[Click eStock] "Daewoo Construction, Sharp Rise in Cost Ratio... Target Price Downgraded"

[Asia Economy Reporter Hwang Yoon-joo] Korea Investment & Securities forecasted on the 29th that the cost of sales ratio for the housing/construction sector of Daewoo E&C in the second half of the year will be around 89%, and it is expected to stabilize downward from next year onward. Accordingly, the investment opinion 'Buy' was maintained, but the target price was lowered to 7,700 KRW.

Researcher Kang Kyung-tae of Korea Investment & Securities stated, "The reason for the poor operating profit in the second quarter this year was that the cost of sales ratio for the housing/construction sector (93.2%) increased by 8.0 percentage points compared to the previous quarter and the same period last year." This is the highest level in 34 quarters since the fourth quarter of 2013 (98.1%), when there were more than 20,000 unsold houses nationwide after completion.

Researcher Kang explained, "The cost of sales ratio for the housing/construction sector in the second half of the year is expected to be in the high 80% range. The company's forecast was around 89%, and the estimate reflected a gradual decline from 88.5% in the third quarter as the quarters progress."

He added, "The reason for expecting the cost ratio of this sector to stabilize downward in the second half of this year and next year is that the conditions of material purchase contracts are expected to improve over time."

He evaluated, "After the application of the revised pre-sale price ceiling system, the sales realization of newly started housing sites and the commencement of new sites reflecting inflation have increased, improving the sales mix. There will be no deterioration in the cost ratio compared to the second quarter."

Regarding the lowering of the target price, Researcher Kang explained, "It is the result of reflecting the provisional figures for the second quarter and the revised estimates of the cost of sales ratio for the housing/construction sector from the second half onward, which caused the net profit estimates for 2022 and 2023 to decrease by 19.9% and 3.8%, respectively, compared to previous estimates."

However, regarding maintaining the investment opinion, he said, "This is because the plant and civil engineering sectors are delivering results exceeding market expectations and previous estimates in terms of profitability," and added, "It is time to once again consider Daewoo E&C's strengths outside the housing sector, including the sales from the Vietnam THT pre-sale and land sales to be reflected in the second half."