Construction Industry
Risks Likely to Ease in 2nd Half

NH Investment and Securities forecasts continued boom in overseas construction

Construction companies have seen stock prices falling farther than the Korea Stock Price Index (KOSPI) in the first half of 2008 due to an increase in bad debts caused by unsold apartments and a risk of worsening cash flow. However, such fears are forecast to be somewhat eased in the second half because of such factors as a drop in the supply of apartments whose selling prices are regulated by ceilings, the government's easing of real estate restrictions and an expected stabilization of raw materials prices.
In its recent industry prospects and top picks for the second half of 2008, NH Investment and Securities Co. also predicted that construction companies will see a continued boom in the overseas construction sector.
Chances are high that construction stocks could rebound in the second half, replacing a gloomy first half. Currently, the construction industry is hopeful to post sales growth, but uncertainties, caused by a rise in unsold apartments and a risk of raw materials price hikes have been mounting. However, starting the second half of 2008, those risks will be eased. The Lee Myung-bak government is expected to come up with detailed steps to turn around the domestic economy if it can cope with the current unrest and if the 18th parliament returns with the resumption of normal activities by lawmakers. In particular, it is expected to introduce steps to boost the provincial construction industry, which takes the lion's share in the provincial economy, and to initiate social overhead investments worth 5.5 trillion won through a supplementary budget.
NH Investment and Securities rates construction stocks at "outperform."Although the current situation makes it somewhat more difficult to give an outperform rating, given the current lack of momentum in the sector, stock prices currently reflect the fears of a drop in revenues and uncertainties are expected to be alleviated through the easing of unsold apartments and the stabilization of raw materials prices. Thus, now is the time to expand investments with a long-term perspective. Expectations for sales growth in construction stocks are high. Declining earnings are only temporary and when the fear of earnings loss disappears, an investment in construction stocks are expected to yield substantial returns.
Meanwhile, Korean construction companies are forecast to land orders worth about $23 billion in the overseas construction sector in the first half of the year, up 43 percent from $16.1 billion in the same period last year. They are predicted to post $22 billion worth of orders in the second half of 2008, close to the projection for the first half. The reason for the lower-than-expected order projection for the second half is that they do not have room to receive orders because of a shortage of such capital expenditure (CAPEX) items as manpower. Large-size contractors are expected to be selective about the projects they take on, opting for orders with rich returns. Overall, the 2008 projection for orders received is approximately $45 billion, up 10 percent from last year.
Since 2006, large-scale engineering plant orders from the Middle East have served as a new revenue growth engine for large-sized contractors. As contractors have a backlog of orders due to a rush of new orders, the overseas construction market has shifted to a seller's market in which they turn their attention to profit-yielding orders. Korean contractors are expected to maintain the momentum for landing orders, as they have an edge in terms of costs, as Kuwait's KNPC's bid shows.
NH Investment and Securities'recommended picks are Samsung Corp., with strong prospects for growth in overseas construction with a "buy"rating and a target price of 80,000 won, and Hyundai E&C, to be on the block, with a "buy"rating and a target price of 105,000 won. It also rated Halla Engineering & Construction Corp., which acquired Mando, a "buy"with a target price of 46,000 won. nw

■ Trends of unsold apartments

■Stats on Korean companies'landing orders overseas