Korean construction industry market cap halves in more than 2 years

GS Engineering & Construction Co. (GS E&C) headquarters in Seoul. [Photo by Yonhap]

In the aftermath of the recent parking lot collapse at a residential complex built by GS Engineering & Construction Co. (GS E&C) in Geomdan, Incheon, South Korean construction stocks have undergone a significant de-rating, with their collective market capitalization dwindling by nearly half over a span of more than two years.

According to data from the Korea Exchange released on Tuesday, the combined market capitalization of stocks categorized under construction companies in the stock market stood at 13.99 trillion won ($10.58 billion) as of August 25.

This represents the lowest recorded value since April 1, 2020, when it stood at 14 trillion won, and less than half of the 28 trillion won it achieved in June 2021.

To provide a context, the market capitalization was 15.69 trillion won at the close of April, just prior to the collapse of the underground parking facility within the Geomdan apartment complex. In the span of the past four months, there has been a loss of 1.7 trillion won in market capitalization, a drop of 10.89 percent.

From May through August 25, shares of GS E&C plummeted 35.19 percent, Ilsung Construction Co. 27.45 percent, Sc Engineering Co. 24.15 percent, Kolon Global Corp. 20.79 percent, Hyundai Engineering and Construction Co. (Hyundai E&C) 18.29 percent, Shinsegae Engineering & Construction Co. 17.75 percent, and HDC Hyundai Development Co 15.93 percent.

During this period, 33 out of 38 stocks in the main Kospi construction sector saw their stock prices decline, indicating that virtually the entire sector was affected by the GS E&C incident.

But the recent announcement by the Ministry of Land, Infrastructure and Transport of administrative penalties against GS E&C and the results of safety inspections of other apartment sites have been received positively by the market, as it is seen as resolving the uncertainty in the construction sector, leading to expectations of a stock price rebound.

The land ministry announced on Sunday that it imposed a 10-month business suspension on GS E&C and confirmed that the concrete strength of 83 sites under construction by the company met the safety standard and that there were no missing rebars.

Following the announcement, shares of major construction companies rose on Monday, with GS E&C rising 3.43 percent, Hyundai E&C 7.91 percent, DL E&C Co. 4.22 percent, Daewoo Engineering and Construction Co. (Daewoo E&C) 4.14 percent, Ilsung Construction 2.85 percent and Tae Young Engineering and Construction Co 2.76 percent, and the Kospi’s construction industry market capitalization reached 14.49 trillion won, up 585 billion won, or 3.64 percent, from the previous trading day.

“Although housing-related indicators have shown slight improvement and second-quarter earnings were strong, construction stocks have persistently underperformed due to uncertainty surrounding the comprehensive investigation of GS E&C,” said Kang Kyung-tae, an analyst at Korea Investment & Securities Co. “Relief over the outcome of the investigation will partially resolve the construction sector undervaluation.”

However, there is a view that a long-term increase in construction stocks is unlikely.

“The land ministry’s announcement did have a positive impact in resolving the negative aspects, but given that the construction sector is currently so undervalued that it is not surprising if the stock price rises at any time,” said Baek Kwang-je, an analyst at Kyobo Securities Co.

“Companies such as Hyundai E&C and Daewoo E&C have the potential to continue their upward trend due to solid overseas performance and benefits related to small modular reactors (SMRs), but other stocks may only rebound temporarily as their performance competitiveness tends to lag behind,” he added.