[Wealth Succession] Yushin① Owner's Building Purchase Increases Borrowings... Expanding Cost Burden

Interest Expenses Exceeding Rent
Liquidity Decline Due to Cash Outflow

Civil engineering company Yushin has significantly increased its borrowings after purchasing the building owned by Chairman Jeon Gyeong-su and his family. As a result, it is expected to pay more interest than the previous rental fees for using the building.

According to the Financial Supervisory Service's electronic disclosure system on the 5th, Yushin acquired a 60% stake in the land and building of the Yushin Building located in Gangnam-gu, Seoul, from Chairman Jeon Gyeong-su and his family for 56.3 billion KRW in March. This amount corresponds to about 25% of Yushin's total assets.

According to the valuation report, the total value of the Yushin Building's land and building was appraised at 93.8 billion KRW. The value was assessed by two appraisal firms based on nearby real estate transaction prices, and the average was calculated. Sixty percent of the total value was estimated at 56.3 billion KRW.

The Yushin Building was established by the late Jeon Geung-ryeol, the founder of Yushin, who purchased the land in 1982. It was inherited by Chairman Jeon Gyeong-su and his family in 2018. Currently, Yushin uses the entire building.

Yushin purchased the 60% stake in the Yushin Building entirely in cash. Excluding the existing rental deposit of 5.8 billion KRW, 50.5 billion KRW was paid in cash to the former chairman and others. It is analyzed that Yushin liquidated short-term financial products and increased short-term borrowings to raise the cash. As of the end of the first half of this year, Yushin's short-term financial products decreased by 15.3 billion KRW compared to the end of last year, while short-term borrowings increased by 32.2 billion KRW.

The interest rate on short-term borrowings is 5.98%. The annual interest on the increased short-term borrowings alone is about 1.9 billion KRW. This amount exceeds the total interest expenses of 1.1 billion KRW that Yushin paid last year. Without any adjustment to the interest on borrowings, Yushin's interest expenses this year are estimated to triple compared to last year.

In particular, Yushin is expected to spend more on interest expenses than the rental fees it has paid so far for using the building. Until last year, Yushin paid about 510 million KRW annually in rent to the former chairman and others. Considering the deposit was 10 billion KRW and estimating an opportunity cost of about 5%, the rental fee was around 1 billion KRW.

However, considering the interest expense of 1.9 billion KRW due to short-term borrowings and the interest income that could have been earned from short-term financial products at around 5%, it is estimated that about 2.7 billion KRW will be spent annually. This means purchasing the building was not a more efficient choice than renting.

Such an increase in non-operating expenses negatively affects Yushin's performance. Last year, Yushin recorded sales of 341.1 billion KRW and a net profit of 20.1 billion KRW, with a net profit margin of about 5.9%. Considering the decrease in interest income and the rise in interest expenses this year, the net profit margin is likely to decline.

Additionally, the increase in borrowings has slightly worsened the financial structure. Yushin's net borrowings, calculated by subtracting cash equivalents from total borrowings, stood at 19.2 billion KRW as of the end of the first half of this year. Until the end of last year, cash equivalents exceeded liabilities, resulting in negative net borrowings, but this changed starting this year. Furthermore, over 97% of short-term financial products are pledged as collateral for borrowings, further reducing liquidity.

Regarding this, a Yushin official stated, "Short-term borrowings are used not only for the building purchase cost but also for operating fund procurement," adding, "There are also future investment plans."

Meanwhile, established in 1966, Yushin is a construction company engaged in roads, airports, railroads, structures, urban planning, supervision, and other design projects. It covers all areas of construction projects except construction itself, including feasibility studies, design, and supervision across all engineering fields.