Construction Stocks Surge on China's Stimulus Plan... "Benefits Will Take Time"

KB Securities Report

[Asia Economy Reporter Lee Myunghwan] Following the announcement of China's economic stimulus measures, domestic construction-related stocks surged sharply; however, securities analysts suggest that it will take considerable time before these gains translate into actual performance.

According to KB Securities on the 28th, construction machinery stocks such as Hyundai Doosan Infracore (15.26%) and Hyundai Construction Equipment (7.88%) closed with significant increases on the 26th. This surge is presumed to be driven by expectations of benefits following the Chinese government's announcement of additional stimulus measures.

According to foreign media including Bloomberg, China is promoting a stimulus package that includes an investment of 6.8 trillion yuan (approximately 1,324 trillion won) in high-speed rail, waterways, and the energy sector. The stimulus package reportedly includes 19 economic stabilization measures focusing on policy and financial support expansion as well as infrastructure investment. Earlier, to improve the deteriorated economic situation caused by lockdown measures in major cities, China announced 33 policy packages in May; however, as the economic slowdown trend continued into the second half of the year, additional measures were introduced, according to KB Securities' assessment.

The stock price trends by company also revealed differences based on expectations of China's stimulus measures. Among construction machinery companies, Doosan Bobcat, which mainly operates in advanced markets, closed with only a 0.71% increase, whereas Hyundai Doosan Infracore, which has a high market share in China, rose by 15.26%.

However, KB Securities forecasted that the Chinese government's stimulus measures would not immediately lead to an increase in construction machinery sales. Since 2018, over 960,000 excavators have been sold, but due to insufficient workloads, the average monthly operating hours of the equipment have been continuously declining. KB Securities researcher Jung Dong-ik analyzed, "An increase in new demand will only be possible if the utilization rate of existing equipment rises sufficiently," adding, "For the time being, the focus is likely to be on utilizing existing equipment rather than purchasing new machinery."

He also advised paying attention to the seasonality of the Chinese construction machinery sector, where sales are concentrated in the first half of the year. Excavator sales in China are distributed approximately 60% in the first half and 40% in the second half, with a significantly higher proportion in the first half. This is explained by the fact that installment purchases are common, and buyers tend to avoid purchasing before winter when the ground freezes and workloads decrease. Researcher Jung predicted, "Even if this stimulus package positively impacts construction machinery sales, the effect is expected to fully materialize only after the 2023 Lunar New Year."