Construction Industry H2 Issue PF Restructuring... Top Pick is Samsung E&A

Yuanta Securities on the 25th highlighted a high possibility of earnings improvement and presented Samsung E&A as the top preferred stock in the construction sector. Additionally, it pointed to the restructuring and cleanup of real estate project financing (PF) as a key issue to watch when investing in the construction sector in the second half of the year.

Jang Yoon-seok, a researcher at Yuanta Securities, stated in a report on the 25th, "The profitability of the construction sector in the first half of this year was sluggish compared to the market, except for HDC Hyundai Development Company," and analyzed, "Despite various burdens surrounding the industry conditions, two factors?valuation discounts compared to similar past periods and upward revisions of earnings expectations?supported the stock price increase."

He added, "Among these, companies with visible upward revisions in earnings expectations are judged to have relative attractiveness, and accordingly, Samsung E&A is presented as the top preferred stock."

As a checkpoint for the second half, he pointed to the restructuring and cleanup of real estate PF. Jang said, "The cleanup of distressed projects to be promoted in the second half requires attention from the perspective of reducing risk factors in the industry," and explained, "According to guidelines set by financial authorities, financial companies will conduct their own evaluations of the profitability of projects they hold by early July and plan to establish follow-up plans for projects judged to be at risk or distressed by the end of July."

He also noted, "From the perspective of construction companies responsible for construction and credit enhancement, the main risks arising from the cleanup of distressed PF in the second half are that PF loans from developers that remain unpaid even after auctions or sales may materialize as contingent liabilities from PF guarantees provided by construction companies, and that there may be difficulties in recovering construction costs invested in projects under construction." However, he assessed, "Among Yuanta Securities-covered construction companies, the proportion of bridge loans for local subcontracting projects with relatively high default risk compared to their equity capital is highest at 13% for GS Construction and HDC Hyundai Development Company, while other construction companies manage this at around 1%, so the impact of distressed asset processing in the second half is expected to be limited."