[Why&Next] Despite Construction Companies' 'Earnings Shock,' Stock Prices Keep Rising... Why?

Hyundai Construction Rises 22% Since Beginning of Year
Stock Prices Reflect Expectations for Industry Recovery

Despite the downturn in the construction industry, the stock prices of major construction companies are fluctuating. Analysts suggest that positive expectations for a performance rebound and forecasts of large overseas orders are driving the stock prices up.

According to the Korea Exchange on the 3rd, as of the 31st of last month, Hyundai Construction's closing price was 31,050 KRW, up 22% compared to the beginning of the year. On the 24th of last month alone, it recorded an increase of over 6%. The price not only surpassed the 30,000 KRW mark per share but also jumped to 31,500 KRW.

This upward trend contrasts with Hyundai Construction's performance. On a consolidated basis, Hyundai Construction recorded an operating loss of 1.2209 trillion KRW last year. This is the first operating deficit in 23 years since 2001. It fell far short of the expected operating profit of 578.1 billion KRW.

Daewoo Construction also shows a gloomy performance outlook, but its stock price is rising. From the beginning of this year to now, the stock price has increased by 9%. However, last year's operating profit (357.1 billion KRW) is expected to plummet by 46.1% compared to the previous year. Sales are also expected to decrease by more than 10%. DL E&C's operating profit is also forecasted to decline by 17.9% to 271.7 billion KRW, but its stock price has risen by 2.1% compared to the beginning of the year.

The industry views that expectations for an improvement in the business environment have been reflected in the stock prices. For example, Hyundai Construction's deficit is largely due to the preemptive reflection of temporary cost increases in its subsidiaries. Large one-time costs occurred in overseas plant projects such as Hyundai Engineering's Balikpapan refinery in Indonesia and the Jafurah gas field in Saudi Arabia, and these were prioritized in the financial statements, resulting in a deficit. Regarding this, Lee Eun-sang, a researcher at NH Investment & Securities, observed, "Although an operating loss occurred this quarter due to cost recognition at major overseas sites, profitability improvement is expected to begin in earnest this year due to proactive cost reflection."

Growing expectations for overseas orders this year have also boosted stock prices. The Czech commercial nuclear power plant construction project, in which Daewoo Construction is participating as the main contractor, is expected to finalize the contract in March this year. The Czech government estimates the project cost at about 24 trillion KRW.

The Korea Research Institute for Construction Industry recently predicted in its report "2024 Overseas Construction Order Analysis and 2025 Outlook" that the global construction market will grow by 6.4% compared to last year to about 15.6 trillion USD, expecting an increase in overseas construction orders. The report stated, "The resolution of geopolitical instability in the Middle East and the possibility of an end to the Russia-Ukraine conflict are expected to have a positive impact in terms of reducing uncertainties in the overseas construction market," adding, "To expand orders for our companies amid a favorable ordering environment, it is necessary to resolve domestic political instability and ensure the continuity of policies such as the investment and development-type project activation plan announced last year."

Recently, the world's largest asset management company, BlackRock, disclosed that it holds more than 5% of GS Construction's shares, which is also analyzed as reflecting such expectations. BlackRock announced on the 21st of last month that it holds 5.02% of GS Construction shares for "simple investment purposes."

Park Won-gap, Senior Real Estate Specialist at KB Kookmin Bank, said, "The market situation in the construction industry has been very unfavorable, but it seems that this period is passing, centered on large construction companies," adding, "It appears that not only the domestic construction market but also expectations for overseas orders such as Ukraine reconstruction are influencing this."