Construction Stocks Collapse Due to Legoland-Related Setbacks... What Is the Future Outlook?

[Image source=Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] Due to the fallout from Legoland, concerns over the deterioration of project financing (PF) loans have increased, causing construction stocks to consecutively hit 52-week lows. Furthermore, with the real estate market outlook for next year not looking very bright, there are also views that the recovery of construction stocks’ prices may become even more difficult.

According to the Korea Exchange on the 30th, on the last trading day of last week, the 28th, Hyundai Construction closed at 35,100 KRW, down 0.99% from the previous trading day. This represents a drop of about 15% over the past month. The day before, Hyundai Construction hit a 52-week low during intraday trading at 33,000 KRW. GS Construction showed a similar trend. On the same day, GS Construction closed at 22,350 KRW, down 1.32%, having hit a 52-week low of 20,800 KRW during intraday trading the day before. Daewoo Construction closed down 0.47% at 4,240 KRW, and DL E&C closed down 3.26% at 35,650 KRW. All these construction companies showed a decline of about 10-20% over the past month.

The asset-backed commercial paper (ABCP) default incident triggered by Legoland appears to have increased distrust in real estate PF loans, dragging down construction stocks. In addition, with rapid interest rate hikes implemented by the U.S. Federal Reserve (Fed) and other countries, the real estate market has also taken a direct hit. Transactions have noticeably decreased, and concerns over unsold properties are growing.

Researcher Park Sera of Shin Young Securities explained, "Typically, the sequence would be a downturn in the real estate market, an increase in unsold properties, deterioration of construction companies’ cash flow, and PF defaults. However, this time the starting point is different, being a PF payment guarantee crisis caused by tightening in the capital market." She added, "Due to the real estate market downturn, construction companies are expected to see decreases in sales and orders, delays in sales conversion speed, and worsening profitability."

Researcher Park further stated, "The more frightening issue is the inability to make payments due to unsold real estate, which has not yet occurred but is a factor increasing market anxiety. Considering that the interest rate hike trend is expected to continue until the first half of 2023, 2023 will likely be a difficult year focused more on gauging the bottom rather than growth, due to weakened real estate purchasing power."

On the other hand, some voices argue that these concerns are excessive. Researcher Kang Kyung-tae of Korea Investment & Securities analyzed, "Even assuming a large-scale capital increase to resolve liquidity shortages, the current stock prices have fallen excessively. All these construction companies are trading at their lowest levels since 2010, and their financial strength is solid compared to market concerns."

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