Major Builders Squeeze Cost Ratios, First-Quarter Results Diverge [Real Estate AtoZ]

Performance Review of Top 5 Construction Companies

Improved Cost Ratios Lead to Higher Operating Profits Despite Lower Sales

While the sales of major domestic construction companies declined across the board in the first quarter of this year, their profitability management varied by company.

Some companies saw a decrease in profits due to various one-off expenses or unpaid receivables, while others improved profitability by recalculating their cost ratios. As the prolonged downturn in the sector has made it difficult to expand externally, detailed profitability management for individual projects or sites has become increasingly important. With high interest rates, the burden of project financing (PF), and the prospect of soaring raw material prices due to the protracted Middle East war, this trend is expected to continue for the time being.

According to first-quarter results released by each company on May 5, Daewoo Engineering & Construction recorded an operating profit of KRW 255.6 billion (on a consolidated basis; hereafter the same), up 69% from the same period last year. Even though its sales dropped by 6% to KRW 1.9514 trillion, profits increased significantly. This was attributed to recalculating the cost ratio for housing and building projects nearing completion, as well as one-off gains such as contract increases, which brought in an additional KRW 100 billion.

The cost ratio refers to the proportion of construction costs, such as materials and labor, to sales. In Daewoo Engineering & Construction's housing division, the cost ratio was 88.4% last year, but improved to 79.2% in the first quarter of this year. From a construction company's perspective, profitability tends to be higher for in-house projects that encompass both development and construction, rather than simple contracting; this factor was reflected in this year's first-quarter performance.

DL E&C posted an operating profit of KRW 157.4 billion in the first quarter, up 94% from the same period last year. Similarly, sales declined slightly, but profitability increased significantly due to an improved cost ratio. The company's housing division had a high cost ratio of 90.7% last year compared to its civil engineering and plant divisions, but this improved to 79.9% in the first quarter. The cost ratio for the civil engineering and plant divisions was 90.2%, similar to last year.

GS E&C posted an operating profit of KRW 73.5 billion in the first quarter, up 4% year-on-year. However, sales fell by more than 22% to KRW 2.4005 trillion. The decrease in scale was mainly due to a contraction in the architecture and housing divisions, resulting from a decline in presales and project starts over the past one to two years. Notably, the cost ratio for the plant division exceeded 124%.

Busy construction is underway at the Yongin Semiconductor Cluster General Industrial Complex construction site in Wonsam-myeon, Cheoin-gu, Yongin-si, Gyeonggi-do. Photo by Yonhap News Agency

In contrast, Samsung C&T recorded an operating profit of about KRW 111 billion in the first quarter, down around 30%, after reflecting provisions following a Supreme Court ruling on retirement allowance calculation standards. The company estimated that, had this not been reflected, the first-quarter operating margin would have been around 5.0%, better than the 4.4% recorded in the same period last year. By business segment, sales in the architecture division declined by KRW 484 billion, while the plant division saw an increase of KRW 363 billion.

Hyundai Engineering & Construction recorded an operating profit of KRW 180.9 billion in the first quarter, down 15% from the same period last year. Compared to last year, the cost ratio improved mainly in the plant division, but operating profit shrank as sales at subsidiaries Hyundai Engineering and in the housing business fell by 25% and 19%, respectively. An industry official commented, "Given the volatility in current conditions, companies are focusing less on expanding scale and instead maintaining a strategy of selective orders while prioritizing improvements in cost ratios through integrated purchasing and process optimization."

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