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Positives likely to emerge after 2Q24 earnings release

2Q24 preview: Likely to swing to an operating profit

For 2Q24, we expect GS E&C to post consolidated revenue of W3.28tr (-6.1% YoY) and operating profit of W74.6bn (turning to profit YoY), with the latter missing the consensus (W85.5bn). We estimate that the building/housing division’s cost ratio rose slightly QoQ, as: 1) new apartment move-ins declined from 7,900 units in 1Q24 to 4,560 units in 2Q24F; and 2) sizable settlement gains from previously completed housing projects were recognized in 1Q24. The firm likely swung to an operating profit mainly due to a favorable comparison arising from massive one-off costs (W552.6bn) incurred in 2Q23 related to the Incheon garage collapse accident.

Positive expectations for water treatment business (GS Inima) and plant orders

We believe GS E&C’s non-housing businesses will see solid order momentum. First, wholly owned subsidiary GS Inima received two sewage treatment orders (W900bn each) in Brazil in June and July. If GS Inima wins the Ghubrah III desalination plant project (W1.6tr) in Oman following the completion of financial agreements in August, the subsidiary’s total overseas orders (EPC + concessions) will likely exceed W3tr for the year. Second, the plant business will likely continue to enjoy growth in orders from group affiliates (e.g., GS Caltex) this year.

In 1H24, GS E&C’s housing presale volume exceeded 8,486 units, reaching 43% of its full-year guidance. We believe the recent increase in presales (with prices reflecting rising costs) will lead to an improved cost ratio at the building/housing division.

Maintain Buy and TP of W21,000

We maintain our Buy rating and target price of W21,000 (target P/B of 0.4x) on GS E&C. The stock remains our second-most preferred pick in the construction sector. Notably, the company’s liquidity conditions should receive a boost from the likely sale of GS Inima shares in 2H24 (and the subsidiary could fetch a higher valuation than in the past following order wins this year). GS E&C plans to announce its medium/long-term strategic direction in July following the appointment of a new CEO.









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