COVID-19 Mixed Impact...Strong Construction in Q1, Building Materials Wobble

Construction Stocks 'Overweight' Upgraded Due to Total Order Increase... Face-to-Face Sales Essential, Building Materials Stocks' Target Prices Lowered

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[Asia Economy Reporters Ji-hwan Park and Bo-ryeong Geum] The construction and building materials industries, which are connected as upstream and downstream sectors of the construction market and considered as a family under one roof, are experiencing mixed fortunes. Although both sectors share the prolonged downturn in the construction market and the impact of the COVID-19 pandemic, securities firms’ evaluations differ significantly. While the construction sector is seen as less affected by the COVID-19 shock, the building materials industry is expected to face inevitable sluggishness due to social distancing measures.

According to the Korea Exchange on the 13th, the construction industry index fell from 92.66 at the beginning of the year to 51.39 on the 19th of last month, then recovered to 74.41 on the 10th. Compared to the start of the year, this represents declines of 44.54% and 19.7%, respectively. During the same period, the KOSPI dropped by 32.99% and 14.46%, indicating that construction stocks experienced a relatively larger decline. This is interpreted as a learning effect from past vulnerabilities during financial crises. During the Asian financial crisis, major construction companies of leading groups went through bankruptcy, workout, and sales processes, and during the 2008 Lehman Brothers crisis, many construction firms faced credit risks.

However, there is a forecast that this time, first-quarter earnings may actually be favorable. It is rare for construction sites to have significantly slowed progress due to COVID-19, and even where delays exist, the impact on earnings is considered limited. Yoon-ho Cho, a researcher at DB Financial Investment, explained, "The total order amounts for GS Construction, Daelim Industrial, Hyundai Construction, Daewoo Construction, and Samsung Engineering are expected to increase compared to the same period last year," adding, "The relatively stable performance of construction companies is likely to help improve investor sentiment." DB Financial Investment has upgraded its investment opinion on construction stocks to 'overweight.' The risk of negative growth due to order declines existed before the COVID-19 outbreak, and rather, construction investment expansion is expected as an economic stimulus after the pandemic ends.

On the other hand, securities firms are lowering their target prices for major building materials companies one after another, reflecting expectations of a significant drop in market demand due to COVID-19. Typically, March and April are peak seasons for the industry, coinciding with the new school year, moving, and weddings. However, since face-to-face sales with customers are essential, it is pointed out that the usual seasonal boost cannot be expected this year due to social distancing measures caused by COVID-19.

Min-jae Lee, a researcher at NH Investment & Securities, said about Hanssem, "From the second quarter of this year, growth slowdown is expected due to weakened consumer sentiment caused by COVID-19," lowering the target price by 23.5% from 93,500 KRW to 71,500 KRW. KB Securities recently lowered LG Hausys’ target price by 35.3% from 68,000 KRW to 44,000 KRW. SK Securities also cut KCC’s target price from 270,000 KRW to 160,000 KRW. There are growing concerns that negative growth may continue this year as well, following last year. Recently, securities firms have been revising down their earnings forecasts for building materials companies by about 10-20% compared to the beginning of the year, lowering expectations.

In response to this situation, preparations for the worst-case scenario are also being observed. LG Hausys recently announced a decision to sell its Ulsan Sinjeong company housing worth 63 billion KRW as part of efforts to improve asset efficiency. Yuri Song, a researcher at Hanwha Investment & Securities, said, "This is part of efforts to improve profitability amid the lack of significant improvement in the upstream industry atmosphere, such as a decrease in apartment move-in volumes."

This content was produced with the assistance of AI translation services.