"Even Paying Interest Is Difficult"... Construction Companies' Finances Worsen [Construction Financial Check①]

Analysis of Quarterly and Semiannual Reports of Construction Companies in Their 40s
Number of Companies with Interest Coverage Ratio Below 1 Increased from 9 to 14
'Highly Indebted and Struggling to Pay Interest' Companies Increased from 6 to 8
Number of Construction Companies with Debt Ratio Over 200% Decreased from 12 to 11 During the Same Period

This year, apartment prices in Seoul soared, but construction companies' finances have become even tighter. Although one might expect strong sales due to rising housing prices, in reality, companies struggled to secure profits due to increased construction costs and poor sales performance in provincial areas. As it became harder to make profits, more construction companies found themselves unable to afford interest payments on their loans.

Experts evaluated that "due to the sharp rise in construction costs from 2021 to 2022, construction companies reduced their sales, leading to a significant decline in financial profits this year." Since there is a 2-3 year gap between sales and move-in, the profit decline caused by past increases in construction costs was reflected this year. The trend of rising costs continues this year as well, making it difficult for construction companies to secure profits.

Among the top 40 construction companies, those with interest coverage ratio below 1 increased from 9 to 14

On the 7th, Asia Economy analyzed 29 of the top 40 construction companies that disclosed their semi-annual reports and found that 14 companies had an interest coverage ratio below 1 in the second quarter of this year (separate basis). This is 5 more than the previous quarter (9 companies). The interest coverage ratio is an indicator showing a company's ability to pay interest. It is calculated by dividing operating profit by interest expenses. Companies with an interest coverage ratio below 1 for three consecutive years are classified as 'marginal companies.'

Six companies saw their interest coverage ratio fall below 1 in the second quarter of this year: Daewoo Construction (2.18x → 0.92x), Hyundai Engineering (18.84x → -25.23x), Hanwha (3.86x → -0.41x), DL Construction (5.83x → -4.09x), KCC Construction (3.29x → 0.55x), and HJ Heavy Industries (1.26x → -4.19x). Only Lotte Construction improved its interest coverage ratio above 1 during the same period (0.84x → 1.75x).

Eight construction companies had interest expenses exceeding operating profits for both the first and second quarters this year. Except for SK Ecoplant (0.80x → 0.84x), GS Construction (0.57x → 0.60x), Kolon Global (0.11x → 0.01x), Kumho Construction (0.29x → -6.42x), Dongbu Construction (-3.86x → -8.26x), Hanshin Engineering & Construction (0.99x → 0.90x), Shinsegae Construction (-3.05x → -3.32x), and SGC E&C (0.14x → -0.13x) saw their ability to pay interest worsen.

As construction costs increased, construction companies' operating performance deteriorated. According to the Korea Institute of Civil Engineering and Building Technology, the Construction Cost Index in August reached 129.71 (provisional), up 30.36% from 99.35 in August 2020.

Park Cheol-han, a research fellow at the Korea Research Institute for Construction Industry's Economic Finance and Urban Research Office, said, "Construction costs rose most sharply between 2021 and 2022. The difficulty in achieving profitability for projects started during this period appears to have been reflected this year." The Construction Cost Index recorded 114.13 in August 2021 and 124.34 in August 2022.

Apartment pre-sale rates in provincial areas remain sluggish. According to the Housing & Urban Guarantee Corporation (HUG), as of the second quarter this year, initial pre-sale rates in provinces such as Busan (3.3%) and Gyeongnam (8.2%) have not improved, unlike the Seoul metropolitan area, which stands at 72.4%. Jeon Ji-hoon, a researcher at Korea Credit Rating's Corporate Evaluation Division, said, "Unlike Seoul, many provincial projects still have poor pre-sale rates," adding, "Construction companies with such projects will face increased financial burdens."

More debt and difficulty paying interest: construction companies increased from 6 to 8

Seoul apartment reconstruction site.
[Photo by Yonhap News]

More construction companies have increased debt despite lacking funds to pay interest. In the second quarter of this year, eight construction companies had an interest coverage ratio below 1 and a debt ratio exceeding 200%, two more than the previous quarter. Lotte Construction and Shinsegae Construction dropped out of this group, while Daewoo Construction, Hanwha, HJ Heavy Industries, and Dongbu Construction were added.

Daewoo Construction, Hanwha, and HJ Heavy Industries saw their interest coverage ratio fall below 1 during the same period, and Dongbu Construction's debt ratio exceeded 200%. Lotte Construction improved its interest coverage ratio above 1, and Shinsegae Construction reduced its debt ratio below 200%.

Among the 29 companies, 11 had debt ratios exceeding 200% in the second quarter, one fewer than the previous quarter. Daewoo Construction and GS Construction had debt more than twice their equity for two consecutive quarters. Shinsegae Construction and Hyosung Heavy Industries lowered their debt ratios below 200% in the second quarter, while Dongbu Construction's debt ratio rose above 200%.

Shinsegae Construction reduced its debt ratio from 723.3% in the first quarter to 147.7% in the second quarter of this year. This was not due to a sudden improvement in business viability. In May, the company issued KRW 650 billion in perpetual bonds (hybrid capital securities), increasing its capital and thereby lowering the debt ratio numerically. Perpetual bonds are classified as capital rather than debt in accounting. In contrast, Hyosung Heavy Industries' debt ratio only slightly decreased from 201.2% to 196.4% during the same period. Dongbu Construction's debt ratio rose from 177.7% to 217.8%.

Park Seon-gu, head of the Economic Finance Research Office at the Korea Construction Policy Research Institute, said, "Construction costs rose sharply around 2022, and failure to properly receive these costs became a financial risk factor this year," adding, "However, recently the rate of increase in construction costs has slowed, and contracts are being made recognizing some of the cost increases, so construction industry profits are expected to improve next year."