South Korea's construction sector fell 9.0% over a one-month period ending on '이달 8일', underperforming the KOSPI by 5.9 percentage points, but brokerage analysis indicates order prospects post-2027 are strengthening due to three government-backed mega projects and AI data center investments. Shinhan Investment & Securities analyst Kim Sun-mi maintained an 'Overweight' rating on the sector in a report released on '10일', citing the projects as creating unprecedented order opportunities for construction firms. The assessment follows the government's announcement of the 'Korea Great Leap Forward Three Mega Projects' on '지난달 29일', which added to existing opportunities from global energy plant market restructuring.
Construction Sector Records 9% Decline Over One-Month Period
The construction sector declined 9.0% from '지난달 8일' to '이달 8일', underperforming the KOSPI index by 5.9 percentage points, according to Shinhan Investment & Securities data. Factors weighing on the sector included difficulties in previous negotiations, potential interest rate hikes in the US and South Korea, DL E&C's Saudi Arabia tax controversy, and capital flows concentrating in the IT sector. The sector experienced a partial rebound following the '지난달 29일' announcement of the three mega projects, which revived expectations for order expansion.
Second-quarter earnings for major construction firms are expected to meet or slightly exceed market expectations. Housing sales continue to decline due to project completions from 2021-2022 pre-sales, but profitability improvements persist from downward adjustments to budgeted cost ratios in the order backlog. Additional variables include expanded won-denominated overseas revenue from currency appreciation, one-time cost settlements related to the domestic Shaheen project, and Samsung E&A's affiliate sales expansion.
Three Mega Projects Create Post-2027 Order Pipeline
Analyst Kim stated that while full-scale order timing will materialize post-2027, the construction sector is encountering abundant order opportunities through the combination of the global energy plant market and large-scale domestic investment decisions. The sector is simultaneously facing opportunities from: nuclear power and LNG business opportunities following US-Iran war-driven global energy market restructuring, new construction investments from the three mega projects, local housing market recovery following large-scale development projects, and urban redevelopment project expansion.
The report noted that considering demand confirmation, financing, and energy price volatility for global energy infrastructure projects, actual construction firm orders will likely materialize post-2027. Regarding the housing market, the report assessed that polarization between the Seoul metropolitan area and provinces continues, with metropolitan demand indicators remaining solid while provinces face concerns over unsold inventory, uncommenced project financing, and population outflow, resulting in slower recovery.
AI Data Centers Identified as Near-Term Catalyst
AI data centers were identified as the near-term stock price catalyst for the construction sector. The rationale cited includes government support for large-scale projects, fast commercialization speed, short construction periods, and high contribution to earnings. According to the report, AI data center investment within the mega projects is planned at a total scale of 18.4GW, comprising 8.4GW in phase 1 and 10GW in phase 2. Construction costs were estimated at approximately 110 trillion to 150 trillion won when applying 6 billion to 8 billion won per MW.
The analyst stated that construction firms are expected to experience a period of internal stabilization through 2026, followed by a surge in new orders in 2027 and rapid earnings growth in 2028. The report also noted that increased groundbreaking volumes warrant attention to building materials companies such as cement and concrete manufacturers.
GS E&C Named July Stock Pick on Data Center Track Record
GS E&C was presented as the July stock of interest. The assessment was based on GS Group's participation across the entire AI data center value chain, including development and operation, cooling solutions, power supply, and construction, which could highlight GS E&C's benefits. GS E&C has a track record of building a total of 16 data centers since 2006 and is currently proceeding with or pursuing 11 new projects.
Analyst Kim explained that GS E&C is expected to pass through a period of internal stabilization through 2026, then face a surge in new orders in 2027 and a period of rapid earnings growth in 2028. The report maintained a buy-on-dips strategy as valid during sector corrections.
Nuclear Stocks and Housing Market Outlook
Nuclear-related stocks were assessed to have potential for renewed momentum post-September. The analysis indicated that investor sentiment could revive when tenant confirmation for the US Fermi project, Vietnam nuclear power orders, and confirmation of the nuclear export special law become visible. However, the report noted that actual construction firm orders for global energy infrastructure projects will likely materialize post-2027, considering demand confirmation, financing, and energy price volatility.
Regarding the housing market, the report evaluated that polarization between the Seoul metropolitan area and provinces continues. Metropolitan demand indicators remain solid, while provinces face concerns over unsold inventory, uncommenced project financing, and population outflow, resulting in slower recovery. However, the report projected that the local housing market will gradually recover as government policy concentrates on demand incentives such as balanced regional development.
FAQ
What caused the 9% decline in Korean construction stocks over the one-month period?
The construction sector fell 9.0% from '지난달 8일' to '이달 8일', underperforming the KOSPI by 5.9 percentage points. Factors included difficulties in previous negotiations, potential interest rate hikes in the US and South Korea, DL E&C's Saudi Arabia tax controversy, and capital flows concentrating in the IT sector. The sector experienced a partial rebound following the '지난달 29일' announcement of the three mega projects.
How large is the AI data center investment planned under the mega projects?
AI data center investment within the mega projects is planned at a total scale of 18.4GW, comprising 8.4GW in phase 1 and 10GW in phase 2. Construction costs are estimated at approximately 110 trillion to 150 trillion won when applying 6 billion to 8 billion won per MW, according to the Shinhan Investment & Securities report released on '10일'.
Why did Shinhan Investment & Securities select GS E&C as the July stock pick?
GS E&C was presented as the July stock of interest because GS Group participates across the entire AI data center value chain, including development and operation, cooling solutions, power supply, and construction. GS E&C has built 16 data centers since 2006 and is currently proceeding with or pursuing 11 new projects, positioning it to benefit from the government-backed AI data center investments.
