[Click eStock] "Construction Sector, Watch the Real Estate Cycle"... Recommended Stocks for the First and Second Half?

Construction Industry Marginalized by Real Estate Market Fear
"Separate Investment Strategies and Recommended Stocks for First and Second Half"

Daishin Securities advised on the 29th that "the definite rebound point of the domestic real estate market will be next year," recommending a focus on 'safety first' in the first half of the year and 'housing market improvement' and 'easing of competition' in the second half.

November 30, 2022, at an apartment reconstruction site in Gangdong-gu, Seoul. Photo by Hyunmin Kim kimhyun81@

On this day, researcher Lee Tae-hwan of Daishin Securities stated, "Based on past housing cycle trends, we need to forecast the future market direction and the appropriate timing for investing in the construction sector."

He first pointed out, "After the Taeyoung Construction workout incident, fear of the real estate project financing (PF) market has grown again," adding, "Unsold inventory has increased mainly in provincial areas, leading to a contraction in new construction starts, and unstarted bridge loans have accumulated. The PF refinancing risk, which repeats every 6 months to 1 year, is a concern."

In fact, over the past two years, due to poor leading indicators (construction starts, orders), earnings expectations have declined, and combined with the market downturn, investment sentiment toward construction stocks has significantly worsened. As of last month, the monthly average trading volume ratio of the construction sector compared to the KOSPI was 1.9%, the lowest level since 2000. The researcher explained, "The recovery of construction sector stock prices requires first confirming a reversal signal in the domestic real estate market. A base rate cut and PF restructuring events are anticipated within the year."

The definite rebound point of the real estate market is estimated to be next year. The researcher said, "The average housing cycle period from the 1st to the 7th cycle was five years. Recent cycles have shown a tendency for the cycle length to shorten," adding, "Since July last year, we have entered the expansion phase of the 8th cycle. Considering the duration of recent expansion phases, it is expected to last about 27 months."

He also noted, "Move-in households paid more attention to changes in jeonse prices relative to sales prices. The volume of scheduled move-ins next year is expected to decrease by 26% compared to this year, and the rise in the jeonse price ratio will act as a driving force," further explaining, "Government policies have been relatively more effective in easing rather than tightening regulations. The increasing trend of unsold inventory in provincial areas and the liquidity crisis of construction companies are situations that cannot be neglected."

Accordingly, he recommended betting on safety first in the first half and housing market improvement and easing of competition in the second half. The researcher advised, "The first half is a period when no special market changes are detected," adding, "Exposure to unstarted PF projects is low, and stable earnings growth is possible this year. Focus will be on companies with structural mid-term growth potential based on business expansion." The recommended stocks for the first half are Samsung E&A (Samsung Engineering), DL E&C, and HDC Hyundai Development Company.

Furthermore, in the second half, when interest rate cuts and government support policy announcements expected to improve the market next year will occur, the industrial structure centered on key construction companies may be reorganized during the PF project restructuring process. Attention should be paid to companies that have been sidelined relative to profits and cash flow," naming Hyundai Construction, GS Construction, and Daewoo Construction as recommended stocks for the second half.