Title: Construction Stocks 2007
Hc - January 1, 2007 01:26 AM (GMT)
There is a posting by forumer Cats8 in canslim.sg:
| QUOTE |
A few of us are bullish that Construction Stocks would be one of the plays in 2007. I, FULLY agreed with most of them. Construction Industry has/had (I dunno whether is it out yet) in doldrums for so many countless quarters in Singapore's GDP. It is beginning to see a little light at the end of the tunnel from the last 2/3 Quarters GDP's reporting...+ve ..Lei! For some who studied GDP, or economics - GDP measured current Q against the same Q last yr, so when it shows positive, it does not mean it wl be the same as 1989/1995 construction's bull...... it is only a little baby bull..... The Questions to ask are then: a) is this the time to go in? B) wat abt opportunity cost since it is and will continue to be bull run in stk market? c) which counters to buy? d) how long shd I hold? e) wat is the risk? |
(See: http://www.canslim.sg/forum/viewtopic.php?p=9971#9971)
Cat's post prompt me to do some thinking, and here are my 2 cents:
We can view construction companies from 2 angles:
1. Main or sub-contractors/suppliers
Construction stocks in this view have to be divided into 2 groups: one is main contractor that involved in securing contract directly from employer/developer/client/owner, and one is sub-contractor that involved in securing the contract from the main contractor. There are some specialist sub-con do get contract directly from employer, the the main bulk is still from main-con.
The issue to consider here is the risk of default. With the rosy picture in property, the risk of employer going under is very limited, so main-con only faced with competition pressure and has limited risk for default payment. But the financial health of main-con, who now pay the sub-con or supplier, is a different story. We have seen many main-con (listed or not) going under, and all the down stream sub-con or supplier are affected. So the risk on sub-con/supplier is higher, on top of the competition among the sub-con/supplier themselves.
With the recent increased in oil price, materials cost has greatly increased. But because of the availability of contracts available, the contract price did not increased proportionally. The difference is absorbed by main-con, who is likely to pass it down (partially if not all) to the sub-con. If main-con can pass it down, sub-con suffer. If main-con cannot pass it down, his financial suffers, which in turn affect payment to sub-con/supplier, and thus sub-con/supplier also suffers. In any case, the sub-con group is at a disadvantage.
So when choosing construction company, we have to be mindful of this risk.
2. Source of income
2a. Not all construction company's main income come from construction activities. Many, especially those main-con, are also involved in property development. They may not be doing the project in solo, or doing what Ho Bee is doing, but still in property market. From the price of property price seen in prime location and the general improvement of Singapore economy, those non-prime location property price will see better days. So those who are involved in the properties development will have better chance of seeing better profit.
2b. I am not sure how many of these construction companies have oversea income that contribute to their bottom line, and how important is this contribution. But this is another factor that we have to look into.
Just my view, comment and contribution is welcome.
As usual, I don't have much time to do all the FA ground work, I will still rely on my chart to trade.
Hc - January 1, 2007 01:31 AM (GMT)
Here is the list of Property & Construction related stocks I gather from Shareinvestor.com for easy reference.
