Can Crawling Construction Stocks Rebound in the Second Half?

Rising Construction Material Costs
Likely to Severely Impact Profitability
Overseas Orders to Expand from Q3

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] As raw material prices rise, concerns over construction companies' profits are growing, causing their stock prices to plummet. The securities industry expects earnings forecasts to be adjusted downward, but said that overseas order momentum in the second half of the year can still be maintained.

According to the Korea Exchange on the 15th, the KRX Construction Index fell about 6.64%, from 555.28 to 518.42. Among all KRX indices, this sector experienced the largest decline, significantly underperforming the KOSPI return (-0.44%).

The sluggishness in construction stocks was largely driven by concerns over earnings. Above all, profitability is expected to deteriorate significantly due to rising construction material costs amid prolonged inflation. As the cost of materials used to build houses increases, groundbreaking is delayed, and with a widespread decline in real estate prices sentiment, pre-sales are not proceeding smoothly. The cost ratio (the proportion of cost to product price) of major construction companies is estimated to have risen by 3 percentage points compared to before.

Researcher Bae Se-ho of Hi Investment & Securities said, “While profit estimates have been revised downward due to rising material costs, indicators such as real estate interest rates, unsold units, groundbreaking, and sales indices suggest that the real estate market is unfavorable to construction companies,” adding, “The announcement that the easing of real estate regulations was less intense than the market expected also negatively affected the index.”

Additionally, concerns over the recognition of bad debt provisions at overseas sites due to rising cost ratios are suppressing stock prices. The Karbala oil refinery project in Iraq, where Hyundai Engineering & Construction and GS Engineering & Construction are contractors, is expected to reflect additional costs in the second quarter. Unbilled construction and accounts receivable for this project amounted to about 200 billion KRW as of the first quarter. Furthermore, as project bids have generally been delayed, overseas order backlogs in the first half of the year are analyzed to have been mostly sluggish.

Securities experts foresee that overseas order momentum in the second half of the year could lift stock prices again. Additional overseas cost issues are not expected to continue as a trend, and orders are expected to expand from the third quarter. Above all, with the sharp rise in oil prices improving the fiscal environment of oil-producing countries, a favorable order market is anticipated. Nuclear power plant orders targeting Eastern European countries are also expected due to changes in government nuclear policies. Researcher Kim Ki-ryong of Yuanta Securities explained, “Expanding overseas orders through the plant and nuclear power sectors is effective,” adding, “The second half of the year is a period to bottom out concerns over costs, and expectations for government housing supply expansion and regulatory easing are also valid.”

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