Three Consecutive Quarters of Profit
Operating Margin at 1.4% in Q3
Profitability Improvement Challenged by Bad Debt Risks
The risk of bad debt (loss) at Dongbu Construction has emerged as a major obstacle to securing next year's performance. Bad debt is increasing at sites where construction has been halted or sales performance is poor, making profitability improvement (operating margin) a key challenge going forward.
According to the Financial Supervisory Service's electronic disclosure system on December 31, Dongbu Construction recorded cumulative consolidated sales of 1.2349 trillion won in the third quarter of this year. This is a slight decrease compared to the same period last year (1.2721 trillion won). Operating profit reached 17.3 billion won, marking a profit for three consecutive quarters.
The cost ratio, considered a key indicator of profitability, also improved significantly. The cost ratio, which was 99.5% in the third quarter of last year, fell by 10.1 percentage points to 87.4% in the third quarter of this year. This was due to a significant decrease in the proportion of high-cost projects that began in 2022, when raw material prices surged.
New orders have also increased, raising expectations for improved performance. Dongbu Construction achieved a record-high order intake of 4.167 trillion won this year, the largest since its founding. Orders from urban redevelopment projects alone amounted to 735.1 billion won. The order backlog, which represents future work, stood at 12.0643 trillion won as of the third quarter, securing about seven years’ worth of work based on annual sales.
Profitability Remains Weak Despite Continued Surplus... Bad Debt Provisions Weigh Down Results
However, it remains difficult for the company to strengthen its fundamentals. Dongbu Construction's operating margin for the third quarter of this year was 1.4%, falling short of the construction industry average (about 3%). Although the company posted operating profits for three consecutive quarters, overall profitability improvement was limited due to the recognition of bad debt provisions for long-term uncollected receivables.
The increase in selling and administrative expenses (SG&A) is believed to have contributed to the weakening profitability. While cumulative sales for the third quarter decreased by 2.9% year-on-year, SG&A expenses rose from 86.7 billion won to 138.8 billion won, a 1.3-fold increase. The main reason was the rise in bad debt expenses. Cumulative bad debt expenses reflected in SG&A for the third quarter of this year amounted to 59.5 billion won. In comparison, cumulative bad debt expenses for the third quarter of last year were only 11.4 billion won. Bad debt expenses are recognized as losses for amounts among accounts receivable that are deemed difficult to collect, directly impacting operating profit. In the third quarter of this year, bad debt provisions were mainly recognized for receivables related to the Geumyang secondary battery project, the Gimpo Hangang logistics development project, and the Gimpo Hangang knowledge industry center, where collection of construction costs has been delayed.
The bad debt allowance ratio, which is set aside to prepare for collection uncertainty, also increased. The bad debt allowance ratio, which was 16% in the third quarter of last year, rose by 11.1 percentage points to 27.1% in the third quarter of this year. A higher bad debt allowance ratio indicates that the proportion of accounts receivable expected to be difficult to collect has increased among total accounts receivable.
Moreover, there are still a significant number of long-term uncollected receivables at project sites where construction has been halted or sales are poor, such as the Sejong City P4 project (4.8 billion won) and the Geumyang secondary battery project (17.4 billion won). The possibility of additional bad debt provisions cannot be ruled out.
The key to improving profitability will be how much the company can ease the financial burden caused by future bad debt provisions. Dongbu Construction stated that it plans to proactively manage bad debt risk to lay the foundation for mid- to long-term profitability improvement. A Dongbu Construction official said, "Although there was some disappointment as operating profit was partially adjusted due to the recognition of bad debt allowances in the third quarter, we confirmed the stability of our profit structure by maintaining a surplus. We believe that proactively addressing potential risks will have a positive effect on strengthening our mid- to long-term financial soundness."
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