[Click e-Stock] "Due to Regulations... Construction Stocks Should Focus on Overseas Growth and Earnings Momentum"

"Cost Increases Unavoidable in the Medium to Long Term"
"Top Picks: Samsung E&A and Hyundai Engineering & Construction"

On July 15, Kiwoom Securities commented on construction sector investments, stating, "Due to existing lending regulations and the possibility of additional regulations, the stock prices of residential construction companies are expected to remain sluggish in the short term." The firm added, "It is necessary to focus on companies with overseas growth drivers or clear earnings momentum."

Kiwoom Securities named Samsung E&A and Hyundai Engineering & Construction as its top picks, and DL E&C as a stock to watch.

"Cost Increases Unavoidable in the Medium to Long Term"

On this day, Shin Daehyun, a researcher at Kiwoom Securities, stated, "Following the lending regulations, construction companies may offer additional relocation loans to union members at lower interest rates to secure orders, or they may defer the payment schedule of contributions to ease the burden on residents. Therefore, cost increases are inevitable in the medium to long term," he explained.

Although the real estate market was strong in the second quarter of this year, the upward trend is expected to slow as the concentration in certain areas has been alleviated by stronger-than-expected lending regulations, such as the 6·27 lending regulation. Shin noted, "In a situation where supply is limited, unsold units after completion are not decreasing due to the previously high pre-sale prices. It will be necessary to monitor whether the 6·27 lending regulation will lead to higher real estate transaction prices outside the concentrated areas and thereby reduce unsold units after completion."

Competition in the redevelopment market has increased compared to the past one to two years. Shin observed, "There is a growing number of unsold units and intensifying concentration in the real estate market. As a result, construction companies are focusing on urban renewal projects, which are relatively easier to sell. In particular, competition is intensifying for major landmark projects in Seoul," he pointed out.

He added, "However, only four competitive bids have been identified among urban renewal projects this year, indicating that the trend has not yet spread across the entire market. While selling and administrative expenses for construction companies' urban renewal orders are expected to rise this year, it is not yet a point where gross profit margins are weakening. The stable profitability of urban renewal projects is expected to be maintained."

Due to recent lending regulations and the potential for further regulation, some urban renewal projects are expected to experience short-term delays. Shin explained, "Because construction costs have increased and pre-sale prices have risen, all payments?including relocation loans, interim payments, and balances?must be kept within 600 million won by the time of final payment. In addition, conditional lease loans for ownership transfer are being restricted, and there is now a residency requirement when taking out a mortgage, which will likely reduce investment demand."

"Top Picks: Samsung E&A and Hyundai Engineering & Construction"

Samsung E&A and Hyundai Engineering & Construction were selected as the top picks. Shin said, "Samsung E&A is expected to secure orders in the non-petrochemical sector in the second half of the year, and sales are projected to grow again year-on-year. Since earnings are also expected to increase next year, the company is likely to meet market expectations even as the housing market's upward trend slows in the short term."

Regarding Hyundai Engineering & Construction, he commented, "Expectations for the nuclear power sector remain valid. Although there is some short-term performance pressure, the company is still at the beginning of nuclear market expansion, and if actual orders become visible, the valuation premium could be sustained."

DL E&C was also introduced as a stock to watch. Shin stated, "As the gross profit margin of the housing division has started to improve in the second quarter, the margin is expected to exceed 15% in both the third and fourth quarters. With continued reductions in selling and administrative expenses, the operating margin is also expected to gradually increase in the second half of the year."