Presidential Election-Driven Momentum and Earnings Surprise:
KRX Construction Index Jumps 15% in a Month
Shift From Regulation to Supply Expansion
Construction Companies See Target Prices Raised
Recently, as presidential candidates have pledged to expand housing supply and expectations for strong earnings have grown, investor interest in construction stocks has been increasing.
According to the Korea Exchange on May 11, the KRX Construction Index closed at 660.18 on May 9, up 86.3 points (15%) from a month earlier (April 9). At the beginning of this year, the index had remained in the 540 range due to surging raw material prices and a decline in orders.
However, as presidential candidates have recently competed to promise increased housing supply, the market sentiment has shifted. The rise in individual stock prices is also notable. Hyundai Engineering & Construction set a new 52-week high on May 8, and its share price rose 15% from 35,850 won on April 9 to 41,200 won on May 9. GS Engineering & Construction (17.8%), Daewoo Engineering & Construction (18%), Samsung C&T (13.6%), and DL E&C (13%) also saw upward trends.
Presidential Election-Driven Momentum and Earnings Expectations... Construction Companies See Target Prices Raised
Lee Jae Myung, the Democratic Party of Korea presidential candidate, announced on April 25 that he would overhaul aging infrastructure in the first-generation new towns and actively support the redevelopment of aging planned cities such as Suwon, Yongin, Ansan, and Incheon (Yeonsu and Guwol). He also promised to lower barriers to redevelopment and reconstruction in Seoul's old downtown areas and to increase the floor area ratio to allow for taller apartment buildings. Additionally, he pledged to develop a "fourth-generation smart new town" as the next phase after the third-generation new towns.
Kim Moonsoo, the People Power Party presidential candidate, pledged to create areas with half-price monthly rent near university districts and to expand the supply of single-person apartments and officetels. The People Power Party also announced at the party level that it would adopt policies to raise the floor area ratio and building coverage ratio not only for redevelopment and reconstruction areas but also for new apartment construction.
The campaign of Lee Junseok, the Reform New Party presidential candidate, also proposed a significant increase in the floor area ratio to expand housing supply. In particular, they emphasized a focus on supplying 59-square-meter units instead of the 84-square-meter units, which are often too expensive for two-person households.
In this presidential election, even the Democratic Party of Korea, which had previously maintained a stance of strict regulation and punitive taxation, has shifted toward a "hands-off" approach to stimulate the market, raising expectations for revitalization of the real estate sector.
Better-than-expected earnings have also positively influenced investor sentiment. In the case of Hyundai Engineering & Construction, 13 securities firms raised their target prices over the past month. Korea Investment & Securities, which raised its target price the most (from 53,000 won to 63,000 won), stated, "The decline in housing cost ratio (the proportion of costs to sales) and new orders in areas such as nuclear power plants are expected to be fully reflected this year," adding, "This is the point at which Hyundai Engineering & Construction escapes the long-standing valuation trap." A valuation trap refers to a situation where a stock is undervalued relative to its actual value but does not rise due to concerns about performance.
Daewoo Engineering & Construction also saw its target price raised by four securities firms. As many as 11 securities firms raised their target price for DL E&C. All of these construction companies reported first-quarter earnings this year that exceeded market expectations, fueling optimism for profit improvement.
'Policy and Connections-Themed Stocks' Also Emerge
Meanwhile, some construction companies have seen their share prices suddenly surge as they became themed stocks linked to specific candidates or policies. Kyeryong Construction, a construction company based in the Chungcheong region, was labeled a "Sejong City themed stock" as pledges to relocate the presidential office and National Assembly to Sejong gained attention, causing its share price to fluctuate sharply.
Kyeryong Construction's share price had remained largely unchanged in the 10,000-won range for more than two years, but on April 8, it jumped by the daily limit of 30% in a single day to 20,500 won. After that, it closed at the upper limit for two consecutive trading days. The closing price on May 9 was 25,950 won, up 8.6% from a month earlier.
Sangji Construction emerged as a stock related to candidate Lee Jae Myung after it was revealed that former outside director Lim Mooyoung had participated in Lee's campaign in 2022. Sangji Construction's share price hit the upper limit on April 2 and continued to hit the upper limit on 13 out of 25 trading days through May 9.
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