Construction industry recovery: Which stocks to watch?

Vietcap Securities (VCSC) has just released a report analyzing the Construction industry with the assessment that industrial and infrastructure projects are leading the industry's recovery.

The construction industry contributes 6-7% to Vietnam's GDP growth in the 2013-2023 period , showing a high correlation with GDP.

Vietnam’s construction industry consists of three main sectors: civil, industrial and commercial, and infrastructure. During the 2013-2023 period, civil construction accounted for 41% of the total construction value, followed by industrial & commercial construction (32%) and infrastructure (27%).

VCSC expects all construction segments to grow in the short and long term, although the recovery in the residential segment may be slower. VCSC believes that residential construction will gradually grow as primary transactions in the housing market have recovered since the end of 2023.

In the long term, Vietnam’s stable economy and rapid urbanization will continue to drive growth in civil construction. VCSC expects strong FDI inflows to be the main driver of industrial and commercial construction in the short and long term. The government’s focus on infrastructure development in the 2021-2030 period is also expected to boost the construction sector in the near and long term.

Vietnam’s construction industry faces a number of short-term challenges. While VCSC expects the low-interest-rate environment and the new Bidding Law (effective from January 1, 2024) to benefit the entire construction industry, the sector still faces a number of short-term challenges , including fierce competition, volatile construction material prices, and bad debt pressure on civil construction contractors.

Stocks VCSC rates highly: HPG, BMP, CTD, VCG, and HHV. VCSC rates highly (1) construction material manufacturers benefiting from domestic recovery and low input costs due to weak demand from China, (2) general contractors with strong capital and extensive experience , and (3) infrastructure contractors with large backlogs and/or strong relationships to secure new contracts.

This leads VCSC to rate BMP and HPG highly in the construction material manufacturers group, and CTD, VCG, and HHV in the contractors group.

VCSC rates construction material companies higher than contractors amid the construction industry recovery, as their upstream position in the industry value chain allows construction material companies to record profits early in the construction cycle .

HPG and BMP benefit from favorable input prices and recovering domestic construction demand. Weak demand from China has kept commodity prices low since the beginning of the year. For steel, despite lower output prices, input costs have also fallen faster, allowing HPG to expand its gross profit margin in the second half of 2024 and 2025. For plastics, PVC prices remain low, helping BMP maintain a record high gross profit margin in 2024/25.

VCSC believes HPG is an investment opportunity with good growth, with net profit expected to increase 80%/23% yoy in 2024/2025, thanks to the recovery of domestic civil construction and infrastructure along with expansion plans for 2025.

For BMP, despite slower revenue growth (due to its heavy reliance on civil construction), VCSC expects net profit to remain at a record high of VND1 trillion in 2024/2025 thanks to high gross profit margins.

Therefore, VCSC believes that BMP is an attractive defensive stock pick, with a trailing 12-month cash dividend yield above 10% and an attractive valuation (average P/E for 2024-25F is 9.4x, lower than the company’s historical average of 11-12x). VCSC recommends Buy for both HPG ( target price of VND32,100/share) and BMP (target price of VND130,300/share).

CTD benefits from diversification strategy. CTD, one of the leading civil construction contractors in Vietnam, is shifting to industrial projects due to the slow recovery of the real estate industry. In fiscal year 2024, 50% of CTD's revenue will come from industrial construction, followed by civil construction (40%) and commercial construction (5%).

In FY2025, VCSC expects CTD to benefit from (1) the recovery of Vietnam’s residential real estate sector and (2) accelerated FDI disbursement. CTD estimates its backlog at VND22 trillion in FY2025 (105% of FY2024 revenue), supporting revenue growth in the 2025-2026 period.

Positive outlook for infrastructure contractors VCG and HHV. VCG and HHV are among the leading infrastructure construction companies, with strong construction capabilities and large backlogs. Both companies are currently constructing Phase 2 of the North-South Expressway and Long Thanh Airport. These projects, combined with the companies’ extensive experience and Vietnam’s 2021-2030 infrastructure development plan, will drive VCG and HHV to further growth in the medium term.