Construction Companies Accumulate More Cash to Prepare for Uncertainty

[Asia Economy Reporter Yoo In-ho] It has been revealed that major domestic construction companies have increased their cash holdings in preparation for uncertainty.

Amid concerns that the construction industry downturn will be prolonged due to the novel coronavirus infection (COVID-19) and the government's strengthened real estate regulations, construction companies are expected to continue adopting more conservative financial strategies.

According to the business reports submitted by construction companies to the Financial Supervisory Service on the 8th, Hyundai Construction's cash and cash equivalents last year amounted to 2.586 trillion KRW. This is an increase of 344.8 billion KRW (15.4%) from 2.2412 trillion KRW in 2018. It is the highest level in the past three years.

Accordingly, net borrowings also drastically decreased. It shrank by 98% from 165.5 billion KRW a year ago to 3 billion KRW. The net borrowings to equity ratio dropped by 1.97 percentage points from 2% to 0.03%. This effectively made the company debt-free.

Daelim Industrial's cash holdings also increased by 19.9%, from 2.1345 trillion KRW to 2.5592 trillion KRW during the same period. Daelim's increase in both amount and rate was the highest among the top five construction companies. Net borrowings decreased by about 95%, from 524.9 billion KRW to 27.4 billion KRW.

GS Construction recorded 1.793 trillion KRW, a 12.6% increase during the same period. Daewoo Construction also rose by 7.2% to 756.7 billion KRW.

The industry interprets that major construction companies, facing uncertainty in the real estate market outlook due to the government's strong regulations, have chosen to stockpile a significant portion of their net profits instead of reinvesting them. Among the top five construction companies, except Samsung C&T, four companies converted nearly half of their combined net profit of 2.0981 trillion KRW in 2018 into cash assets, amounting to 1.0207 trillion KRW.

This increase in cash holdings is analyzed as a measure to secure financial soundness for expanding new investments. An executive from Company A said, "As the housing business environment has deteriorated due to government regulations, we are focusing on diversifying our business areas," adding, "To do this, securing financial soundness must come first."

However, concerns have also been raised that it has become difficult for each company to recklessly release the cash they have accumulated as the COVID-19 situation prolongs.

In fact, the amount of corporate bonds that construction companies need to cover this year is considerable. The amount of construction company bonds maturing within the year reaches 1.3 trillion KRW. Hyundai Construction and Hyundai Engineering have corporate bonds worth 200 billion KRW maturing this month alone. Daelim Industrial and Samsung C&T need to cover 300 billion KRW and 205 billion KRW, respectively.

An industry insider said, "Due to the unexpected COVID-19 situation, construction companies have no choice but to shift to a strategy of preservation rather than investment," and added, "It is expected that construction companies will postpone investments rather than recklessly injecting funds into new businesses."