What is the outlook for Vietnam’s construction sector?

The growth of the civil construction industry is cyclical and highly correlated with the growth of commercial real estate supply. Photo: Quoc Tuan

The growth of the civil construction industry is cyclical and highly correlated with the growth of commercial real estate supply. Accordingly, Mr. Lam Viet, BSC’s analyst, believes that the construction sector will recover strongly thanks to (1) real estate supply recovering from COVID-19 due to projects that can’t be implemented in 2020-2021 and (2) strong infrastructure investment to promote the growth of commercial real estate and civil construction as in the period of 2014-2015.

The high backlog value of construction companies is set up by (1) the value of new contracts signed in 2021 has recovered and (2) the epidemic in 2021 has disrupted construction work and most of the contract value is delayed to 2022. "The current spike in backlog value is mostly due to the delay of construction projects in 2020 and 2021." Therefore, the progress of signing new contracts still needs to be further monitored in addition to the implementation of projects", Mr. Lam Viet noted.

Although newly signed construction contracts have added to the contractor's protection clause against price fluctuations in building materials, given the major fluctuations in the macro economy and the world commodity market, Mr. Lam Viet takes a cautious view of the LNG margins of construction enterprises. Steel prices have increased seven times since the beginning of the year, with growth of about 10% for galvanized steel, 20% for construction steel, and 10% for cement. In addition to the rising cost of building materials, the provision of pending receivables will also be a factor in reducing the profits, which are already thin, of construction companies.

Most of the high backlog value of construction companies comes from contracts signed by the end of 2021. According to BSC’s assessment, there is a delay between signing the contract and starting construction because the epidemic in the two years 2020-2021 also disrupted other procedures of real estate projects, such as land clearance, legal framework…

In early 2022, the government approved the largest economic package ever of VND 347,000 billion focused on disbursement in 2022-2023, of which nearly VND 113,850 billion (1/3 of the package) will be spent on infrastructure development. Infrastructure construction enterprises benefit from this public investment program.

As the price of construction materials rises, infrastructure projects are facing difficulties. Although, key projects, especially highways in the South (Binh Thuan, Dong Nai, Binh Duong) are still prioritized by the government and facilitated by the government to be completed on schedule, such as HCM-Long Thanh-Dau Giay highway, Vinh Hao – Phan Thiet, Phan Thiet – Dau Giay.

"We recognize the government's intervention to implement lower-level investment when (1) monitoring weak contractors and those who are behind schedule; (2) supervising the disbursement of public investment in localities; and (3) timely offering appropriate implementation solutions," said Mr. Lam Viet.

BSC lowered its recommendation from outperform to neutral for the construction sector despite positive revenue growth because of (1) higher construction material costs; (2) the risk of provisions for pending receivable debts will affect the profitability of construction enterprises.