Construction industry to enter upcycle
-Thanks to the recent housing market recovery (current downcycle began in 2008), we expect the construction industry to enter an upcycle in 2015. Although risks relating to overseas divisions remain in play, we believe that their cost-to-sales ratios will normalize from 2015. We initiate coverage on the construction industry with a Positive rating.
To enter upcycle thanks to recovering housing market
-Believing that the current downcycle in the housing market (began in 2008) is coming to an end, we expect the construction industry to enter an upcycle in 2015 thanks to the recent housing market recovery.
-As the housing market begins to recover in the Seoul metropolitan area, operating profits at construction companies’ housing divisions are improving. Given the strengthening housing market and easing competition in both the overseas segment and public construction work arena, margins at construction companies should gradually normalize.
Despite high level of uncertainty, cost-to-sales ratios at overseas divisions normalizing
-Current concerns towards construction companies originate from low-margin overseas order taken back in 2012. Worsening cost-to-sales ratios at overseas divisions have created uncertainty and negative sentiment towards overseas projects.
-However, we believe that overseas divisions’ cost-to-sales ratios will gradually improve thanks to: 1) increased use of consortiums among construction companies; 2) easing competition; and 3) selective order taking. Nevertheless, we acknowledge the need to keep a close eye on these divisions’ future earnings figures.
Focus on earnings stability in 1H15 and earnings recovery in 2H15
-We initiate coverage on the construction industry with a Positive rating. We expect construction companies’ operating profits to improve in 2015 thanks to: 1) stronger margins at housing divisions; and 2) normalizing cost-to-sales ratios at overseas divisions. We believe that these two expectations have yet to be fully reflected in constructors’ share prices.
-As our top picks, we present Hyundai E&C and Samsung C&T-the two firms’ overseas divisions have relatively robust cost-to-sales ratios and stable margins. We advise paying attention to Daelim Industries (second-preferred top pick) as its overseas division’s cost-to-sales ratio is set to improve, and further as sales at its housing division are expected to enhance.
*Source:Woori Investment & Securities Co.
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