Home construction retailers continued to build market share through aggressive expansion, but profitability (especially DOHOME’s earnings) could be squeezed by falling steel prices in 2H22. We have HOLD calls on DOHOME and GLOBAL, but our Home Construction Retail pick is now GLOBAL for its relatively better ability to manage margin and clearer profit recovery profile.
Falling steel prices will squeeze DOHOME hard
We have cut our DOHOME profit forecasts by 26% for 2022, 22% for 2023, and 16% for 2024, due to diminished expectations for steel product margins (Figure 1-2). Although we still expect DOHOME to build market share and assume SSSG of 12.5% this year, 10% in 2023, and 10% in 2024, earnings visibility is poor, as big proportions of its sales are steel products and slim-margin wholesale transactions. In 2H22, assuming 100-120 days of steel inventories and seasonally slow demand, DOHOME must deal with fast-falling steel prices by cutting sales prices. Looking forward, we expect its margins to be driven by steel prices and wholesale transactions, so they are likely to be slim.