The construction site of LG Uplus's AI data center in Wollong-myeon, Paju, Gyeonggi Province. This photo is not directly related to the article. [Cha Min-ju]
The construction site of LG Uplus's AI data center in Wollong-myeon, Paju, Gyeonggi Province. This photo is not directly related to the article. [Cha Min-ju]

Construction stocks surged more than 17% last week even as the broader Kospi fell more than 5%, moving in the opposite direction of the overall market. The construction index posted the highest gain among all 50 Kospi sector indexes, and the KRX construction index ranked first among 40 KRX indexes. Analysts attributed the rally to a broadening of growth drivers — away from nuclear power, which had led construction stocks higher in the first half but has since lost some momentum — toward AI data centers and US power plant projects, combined with stronger-than-expected earnings from major construction companies.

The Kospi construction index rose 17.42% from Monday through Friday, according to Korea Exchange, while the Kospi itself fell 5.10% over the same period. The KRX construction index climbed 15.99%, outpacing the Kosdaq's 10.98% gain. Among individual construction stocks, Daewoo Engineering & Construction jumped 28.40%, while DL E&C rose 23.08%, Hyundai Engineering & Construction 16.17% and Samsung E&A 9.82%.

Analysts pointed to a diversification of growth drivers as the key factor behind the recent rally. Nuclear power had been the primary engine for construction stocks, but AI data centers and power plant projects are now emerging as new pillars. At the San Francisco AI Summit held July 24 (local time), President Lee Jae-myung and senior executives from major Korean and US companies announced plans for large-scale investment and supply chain cooperation in AI semiconductors and data centers.

"The nuclear power momentum that drove construction sector share prices in the first half weakened due to delays in securing orders, but strong second-quarter earnings confirmed an improved earnings base, and the San Francisco AI Summit reinforced the data center momentum," said Ryu Tae-hwan, an analyst at Eugene Investment & Securities. "The selection of US investment projects is also expected to serve as a new share price catalyst as domestic construction companies move into the American power plant market."

AI data centers are emerging as a major new order market for construction companies. The government's three mega-projects call for expanding AI data center capacity by 18.4 GW. Based on a construction cost of 12 billion to 13 billion won ($9.15 million) per MW of IT load — the actual power consumed by IT equipment such as servers, storage and networking gear — the total AI data center market implied by major companies' expansion targets is estimated to exceed 100 trillion won, according to LS Securities. That figure is nearly half of the roughly 200 trillion won in total domestic construction orders placed last year.

Data center construction takes about two years excluding permitting, and analysts expect related orders to pick up in earnest this year. "The AI data center market has high barriers to entry, with only about 15 to 20 construction companies that have a track record competing," said Kim Se-ryeon, an analyst at LS Securities. "Companies with a competitive edge are expected to quickly secure a fast-growing new revenue source."

The surge in power demand driven by AI data center expansion is also creating new opportunities in the power plant market. In the United States in particular, rapidly rising electricity demand centered on data centers is increasing the need to build out power generation infrastructure capable of delivering electricity on time. The prospect of a $19.8 billion gas combined-cycle power plant project in Encinal, Texas — being considered as the first major Korean investment project in the US — is also raising expectations for domestic construction companies to enter the American energy market.

"Investment in power plants that prioritize timely supply over the type of generation source is expected to take precedence in response to rising electricity demand in the United States," Ryu said. "This will make it more concrete that domestic construction companies will enter the US energy market."

Improved earnings at major construction companies are also underpinning the share price gains. Second-quarter operating profit at Hyundai Engineering & Construction, Samsung E&A, Daewoo Engineering & Construction and DL E&C all exceeded market consensus estimates compiled by FnGuide.

Hyundai Engineering & Construction posted second-quarter sales of 6.84 trillion won, down 11.4% from a year earlier, but operating profit rose 20.7% to 261.8 billion won, beating the market consensus of 214 billion won. Samsung E&A reported sales of 2.61 trillion won and operating profit of 273.1 billion won, up 19.8% and 51.0% respectively, with operating profit topping the consensus of 218.8 billion won. Daewoo Engineering & Construction saw sales fall 10.1% to 2.04 trillion won, but operating profit surged 182.6% to 232.3 billion won, far exceeding the consensus of 160 billion won. DL E&C posted a 9.5% decline in sales to 1.8 trillion won, while operating profit climbed 26.3% to 159.4 billion won, above the consensus of 123.8 billion won. Analysts noted that earnings estimates have been revised upward following the results, adding further support to the recent rally in construction stocks.

However, some analysts caution that it is too early to read the recent share price gains as the start of a full-fledged recovery in the construction industry. Rising market interest rates are increasing financing costs, mortgage rates are climbing, and project financing viability continues to deteriorate — all of which remain headwinds.

"Operating profitability has recovered somewhat as a higher share of new projects eases construction cost pressures," said Kim Sang-man, an analyst at Hana Securities. "But with revenue contraction accelerating, and given the financial burden from unsold units, move-in risks, accounts receivable collection and project financing contingent liabilities, the scope for a near-term improvement in creditworthiness across the construction industry as a whole is inevitably limited."

Despite those industry headwinds, analysts say the sector warrants attention given its new growth drivers and improving earnings. "Following strong results from construction companies, expectations for data center orders have grown with the announcement of domestic mega-projects, putting construction stocks back in the spotlight," Kim Se-ryeon said. "In the short term, data center and new order expectations appear likely to fill the gap left by the absence of nuclear power orders." Kim maintained an overweight rating on the construction sector.


hajun825@heraldcorp.com