Construction industry in the first half of the year: Revenue recovered but construction material prices eroded profits
Except for Construction 47 due to construction delays and CII due to real estate, all construction enterprises have seen revenue recovery in the first half of this year.
In 2021, the Covid-19 pandemic has affected the entire economy, including the construction industry. Therefore, when the economy reopened, the construction industry improved.
Construction enterprises grow revenue from low base
In the first six months of the year, Hoa Binh Construction (HoSE: HBC) recorded revenue of VND 7,066 billion, up nearly 30%; Hung Thinh Incons (HoSE: HTN) had revenue of VND 3,245 billion, up 14%. Compared to its competitor, Coteccons (HoSE: CTD) had a slightly higher increase of 1.5%, reaching VND 5,195 billion.
The industrial infrastructure construction group also witnessed the same thing. Vinaconex (HoSE: VCG) increased by nearly 50% compared to the first 6 months of 2021. Fecon (HoSE: FCN), Deo Ca Traffic Infrastructure (HoSE: HHV) and Cienco4 (UPCoM: C4G) grew less than Vinaconex.
Meanwhile, Construction 47 (HoSE: C47) temporarily suspended construction of Hoa Binh Hydropower Plant and Long Thanh Airport due to weather and geological reasons, resulting in a revenue drop of more than 50% (the Ministry of Industry and Trade has allowed the Hoa Binh Hydropower Project to resume construction from September 8). The construction segment of CII (HoSE: CII) has grown, but its main source of revenue, real estate business, has decreased by nearly 40%, causing revenue to decrease in the first half of the year.
In particular, for the civil construction sector, despite growth thanks to the market recovery, businesses are still facing difficulties. According to the Ministry of Construction, in the first half of 2022, the supply of new real estate products in all segments is very limited. The reason is due to the tightening of legal procedures for real estate projects and tight control of credit capital, issuance of corporate bonds, and the decline of the bond market.
In addition to the above problems, construction businesses face Another difficulty: The Russia-Ukraine conflict.
Construction material prices erode profit margins
The Russia-Ukraine conflict has pushed up the prices of construction materials. In the construction cost structure, raw materials account for 65-70% of the estimated construction cost. According to the General Statistics Office, the price index of raw materials, fuels, and materials used for production in the first 6 months of the year increased by 6.04% compared to the same period last year. This has affected many domestic contractors.
Hoa Binh Construction’s gross margin decreased from 7.2% to 4.7% in the first 6 months of the year. In contrast to Hoa Binh Construction, Hung Thinh Incons and Coteccons controlled capital costs, so their gross margins increased from 8.6% to 9.6% and 4.9% to 5.6%, respectively.
The increase in construction material prices reduced Vinaconex’s gross profit margin from 14.5% to 13.6%. The same thing happened to Fecon and Cienco 4. CII even operated below cost price with revenue from construction and maintenance of nearly VND263 billion while the cost price of this segment was VND279 billion. In this group, Construction 47 and Deo Ca Traffic Infrastructure controlled costs, so their gross margin increased.
Some businesses later said that they had taken measures to limit the impact of the “price storm” of raw materials. Construction 47 has construction contracts with reputable investors, arranged adequate capital, and is allowed to adjust prices when the state changes policies. Therefore, when there are fluctuations in wages, prices of materials and fuel, this company does not have the risk of price fluctuations. Hoa Binh Construction has negotiated with investors and has provisions to avoid the risk of price fluctuations.
In terms of profit, Coteccons and Construction 47, although controlling input costs, were affected by business management costs and construction suspension, causing the parent company’s after-tax profit to decline. Hoa Binh Construction and Fecon were both affected by raw material costs, business management costs, and interest expenses, so they also witnessed the same thing. The remaining companies were able to reduce costs (Hung Thinh Incons, Cienco 4, Deo Ca Traffic Infrastructure) or had a sharp increase in financial revenue (CII and Vinaconex), so their profits grew.
Construction industry outlook
VNDirect Research expects steel prices to continue to decline gradually in the second half of 2022 and 2023, continuing the momentum since April (down more than 14% since the peak) and helping to reduce the pressure on gross profit margins on construction businesses.
Meanwhile, the progress of public investment is still slow, even though it ended in August, it has not yet reached half of the annual plan. The Ministry of Finance estimates that the disbursement of public investment capital in the first 8 months of the year was more than VND 212,227 billion, equivalent to 35.5% of the annual plan. Currently, 35/51 ministries and 20/63 localities have a disbursement rate of less than 35%. A number of key transport projects (including Mai Son – National Highway 45, Cam Lo – La Son, Vinh Hao – Phan Thiet and Phan Thiet – Dau Giay) are all behind schedule.
However, the decrease in construction material prices will help speed up the construction progress of public investment projects. VNDirect Research forecasts that public investment capital in 2022 will increase by 20-30% compared to the actual implementation in the previous year, because growth in the second half of 2022 may increase compared to the low base level of the same period.
VNDirect Research believes that residential real estate investors may still face challenges in raising capital in the second half of 2022 as the Government requires caution.
