Rising Costs and Unpaid Payments... Construction Companies Face a 'Dark Period' in Q4

Construction Companies' Operating Profits Significantly Decline, Some Report Losses
Market Expectations Missed, Outlook for This Year Remains Uncertain

Due to rising raw material prices and labor costs, concerns over the inability to collect payments for apartment construction in provincial areas, and overseas litigation expenses, the major construction companies' performance in the fourth quarter of last year noticeably declined. As a result, last year's operating profit also fell short of market expectations. This dark period is expected to continue this year, leading construction companies to uniformly lower their sales and order targets.

Construction Companies' Performance Falls Short of Expectations

The operating profits of major construction companies announced by the 31st of last month significantly decreased in the fourth quarter of last year. Hyundai Construction's fourth-quarter operating profit was only 145 billion KRW, a 40% decrease compared to the third quarter (244 billion KRW). This was due to the preemptive reflection of 50 billion KRW in costs related to litigation over construction cost settlements filed by partners in the Lusail Plaza project in Qatar.

Construction costs also rose sharply amid high inflation. Researcher Park Sera from Shin Young Securities analyzed, "The cost ratio increased at construction and housing sites, resulting in poor profitability compared to sales growth, which explains why the fourth-quarter performance fell short of expectations." Consequently, Hyundai Construction's operating profit for the entire last year (785.4 billion KRW) remained 6.57% below the securities firms' consensus as of December last year.

Daewoo Construction set aside a bad debt allowance of 110 billion KRW due to difficulties in collecting payments for multiple apartment construction projects in provincial areas. This led to poor fourth-quarter results. A Daewoo Construction official explained, "We conservatively preemptively reflected losses in anticipation of poor sales performance for apartments sold after construction in provincial areas." Daewoo Construction's fourth-quarter operating profit was 77.9 billion KRW, less than half of the third quarter's 190.2 billion KRW. The company's total operating profit last year was 662.5 billion KRW, 14.5% below the securities industry's consensus.

Cost burdens also pressured Daewoo Construction's performance. The company stated, "The cost ratio burden in the housing construction sector continues," explaining that the cost ratio (cost relative to sales) in the housing construction sector rose to 92.5% in the fourth quarter of last year. The Korea Institute of Civil Engineering and Building Technology reported that the construction cost index for 'residential buildings' reached 152.47 (based on 2015 = 100) as of December last year. Compared to December 2020 (121.62), three years ago, this represents an increase of about 25%.

GS Construction recorded an operating loss of 388.5 billion KRW, far exceeding the securities industry's expected loss of 131.7 billion KRW. The operating loss in the fourth quarter alone was 193.7 billion KRW. A GS Construction official stated, "Temporary costs related to the Geomdan apartment accident were reflected, and additional costs were incurred for quality improvement and safety inspections."

This Year Will Be Even Harder... Targets Lowered

Construction companies have taken a conservative approach to this year's market outlook, expecting a bleak scenario. Hyundai Construction forecasts new orders of 29 trillion KRW and sales of 29.7 trillion KRW this year. Orders are lower than last year, while sales are expected to be similar. Daewoo Construction also set targets of 10.4 trillion KRW in sales and 11.5 trillion KRW in new orders, both below last year's performance.

A construction industry official said, "Looking at the domestic housing market alone, this year will be tougher than last year," adding, "After the general election in April, the project financing (PF) defaults, which have been festering due to high interest rates and inflation, will fully emerge, and the real estate market is expected to decline further compared to now, which is the industry's sentiment."

This content was produced with the assistance of AI translation services.