Poor Second-Quarter Results for GS E&C... Stock Outlook Hinges on AI Data Center [Weekend Money]

Operating profit misses consensus by 20%
Share price hinges on data center participation

GS Engineering & Construction posted lackluster results for the second quarter of this year, falling short of market expectations. Revenue declined compared to the same period last year, while operating profit was slashed by nearly half. Nonetheless, the securities firms maintained their "Buy" investment rating and a target share price of 49,000 won. Based on the closing price of 22,200 won on the 30th, this represents an upside potential of 120%. This is a number that is difficult to explain by performance alone.

For the second quarter of this year, GS Engineering & Construction reported consolidated revenue of 2.7799 trillion won and operating profit of 91.4 billion won. Revenue decreased by 13.0% year-on-year, and operating profit dropped by a staggering 43.6%. Operating profit fell nearly 20% short of the market consensus of 114.7 billion won.

The losses are mainly attributed to an expected 50 billion won loss from the plant sector's private investment business and approximately 100 billion won in bad debt expenses in selling and administrative expenses. Increased financial costs also contributed to the sluggish results. Although about 100 billion won in one-off profits were reflected in the housing and building divisions through recognition of execution costs and completion settlement gains, and about 40 billion won in the infrastructure division, this was not enough to offset the downturn.

Nevertheless, what is the reason for the securities firms not lowering their target prices? First, there are signs of a rebound in the housing division. GS Engineering & Construction's housing pre-sale performance for the first half of this year reached 10,950 units, already fulfilling 77% of its annual target of 14,300 units. Compared to last year's total pre-sale figure of 8,858 units, the improvement trend is clear. Although short-term top-line growth is limited, the recovery in pre-sales this year is cited as a reason to expect an expansion in revenue from next year onward.

The bigger variable is the AI data center. GS Engineering & Construction disclosed this year the possibility of participating in the construction of the Donghae AI data center. Mirae Asset Securities assessed that, given the many data center construction experiences and human resources held by its subsidiary Xai C&A, the company has the capability for independent participation in an initial 1.2-gigawatt (GW) project.

The project scale is significant. Based on a data center with a 1.2GW capacity, total construction costs are estimated at about 10 trillion won. This calculation assumes construction costs of 8 to 10 billion won per megawatt. Considering GS Engineering & Construction's consolidated order backlog stands at approximately 75.4 trillion won this year, the AI data center is seen as more than just a thematic project—it is a contract that could transform both the order volume and overall performance.

Ki Ryong Kim, a researcher at Mirae Asset Securities, explained, "If participation in the Donghae AI data center is further solidified and the possibility of entering the overseas nuclear power plant business through involvement in the Ninh Thuan No. 2 project (Team Korea) in Vietnam becomes clearer, these will serve as grounds for share price appreciation."

This content was produced with the assistance of AI translation services.