Semiconductor, Construction, Power to Watch in Next Year's Stock Market

The year-on-year growth rate of domestic facility investment is surging, recording at least double the 10-year average. This increase in facility investment typically follows a pattern of rising imported equipment orders, which then leads to an expansion in domestic equipment and material volumes.

Following this trend, the cycle for semiconductor Soobujang companies is expected to become visible by early next year at the latest, which will positively impact the performance improvement of related companies.

Analyst Heo Jae-mu explained, "The year-on-year growth rate of domestic facility investment is what we're looking at. The yellow line is the current rate. This means that at least double the facility investment compared to the 10-year average is being made."

The construction sector next year is notably interesting due to its current undervaluation, with PBR (Price-to-Book Ratio) ranging from 0.5x to 0.7x. The increase in nominal revenue driven by rising apartment prices is expected to contribute to defending core business profits.

Furthermore, despite sluggish overseas orders, an increase in domestic non-residential (industrial, factory, data center) orders is projected to offset overall construction performance. Analyst Heo Jae-mu stated, "I am very interested in the construction sector next year."

While the construction sector's core business traditionally involves residential projects, non-residential (industrial buildings, factories, etc.) order values have recently surged. Particularly, demand for data center and industrial facility construction is driving the performance of construction companies.

Analyst Heo Jae-mu emphasized the importance of this sector, stating, "Non-residential refers to industrial engineering factories and such." This shift is expected to become a new growth engine for the construction industry.

Apartment prices in Seoul for July surged by 30% to 40% year-on-year, depending on the unit size. If the volume of new apartments remains stable, this rise in sales prices will enable construction companies to secure nominal revenue, positively impacting the defense of core business profits.

Analyst Heo Jae-mu noted the extent of the price increase, stating, "Seoul's apartment prices in July rose by 30 to 40 percent year-on-year, varying by unit size." These factors are expected to play a crucial role in stabilizing the performance of the construction sector.

Nuclear power-related stocks are viewed as long-term momentum assets rather than short-term performance indicators. It will still take time to directly reflect the performance of nuclear power plants at this point.

However, nuclear power-related stocks are expected to act as event-driven momentum, causing above-average gains during the market's upward trend. Analyst Heo Jae-mu said, "The premium, I would say, is nuclear power. But it will take some time until we can express nuclear power in terms of actual performance."

Public sector projects, while having high costs, face restricted sales prices, thus not significantly contributing to operating profit margins. Therefore, for construction stocks to rebound, an increase in nominal revenue is more critical than public sector volume. Analyst Heo Jae-mu explained, "Public sector projects don't significantly help operating profit margins. That's because costs are high, but sales prices are restricted. So, nominal revenue is quite important."

Construction stocks next year are expected to be relatively insensitive to interest rate changes, but the success of the new apartment market remains uncertain due to lending regulations.

Compared to the past housing boom when the construction sector's PBR was in the early 1x range, it is currently undervalued at 0.5x to 0.6x. The growth of the AI industry is expected to raise the valuation ceiling for construction, a legacy industry.

Analyst Heo Jae-mu stated, "Construction's PBR was in the early 1x range during the past housing boom. But now it's around 0.5x, 0.6x. So, if AI were to raise that boom-time valuation, I think we could expect a fairly significant upside." This will act as a positive factor, along with expectations for a Q (quantity) cycle in the construction sector.

The United States' annual electricity production is around 4,000 TWh (terawatt-hours), while China produces over 10,000 TWh. Until now, the cycle of replacing aging facilities with new ones significantly contributed to the power industry, but going forward, a fundamental reconsideration of expanding generation capacity is needed.

Analyst Heo Jae-mu stated, "Until now, the U.S. produces about 4,000 TWh of annual electricity, but China exceeds 10,000. Up until now, replacing old equipment with new has contributed significantly. But going forward, we need to have a fundamental discussion." Specifically, future electricity demand in the 10 regions with concentrated data centers is expected to surge, making the mission of expanding generation capacity urgent.

The generation portfolio to meet increasing power demand can be divided into solar power in the short term, natural gas in the mid-term, and nuclear power in the long term. Solar power is advantageous for short-term power expansion due to its short lead time, natural gas is a mid-term alternative, and nuclear power will serve as a long-term, stable power source.

Analyst Heo Jae-mu stated, "To put it simply, there are only three: short-term solar, mid-term natural gas, long-term nuclear. So, producing more electricity in the future means short-term solar, mid-term natural gas, and long-term nuclear." Furthermore, the importance of the ESS (Energy Storage System) cycle will expand, becoming a realistic alternative for meeting local data center power demands.

The investment focus in the battery industry is shifting from the electric vehicle (EV) market to energy storage systems (ESS). Currently, BYD's performance is not good, while CATL is showing signals of increasing ESS revenue. Domestic battery companies are also expected to see good performance in the ESS sector amidst sluggish EV sales.

Analyst Heo Jae-mu explained, "BYD is not doing well now, and CATL is showing signals of improving revenue from ESS. In Korea too, EVs are not doing well, but ESS will be good. So, I think among the top three battery companies, those that switch from ternary cathodes to LFP or have a higher proportion of ESS orders will perform better." Therefore, battery cell companies that transition from ternary cathodes to LFP (lithium iron phosphate) or have a high proportion of ESS order backlogs are expected to show differentiated stock performance among the top three battery companies.