GS Engineering & Construction's Weak Q2... 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 disappointing 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 cut nearly in half. Despite this, securities firms have maintained a "buy" investment rating and a target price of 49,000 won. Based on the closing price of 22,200 won on July 30, the expected upside potential reaches 120%. Considering performance alone, these figures are difficult to justify.

For the second quarter of this year on a consolidated basis, GS Engineering & Construction reported revenue of 2.7799 trillion won and operating profit of 91.4 billion won. Compared to the same period last year, revenue fell by 13.0%, and operating profit decreased by a substantial 43.6%. Operating profit was nearly 20% below the market consensus of 114.7 billion won.

The main setbacks were a projected loss of 50 billion won from the plant division’s private sector projects and about 100 billion won in selling and administrative bad debt expenses. Increased financial costs also contributed to the weak performance. There were one-off gains of about 100 billion won from reflecting actual construction costs and completion settlement profits in the housing and building division, and about 40 billion won in the infrastructure division, but these were insufficient to offset the overall decline.

Nevertheless, why have securities firms not lowered their target price? The main reason is that the housing division is showing signs of a turnaround. In the first half of this year, GS Engineering & Construction achieved 10,950 new housing unit pre-sales, covering 77% of its annual target of 14,300 units. This is a clear improvement even compared to last year’s total pre-sales of 8,858 units. While short-term growth in size may be limited, this year’s recovery in pre-sales is regarded as a foundation for an increase in revenue from next year onward.

An even bigger variable is the AI data center. GS Engineering & Construction announced the possibility of participating in the Donghae AI data center construction project this year. Mirae Asset Securities noted that, given its subsidiary Xi C&A’s extensive experience in data center construction and available workforce, the company is equipped to participate independently in an initial project of 1.2 gigawatts (GW).

The scale is also significant. For a 1.2 GW data center, the construction cost is estimated at about 10 trillion won, based on the assumption of 8 to 10 billion won per megawatt (MW). Considering that GS Engineering & Construction’s consolidated order backlog stands at around 75.4 trillion won this year, the AI data center is not just a thematic project – it is expected to be a project that could fundamentally change both the scale of new orders and company performance.

Kim Kiryong, analyst at Mirae Asset Securities, explained, "If participation in the Donghae AI data center project becomes concrete, and the company successfully enters overseas nuclear power plant business through its involvement in Vietnam’s Ninh Thuan 2 project (Team Korea), these factors would provide a clear rationale for the stock price to rise."

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