[Click eStock] "Construction, Focus on Improving Individual Companies' Cost Ratios Until the First Half of Next Year"

Industry Preference: HDC Hyundai Development Company, GS Construction, DL E&C in Order

As the increase in construction costs has been a burden on the construction sector for several years, securities analysts have suggested that attention should be focused on the performance of individual companies rather than the entire sector for the time being.

On the 4th, Jang Moon-jun, a researcher at KB Securities, stated, "Until the first half of next year, we should prioritize companies that are emerging from the performance bottom, and in the second half, investments should be made across the entire sector."

This year, the construction sector dramatically rebounded from mid-July but experienced a sharp decline within two months. Researcher Jang analyzed, "This was due to a combination of concerns over government loan regulations, a slowdown in apartment price growth rates in the metropolitan area, and uncertainties regarding the timing of cost ratio improvements." The performance of individual companies was also a major factor. The stock price decline of Samsung E&A, which holds a significant weight in the sector, was particularly notable.

According to KB Securities' analysis, the combined sales of six major construction companies in the third quarter of this year amounted to 19.2 trillion KRW, and operating profit was 593 billion KRW, down 0.3% and 24.9% respectively compared to the same period last year, slightly below market expectations.

Various domestic and international costs were the main causes. Researcher Jang said, "Excluding Samsung E&A, which does not engage in housing business, DL E&C, GS Construction, and HDC Hyundai Development met or exceeded market expectations. Hyundai Engineering & Construction and Daewoo Engineering & Construction fell short." He added, "Some companies maintained relatively stable profit margins in the housing sector, which should become a pillar of future profits. They are likely to emerge from the profit bottom earlier than the sector."

Ultimately, the key investment point related to the sector is expected to be 'cost ratio improvement.' Researcher Jang noted, "The construction cost index has risen rapidly since 2021, causing construction companies' cost ratios to increase significantly in 2022 and 2023, becoming a burden. However, there will be companies showing meaningful signs of cost ratio improvement by early next year at the latest."

Furthermore, Researcher Jang stated, "Which companies improve their cost ratios first depends on the proportion of pre-sale volumes in 2021-2022 being small and the proportion of pre-sale volumes in last year and this year being high." He added, "Sector preferences are in the order of HDC Hyundai Development, GS Construction, and DL E&C," and concluded, "If you want to respond to the sector with a single stock, HDC Hyundai Development alone is sufficient."