Construction sector: leverage from infrastructure development

North-South Expressway Phase 2 project

>> What is the outlook for Vietnam’s construction sector?

North-South Expressway Phase 2 is in focus.

The government aims to push public investment in 2023F with VND793tr in the disbursement pipeline (34% from 2022) in order to overcome the decline of other growth engines. According to Mr. Tran Ba Trung, an analyst at VNDirect, the government's efforts to license new mines have helped to address the construction stone shortage bottleneck, and prices for building supplies like steel, cement, and construction stone are gradually declining. These two factors suggest that the amount of public investment disbursed in 2023 may rise by 20–25% over the amount actually disbursed in 2022.

Key infrastructure projects, including the East North-South expressway phase 2 (Dec. 22), the passenger terminals and runways of Long Thanh International Airport, Terminal 3 of Tan Son Nhat International Airport, the Bien Hoa-Vung Tau expressway (Apr. 23), and the Khanh Hoa-Buon Ma Thuot expressway (Jun. 23), will begin construction in late 2022, according to the Ministry of Transport (MoT) (Jun. 23). The North-South Expressway phase 1's additional eleven subprojects will be finished between 2023 and 2024F.

The MoT will be given the authority to name contractors for NSE Phase 2, which will be applied beginning in late 2022 to consultancy, technical infrastructure relocation, compensation for site clearance, and re-settlement package deals. This will help speed up the project's implementation process. To guarantee that the projects may be implemented in a transparent manner, MoT established a list of requirements. The majority of the packages are likely to go to the top players with the most track records, such as Vinaconex (VCG VN, HOSE), Deo Ca Traffic Infrastructure Investment JSC (HHV VN, HOSE), CIENCO4 Group (C4G VN, UPCOM), etc.

Time for a profit growth turnaround

The government requested all sub-project contractors at NSE phase 1 adhere to the original dates. According to Mr. Tran Ba Trung, this expressway will be finished in sections of 361 km, 148 km, and 128 km in 2022, 23 years from now. Additionally, NSE Phase 2, with its 349 km of expressway, is anticipated to be finished between 2023 and 25F. He anticipates that the demand for asphalt will rise starting in 4Q22 because asphalt paving is the last-mile construction of road projects.

We compare industry sales volume growth based on Petrolimex Petrochemical Corporation, JSC (PLC VN, HNX), which maintained roughly 30% of the local asphalt market share in FY15–21 due to a paucity of statistics on the industry in Vietnam. PLC's asphalt revenue increased during FY2014–2015, a period of sharply rising public transportation investment disbursements. A tight government budget and a drop in private investment in BOT projects were blamed for the low level of infrastructure spending in FY16–19, which led to a 50% decrease in PLC's asphalt income compared to FY2014–15.

"We believe PLC is well positioned to win contracts thanks to: (1) its strong warehouse network and its market-leading capacity; and (2) its long-standing relationships with SOEs and a good track record in contract execution,"  said Mr. Tran Ba Trung.

>> Construction industry expects bright outlook in second half of 2022

Eye on Long Thanh International Airport

Due to the nature of the industry, transportation expenses can make up a sizable portion of the cost of construction stone. The cost of stone delivered to a job site could be double the mine gate price, depending on the route and mode of transportation.

The demand for construction stones in Southeast Vietnam will be primarily driven by the recently begun construction of the Long Thanh international airport. Given their advantages and high-quality products, we think quarries of businesses close to significant projects will be given priority for supply.

Mr. Tran Ba Trung believes that the licensing of construction stone quarries is facing difficulties in both extending the mining time, increasing the mining capacity and especially in exploiting new quarries due to (1) the opposition of local people when the quarries are causing a lot of negative impacts on the environment and (2) most of the old quarries (with the expiry of the mining life) have not yet carried out the closing procedures mine as committed.

Thus, listed construction stone enterprises that own many quarries with long exploitation periods and large mining capacities will have many advantages compared to their competitors and will benefit mainly from Vietnam’s huge demand for infrastructure construction in FY22–30F.

"Listed stone companies that own high quality quarries at favourable locations will supply stone to LTIA, especially the Tan Cang and Thien Tan quarry cluster (owned by KSB, DHA, VLB and DND). "We believe this mega project will drive the earnings of construction stone companies in 2023–24," said Mr. Tran Ba Trung.