[Into the Industry] Construction Sector Facing Severe Cold, Only Samsung Engineering Stays Warm

Expansion of Orders in Both Chemical and Non-Chemical Sectors
Upward Revision of This Year's Operating Profit Estimates
Operating Profit Forecast of 674 Billion KRW for Next Year

[Asia Economy Reporter Minji Lee] As the boom period for domestic housing projects comes to an end, construction companies are facing a challenging period, leading to a clear distinction between strong and weak performers. Stock market experts recommend focusing on companies less affected by the domestic housing market and those expected to expand overseas orders, highlighting Samsung Engineering as a promising stock.

According to the Korea Exchange on the 28th, Samsung Engineering's stock price has risen 3.29% over the past six months (May 30 to November 25), reaching 25,100 KRW. This significantly outperforms the KOSPI return of -8.68% over the same period. Compared to peers in the industry such as GS Construction (-41%), Daewoo Construction (-24%), DL E&C (-21%), HDC Hyundai Development Company (-19%), and Hyundai Construction (-5.5%), Samsung Engineering has maintained a solid stock performance. This is largely due to the sharp decline in investor sentiment toward construction stocks caused by rising interest rates and raw material costs in the first half of this year, which severely impacted the domestic housing market. Recently, liquidity shortages in project financing (PF) have further accelerated the stock price declines of construction companies heavily involved in housing projects.

Gwangsoo Lee, a researcher at Mirae Asset Securities, analyzed, "Next year, uncertainties in the housing business will expand due to an increase in unsold apartments and falling housing prices, leading to an average 0.8 percentage point decline in operating profit margins for large construction companies' housing businesses." As of the end of the third quarter this year, unsold apartments numbered 41,604 units, more than triple last year's 10,000 units, and are expected to grow to as many as 110,000 units next year.

While construction companies with a large proportion of housing projects are expected to face a harsh winter next year, Samsung Engineering's situation is quite different as it has no exposure to the housing business. The company steadily accumulates orders in both its petrochemical business, centered on refining, gas, and petrochemicals, and its non-petrochemical business, which focuses on industrial facilities such as semiconductors and displays, as well as eco-friendly plants, thereby increasing its sales contribution. It is expected to comfortably achieve this year's order target of 8 trillion KRW, with anticipated new orders reaching 9 trillion KRW next year.

Particularly noteworthy is the expected full-scale investment from Middle Eastern countries, which have increased oil revenues due to rising oil prices, starting next year. The Middle East is anticipated to expand chemical facilities for high value-added crude oil processing and gas treatment facilities to meet growing gas demand within the EPC (Engineering, Procurement, and Construction) sector. Additionally, developments for new cities such as Saudi Arabia's NEOM City are expected to accelerate. Jaeseung Baek, a researcher at Samsung Securities, stated, "The expansion of orders in the EPC sector could be a positive factor for domestic construction companies," adding, "Considering Samsung Engineering's increasing revenue contribution from the Saudi Jafurah project and its intensified efforts on Middle East projects, the likelihood of order realization is high." Baek further noted, "Although the investment scale of affiliated groups in the non-petrochemical sector may decrease, since adjustments have not been significant yet, corporate value will be determined by new orders."

Efforts to reduce profitability deterioration caused by fierce order competition are also positive. Taehwan Lee, a researcher at Daishin Securities, explained, "The company is currently reducing costs through the industrialization of EPC (standardization of design, modularization). It is improving quantity estimation accuracy from feed to EPC and lowering variables that cause losses to ease order competition."

Brokerage firms are also revising their earnings estimates upward. According to financial information provider FnGuide, the average estimated sales for this year by securities firms is 9.6178 trillion KRW, a 28% increase compared to the previous year. This is about 500 billion KRW higher than the estimate two months ago of 9.1264 trillion KRW. Operating profit is also estimated at 647.2 billion KRW, about 10 billion KRW higher than two months ago, representing a 29% increase from last year. Sales and operating profit estimates for next year have also been revised upward to 9.7895 trillion KRW and 674 billion KRW, respectively.

In contrast, concerns over the earnings of other construction companies are growing. GS Construction's operating profit for this year is expected to be 595.6 billion KRW, a 7% decrease from last year. This is about 200 billion KRW lower than the estimate two months ago of 721.4 billion KRW. DL E&C's operating profit estimate for this year is 537.9 billion KRW, a 43% decrease from the previous year, significantly below the early-year estimate of 963.8 billion KRW and the estimate two months ago of 643.4 billion KRW.