The author is an analyst for NH Investment & Securities. He can be contacted at [email protected] – Ed.
While there are fears that rising raw material costs may erode COGS-to-sales ratios among builders, we consider these concerns to be somewhat exaggerated, noting that raw materials represent a relatively small share of construction costs. totals. We continue to view the domestic cement industry favorably, in light of: 1) increasing demand for cement; 2) ASP hikes; and 3) the savings effects of alternative fuel system installations. Following a recent correction, valuations in the cement industry look attractive.
The impact of the increase in the cost of raw materials on manufacturers’ cost / sales ratios will be limited
We note that apartment building consumes about 1.0 ton of cement per 3.3 m² and 0.3 ton of rebar per 3.3 m², with overall apartment construction costs of about 5 million W per 3.3 m². Recently, cement prices have gone from 75,000 W / tonne to 78,800 W / tonne. However, given that the increase in cement prices is only 0.2% of the total cost of building apartments (per 3.3 m²), we believe that the effects of rising raw material costs on manufacturers’ margins will be limited.
According to 2020 data collected by the Construction Association of Korea, raw materials account for an average of 24% of total construction costs. By type of construction, the share of the cost of raw materials last year amounted to around 22% for civil engineering, 25% for architecture, 36% for industrial facilities and 24% for landscaping.
On a 12-month moving sum basis from April 2021, domestic construction orders stood at 215 billion won (+ 31% year-on-year), a record high. And the pre-sale volume in June 2021 (including planned pre-sale events) was 180,000 units, a level similar to that seen during the housing market boom from 2015 to 2016. We believe the general conditions are becoming favorable for the cement industry because: 1) the increase in pre-sales volume is expected to lead to an increase in demand for cement in the future; and 2) alternative fuel system installations should help cement factories reduce costs. Despite a recent correction in the share price, we expect cement companies to regain their valuation in light of the strong earnings improvement momentum expected over the 2021-2022 period.
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The Ministry of Land, Infrastructures and Transport (MOLIT) and the Financial Services Commission (FSC) take different positions on the effective date of designation of restricted areas, a term which refers to areas in which the growth in prices of the housing is 2 times higher than inflation or an underwriting ratio is higher than 5: 1 for pre-sales of housing MOLIT argues that a project for which a pre-sale approval was filed before the area in which the project is undertaken or designated as a restricted area will not be subject to the rules applicable to restricted areas. On the other hand, the FSC considers that a project for which a pre-sale notice has been made before the area in which the project is undertaken is designated as a restricted area will not be subject to the rules of restricted areas. Projects in unregulated areas are subject to a loan-to-value ratio (LTV) of up to 60%, while in regulated areas an LTV ratio of up to 30% is applied to projects with house prices. exceed 900 million W. This difference in position between the two organizations is likely to raise concerns among potential buyers who intend to take out loans for an interim payment, and among builders who intend to cover the costs of construction with interim payment.