[8·4 Measures Corporate Analysis]② Daelim Industrial, Why Can They Smile Quietly?

Every industry experiences cycles of rise and fall. The prosperity of the construction industry is no exaggeration to say that it is dictated by construction investment, which accounts for 15% of the Gross Domestic Product (GDP). Since 2018, domestic construction investment has continuously experienced negative growth due to the government's real estate suppression policies. Although it briefly turned positive in the first quarter of this year, this recovery was merely due to an increase in civil engineering projects led by the government. Investment in the housing sector has been rapidly declining every quarter. Construction companies are posting relatively decent results based on previously secured orders, but as they gradually exhaust their project volumes, the growth trend has begun to falter. At this critical moment, the government announced the 8·4 Housing Supply Plan. The plan involves building new homes on idle land and in the 3rd new towns, and supplying an additional 132,000 households in Seoul and Gyeonggi Province by easing floor area ratio regulations. The government has once again introduced construction investment, which has a high employment inducement effect, aiming to achieve the 'two rabbits' of real estate supply-demand adjustment and a soft landing of the economy amid the COVID-19 pandemic. However, it is difficult to expect a revitalization of the reconstruction market due to the relaxation of floor area ratio regulations. This is because of the high level of mandatory contributions and opposition from landowners due to the reconstruction excess profit recovery system. Nevertheless, the dominant view is that about 70,000 to 80,000 households will be supplied without much difficulty. This is clearly good news for the construction industry. Construction company stocks also fluctuated, reflecting expectations for housing construction orders. Asia Economy examines the management status of GS Construction, Daelim Industrial, and Heerim, which have high expectations for housing orders, to gauge the rise and fall of construction companies.

[Asia Economy Reporter Yoo Hyun-seok] Daelim Industrial is quietly smiling at the '8·4 Housing Supply Plan.' If projects implemented through Korea Land & Housing Corporation (LH) or Seoul Housing & Communities Corporation (SH) increase, Daelim Industrial's order volume could grow. However, some analysts suggest that since the government did not include the easing of private reconstruction regulations, which the construction industry had hoped for, the benefits to large construction companies may not be significant.

◆Will the 8·4 policy help secure orders?= Daelim Industrial's order backlog has been decreasing every year, which lowers expectations for future performance. The order backlog was KRW 25.7306 trillion in 2017 but decreased to KRW 21.8282 trillion and KRW 21.8344 trillion in 2018 and last year, respectively. As of the end of the second quarter this year, it dropped to KRW 20.0812 trillion. Orders secured in the first half of this year are also unsatisfactory. The new order amount in the first half of this year was KRW 3.2312 trillion, a 23.33% increase compared to the same period last year. However, this accounts for only about 30% of this year's overall target of KRW 10.9 trillion.

The impact of the government's announced 8·4 Housing Supply Plan on large construction companies is expected to be limited. It does not include general reconstruction regulation easing, and although it includes public participation-type high-density reconstruction, the construction industry anticipates difficulty in attracting participation from associations. There is insufficient incentive to expect revitalization of the reconstruction market, where large construction companies have strengths. Analyst Park Sera of Shin Young Securities explained, "Since the government policy is proceeding as a public participation type, the project scale is unlikely to be suitable for large construction companies ranked in the top 50 with brand apartments," adding, "Small and medium-sized or small-scale construction companies are likely to benefit."

However, there is an opinion that Daelim Industrial might be different. This is because it mainly undertakes reconstruction projects in regions outside the metropolitan area. Most of the reconstruction projects secured this year were in provincial areas. The public participation-type reconstruction led by the government in the policy is a business opportunity that Daelim Industrial can target. Since Daelim Industrial has many projects with LH and SH, it can benefit. Although projects with LH and SH do not have a high-profit margin structure, they are positive in terms of cash flow. An analyst from a securities firm said, "The government policy is structured so that the total volume is unlikely to increase, and the redevelopment atmosphere in Gangnam is cooling down," adding, "It may increase outside Seoul Gangnam and the metropolitan area, which could be beneficial for Daelim Industrial, which has a lower proportion of Seoul projects."

There are signs that the order situation is gradually improving. Last month, Daelim Industrial secured over KRW 500 billion in orders, including the Busan Dangni 1 District housing reconstruction maintenance project, Bupyeong Sipjeong 5 District redevelopment maintenance project, Daejeon Samsung 1 District redevelopment maintenance project, and Busan Songdo regional housing association. Researcher Jo Yoon-ho of DB Financial Investment explained, "It is unlikely to achieve the annual order target of KRW 10.9 trillion this year, but housing sales and domestic housing and civil engineering orders are concentrated in the second half," adding, "Order activities in the second half are important to maintain future performance."

◆Smiling at first-half results... Will it continue into the second half?= Daelim Industrial recorded consolidated sales of KRW 5 trillion and operating profit of KRW 599.7 billion in the first half of this year. Compared to the same period last year, sales increased by 4.6%, and operating profit rose by 11.34%. In the second quarter alone, it achieved sales of KRW 2.55 trillion and operating profit of KRW 310.3 billion, up 3.2% and 4.2% year-on-year, respectively. Operating profit exceeded market expectations of KRW 251 billion by 23.4%.

The improvement in performance was aided by consolidated subsidiaries. The subsidiaries Cariflex and Goryeo Development were newly included. Sales and operating profit related to consolidated subsidiaries in the second quarter were KRW 804.2 billion and KRW 82.4 billion, increasing by 41.26% and 5.23% year-on-year, respectively. Baek Gwang-je, a researcher at Kyobo Securities, said, "Second-quarter results exceeded market expectations due to improved performance of consolidated subsidiaries and the effect of new inclusions," adding, "Although it is the second consecutive quarter of 'earnings surprise,' it is difficult to see it as a meaningful improvement on a standalone basis."

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