[Construction Industry Financial Check③] Kolon Global Strives to Reduce Interest Expenses but Sees No Effect

Kolon Global Q2 Debt Ratio at 503.5%
Operating Profit 300 Million KRW... Down 97.6% YoY
Interest Expense Reduction Attempts Yet Debt Continues to Rise

This year, Kolon Global's debt is snowballing due to sluggish business performance. The scale of long-term borrowings, which was less than 400 billion KRW at the end of last year, is expected to exceed 1 trillion KRW in the second half of this year. While the borrowing scale has increased, earnings have steadily declined, making it difficult to cover interest expenses. Although efforts have been made to reduce interest costs through lowering borrowing rates, it is analyzed that significant effects have not been seen. It is predicted that the success of sales in the second half of this year will be the key to financial improvement.

Debt Ratio at 503.5%... Increased Throughout the Year

According to the Financial Supervisory Service's electronic disclosure system (DART) on the 10th, Kolon Global's standalone debt ratio for the second quarter of this year is 503.5%. The debt ratio has steadily increased since the second quarter of last year.

Long-term borrowings have increased starting this year. Long-term borrowings, which were 386.2 billion KRW in the fourth quarter of last year, rose to 821.2 billion KRW in the first quarter and 916.2 billion KRW in the second quarter of this year. This figure excludes current portion of long-term borrowings due within one year.

As earnings declined, the company secured liquidity through borrowings. Kolon Global's operating profit in the second quarter of this year was only 300 million KRW, down from 2 billion KRW in the previous quarter. Compared to the operating loss of about 28.4 billion KRW in the fourth quarter of last year, the situation has improved. However, quarterly operating profits in previous years exceeded 10 billion KRW.

Operating profit sharply decreased due to rising cost of sales. The increase in construction costs had a significant impact. Cost of sales in the second quarter of this year recorded 736.1 billion KRW, an increase of over 90 billion KRW from 639.2 billion KRW in the previous quarter. Construction costs, which account for more than 85% of cost of sales, rose from 550.2 billion KRW to 631.8 billion KRW during the same period. Gross profit also decreased from 45.3 billion KRW in the first quarter to 38.2 billion KRW in the second quarter. Although sales increased from 684.6 billion KRW to 774.3 billion KRW during the same period, cost of sales rose more significantly.

Due to poor operating performance, cash flow from operating activities showed a net outflow of 155.9 billion KRW in the first half of this year. Accounts receivable, including construction receivables, increased from 466.9 billion KRW in the first quarter to 630.6 billion KRW in the second quarter, extending the accounts receivable collection period from approximately 227 days to about 259 days.

Efforts to Lower Interest Expenses Prove Ineffective

As debt increased amid poor performance, interest burden grew heavier. Interest expenses in the second quarter of this year were 28.6 billion KRW, showing an upward trend each quarter. As of the second quarter, Kolon Global's interest coverage ratio stands at 0.01 times, remaining below 1 for three consecutive quarters. This means the company cannot cover interest expenses with its earnings.

Given this situation, efforts to reduce interest expenses are underway. Kolon Global's long-term borrowing interest rates were generally lowered in the second quarter of this year. As of the second quarter, the total long-term borrowings including current portion amount to 999.2 billion KRW, of which interest rates were reduced on loans totaling 758 billion KRW. The interest rates on the remaining loans remained the same as the previous quarter.

Kolon Global also acquired projects to prevent the expansion of non-performing project financing (PF) businesses. The company purchased subordinated PF bonds worth 172.7 billion KRW for an apartment project in Daejeon. Due to construction delays, the developer's financial capacity was depleted. Facing increased interest expenses from guarantees on the project's loan principal and interest, Kolon Global decided to acquire the project.

An official from a securities firm said, "Kolon Global increased its debt to resolve liquidity issues, which caused the interest coverage ratio to decline." He added, "The sales and move-in performance in the second half of this year are crucial, but recently, only 44% of the supply units were sold in a complex in Ulsan. If this situation continues in the second half, it will be difficult for earnings to recover."