Shares in South Korean builders are on an upward trajectory on the back of improved 2015 earnings and market expectations for more overseas projects with the reopening of the Iranian market and the launch of the Asian Infrastructure Investment Bank.

Korean builders have been outperforming the broader market in January as concerns over the decreasing number of overseas projects are easing on rebounding oil prices that are expected to contribute to stabilizing their balance sheets. These latest developments are seen to be throwing off the hefty losses in Middle East construction projects caused by the builders’ lowball bids.

“The local construction sector is likely to continue its upward trend on mitigating macro risks such as oil prices, combined with the fact that no additional unfavorable factors are foreseen,” said Kyobo Securities analyst Baek Gwang-jae.

According to Korea Exchange data, the 36-member Korea Construction Index climbed 9.56 percent in January, compared with a 2.77 percent decline in the overall KOSPI index.

“In particular, firms that have construction experience in Iran, like GS E&C and Hyundai E&C, have shown solid performances, gaining 30.6 percent and 27.3 percent, respectively, during the one-month period,” Baek said.

But some experts warned of a coming slowdown in real estate transactions in the Korean market, which could take a toll on the builders.

“The possibility of property market slowdown is growing as home buyers are showing concerns over an oversupply of houses, fiscal policy shift and interest rate hike,” said Lee Hong-il, a researcher at Construction Economy Research Institute of Korea.



Better-than-expected earnings



In late January this year, the country’s three major builders -- Hyundai E&C, GS E&C and Daelim Industrial -- logged higher operating profits in 2015 from a year ago, mainly on the back of improved profitability in the domestic housing market boosted by low borrowing costs.

The operating income of Hyundai E&C and GS E&C rose 2.9 percent and 138.6 percent year-on-year to 986.6 billion won ($821.2 million) and 122 billion won, respectively. Daelim Industrial posted profits of 265.6 billion won after incurring losses in the previous year.

Among the leading players, only Samsung C&T’s construction business posted losses of 2.6 trillion won from projects that include the Australian Roy Hill iron ore mine.

Spurred by government policies to boost the property market, Korean construction firms have recently been enjoying a boom in the domestic housing market.

However, concerns still linger as investors are reeling from tighter lending rules designed to curb the nation’s snowballing household debt.

Starting in February, local banks will be implementing more stringent credit control guidelines that may cause a drop in home-backed mortgage loan growth.



Upbeat on Iran and AIIB



In 2015, Korean builders signed $46.1 billion worth of overseas construction deals, down 30 percent from a year earlier after a plunge in crude oil prices led to a suspension or cancellation of projects in oil-rich nations, according to government data.

To offset some of these losses, local builders are pinning hopes on Iran as the country is poised to make big investments to replace aged gas and oil facilities and major infrastructure, following an easing of economic sanctions the United Nations had earlier imposed for its nuclear weapons program in 2010.

Following the lifting of the international sanctions, the Korea International Trade Association projects that Iran’s construction market will reach $154 billion in 2016, up sharply from the $88.7 billion in 2013.

But the reopening of the Iranian market does not guarantee a direct source of revenue, according to experts.

“It needs a long-term approach and thorough analysis of the market as overseas projects are usually considered a high-risk business. To compete with companies from other countries, financing is the essential part for all these activities,” an official at International Contractors Association of Korea said.

South Korean construction companies are also expected to benefit from the launch of the China-led AIIB as it will boost demand for large construction projects.

Korea has a 3.81 percent stake in the new international institution, coming in fifth after China, India, Russia and Germany.

Mirae Asset Securities analyst Lee Kwang-soo said he expects Korean construction companies to retain a steady level of overseas orders.

“Given the recent expansion in construction orders in Asia and the likely sharp increase in the completion of major overseas projects in 2016, which could lead to the start of more new long-term projects, we expect the builders’ share price gains to continue,” Lee said.

By Park Han-na (hnpark@heraldcorp.com)