sector earnings are expected to increase from the second half of 2022. B2B performance is expected to improve from the second half of 2022 as construction starts have increased since the second half of 2020, while B2C sales transactions are expected to remain sluggish due to loan regulations until the election. Therefore, earnings may be weak until the second quarter of 2022. Since the second half of 2021 was sluggish, the second half of 2022, after the election, is expected to show a positive base effect compared to the same period last year. Researcher Kim said, "Hanssem is expected to see earnings growth in the second half of next year," explaining, "Along with increased B2B earnings due to rising construction starts, B2C sales revenue is expected to increase in the second half of 2022 through store expansions in 2021-22."