"Hyundai Family Construction Companies Also Face Court Receivership Due to Unsold Units... Struggling Local Small and Medium Construction Firms"

HN Inc, a mid-sized construction company with Cheong Dae-sun, the third generation of the Hyundai family, as the largest shareholder (81% stake), has filed for court receivership. Liquidity issues arose due to unsold units at their business site, and ultimately, they could not overcome this problem.

The local construction industry, where unsold units are rapidly increasing, appears to be in shock. With even a Hyundai family-backed construction company collapsing, concerns are emerging that the chain bankruptcy of local construction companies, already suffering from a severe real estate market slump, may become a reality.

HNIC, which filed for court receivership, is known to have suffered severe financial difficulties due to unsold units at Sokcho Heriot THE 228. The photo shows a bird's-eye view of Sokcho Heriot THE 228. [Photo by HNIC]

According to the construction industry on the 25th, HN Inc, which recently filed for corporate rehabilitation at the Seoul Bankruptcy Court, has been struggling with severe financial difficulties since the occurrence of unsold units at Sokcho Heriot THE 228 in Jangsa-dong, Sokcho City, Gangwon Province, which was launched in August last year (119 unsold units out of a total of 214 units).

HN Inc is a mid-sized construction company ranked 133rd in construction capability evaluation, with brands such as 'Sun & Ville' and 'Heriot.' According to the audit report registered in the Financial Supervisory Service's electronic disclosure system, its annual sales in 2021 were 283.7 billion KRW.

In the construction industry, following the bankruptcies of local mid-sized construction companies Woosuk Construction and Dongwon Construction Industry last year, and this year the court receivership applications by Daewoo Shipbuilding & Marine Engineering Construction ranked 83rd and HN Inc, the fear of a domino bankruptcy has become a reality, leaving the industry in a state of bewilderment.

Concerns are especially spreading among local small and medium-sized construction companies with severe unsold units. This is because out of 75,359 unsold houses nationwide (as of January), nearly 85%, or 63,102 units, are concentrated in local areas.

The atmosphere is not good either. Closures are already occurring one after another in the local small and medium construction industry. As of the 24th, 518 general and specialized construction companies have closed this year in local regions. About 60% of the 863 construction companies nationwide that have closed (excluding 19 withdrawals), including Seoul and the metropolitan area (Gyeonggi and Incheon), are located in local areas.

It was also analyzed that about 17% of local small and medium construction companies are marginal companies that cannot even pay interest with their annual operating profit. According to the Financial Stability Report released by the Bank of Korea on the 23rd, the proportion of marginal companies among local small and medium construction companies, whose operating profit for three consecutive years did not cover interest expenses, rose from 12.3% in 2021 to 16.7% last year. This is much higher than the 13.4% for small and medium construction companies in Seoul and the metropolitan area and 9.4% for large construction companies.

The proportion of financially distressed companies among local small and medium construction companies, with a probability of bankruptcy exceeding 5% within one year, also increased from 11.4% in 2021 to 12.8% last year. For small and medium construction companies and large construction companies in Seoul and the metropolitan area, this ratio was only 11.1% and 5.5%, respectively.

A representative of a mid-sized construction company in Daegu said, “If even a Hyundai family-backed construction company, rich in connections and financial power, goes bankrupt due to liquidity problems caused by unsold units, what about the local construction companies where unsold units are piling up?” and added, “There are widespread rumors in the industry that several construction companies have already reached their limit.”