일반산업
Current Conditions and Forecasts for Domestic Construction Industry After Corporate Restructuring
2010-10-19LEE, In-Hyuk
목차
요약
Evaluation over Corporate Restructuring of Construction Industry
There were three rounds of preemptive corporate restructuring led by the government
for the last two years since the financial crisis
As a result of three rounds of preemptive restructuring between 2009 and 2010, 12 out of top 300 construction companies were bankrupt (D grade) and 33 were put in a workout program (C grade)
According to the results, all D grade companies are small- to mid-sized construction
companies. The number of companies to face restructuring is smaller than expected and they do not include a large one. For these reasons, it is pointed out that the evaluation fell short of expectation
Compared to the slowdown level of the construction market, the level of corporate
restructuring was not enough
Since large companies have favorable financial structure with off-balance sheet effects through PF payment guarantee, risks that each of them faced are not big. However, housing market conditions such as unsold housing stocks, housing supply rate and housing prices have been worse than in 2000
when corporate restructuring took place
Uncertainties surrounding the construction industry have been eased and industrial risks have not spread into financial and economic sectors. As such, the industry benefited from preemptive restructuring. However, considering that the housing market is in its early stage of a structural change, this corporate restructuring may be not an end but a beginning
Forecasts for Housing Division
Accumulation of unsold housings has continuously slowed down the housing market
and liquidity risks resulting from unoccupied houses still exist
Although unsold houses have gradually decreased with discount sales and a shift into leasing, problems with unoccupied houses have not been resolved with a slowdown in housing transactions and a drop in housing demand. Under these circumstances, approximately 150,000 apartments will be newly occupied nationwide by March 2011
Accordingly, construction companies face different risks caused by a slowdown in the housing market such as a risk in operating cash flow, a risk in financial strength resulting from increased external borrowing and subrogation payment risks of PF contingent liability for which joint and several guarantee is pledged upon bankruptcy of a developer
Bipolarization between large companies and SMEs in terms of housing projects will be deeper
Construction companies have minimized their own projects and subcontracting and have proceeded with housing projects with focus on improvement projects in Seoul and the metropolitan area with low risks for fear of unoccupied houses and PF contingent liability due to unclear forecasts for the housing market. Such improvement projects are monopolized by a small number of large construction companies with high brand awareness and strong financing abilities
More houses will be provided by the public sector with the Bogeum Jari Housing and
construction of the 2nd New Town. However, the government announced its plan to adjust housing supply with the August 29th Policy. Accordingly, if the private sector in the market is able to absorb standby demands of mid-income class and working class that have delayed housing purchase until houses are provided though the Bogeum Jari Housing, the private housing market will improve
Forecasts for Overseas Project Division
Overseas construction contracts are on the rise with an increase in investment of oil
producing nations in the Middle East in infrastructure and plant construction contracts
with inflow of oil money
The amount of overseas construction contracts executed by Korean companies have increased 45.6% on average on an annual basis for the past five years: US$ 47.6 billion in 2008 and US$ 49.1 billion in 2009, posting a record high every year. If oil prices are maintained, the amount will break the record of US$ 60 billion this year
Considering global construction market amounting to over US$ 6 trillion as of 2009 and an estimated 5% of annual growth rate and improving competitiveness of domestic construction companies on winning orders, external and profit contributions of Korea's MS and overseas project divisions will gradually increase
Due to concerns over tougher competition on winning orders in the Middle East
caused by Europe's countermeasures and China's advance into the market, domestic
companies need to diversity overseas projects
China is accumulating experiences by having significant influence mainly in Africa with its government's financial support and actively participating in civil engineering and SOC projects. It is likely to advance into the Iranian construction market on which economic sanction has been imposed
As orders for construction have fallen off in the region due to the financial crisis and
economic recession, European companies with its price competitiveness resulting from weak euro are actively trying to win orders for construction in the Middle East where domestic construction companies are key players
Domestic construction companies need to advance into non-Middle Easter states instead of Middle Eastern nations which are highly sensitive to oil prices
Forecasts for Public Civil Engineering Project Division
Favorable conditions for investment in civil engineering projects with increased public
investment in key projects like the Four Rivers Project continue
With a slowdown in public order growth, orders for civil engineer have sharply dropped. However, the amount of orders received for civil engineering in 2010 1H hit the record high in ten years except that for 1H of the previous year and the volume of such orders remains favorable
Since budge will be executed between 2010 and 2011, the amount to be received through the execution of civil engineering projects will be on the rise
The Four Rivers Project leads to a boom in the civil engineering market
It would be favorable that construction companies facing liquidity problems caused by an increase in unsold houses reduce the total fixed cost and improve cash flow by winning more orders because a boom in the public civil engineering market guarantees stable contract payment. However, as tougher competition on winning orders droves down bid price rate, profitability is likely to decrease
Since a large number of bidding for the Four River Project is in the form of turnkey contracts, large companies with advantages in terms of sales skills, financing abilities and project execution experiences will first benefit from the Four River Project
However, as the government encourages SMEs by diversifying contract delivery methods and increases participation of local companies located close to a site, local construction companies will be able to win some orders
Conclusion and Implications
Overseas projects and public projects have led the construction market, but large
construction companies enjoy most benefits
Housing projects will focus on improvement projects and house supply by the public sector. Despite a bright forecasts for winning orders for overseas projects, tough competition between domestic and foreign companies are likely. Winning orders for public civil engineering projects will help improve liquidity, not profitability
Overseas projects and public projects will lead the construction market for the time being. While large construction companies will enjoy most benefits, SMEs are likely to be marginalized
Due to deeper bipolarization between large companies and SMEs, SMEs should seek
'strategies for the future survival'
Since most D grade companies are small- to mid-sized construction companies, their sales environment is getting worse and bipolarization between large companies and SMEs in the domestic construction market will be deeper
With their lower credit ratings, weaker financing abilities and less civil engineering experiences, it is hard for SMEs to win the government's favorable turnkey projects. Since they do not have other construction branches, it is impossible to stably win construction projects from a parent company and expect financial flexibility between a parent company and affiliates
SMEs that have survived corporate restructuring, especially those with high dependence on housing projects, should secure liquidity through sales and financial activities in the short term and diversify business portfolio in the long term
There were three rounds of preemptive corporate restructuring led by the government
for the last two years since the financial crisis
As a result of three rounds of preemptive restructuring between 2009 and 2010, 12 out of top 300 construction companies were bankrupt (D grade) and 33 were put in a workout program (C grade)
According to the results, all D grade companies are small- to mid-sized construction
companies. The number of companies to face restructuring is smaller than expected and they do not include a large one. For these reasons, it is pointed out that the evaluation fell short of expectation
Compared to the slowdown level of the construction market, the level of corporate
restructuring was not enough
Since large companies have favorable financial structure with off-balance sheet effects through PF payment guarantee, risks that each of them faced are not big. However, housing market conditions such as unsold housing stocks, housing supply rate and housing prices have been worse than in 2000
when corporate restructuring took place
Uncertainties surrounding the construction industry have been eased and industrial risks have not spread into financial and economic sectors. As such, the industry benefited from preemptive restructuring. However, considering that the housing market is in its early stage of a structural change, this corporate restructuring may be not an end but a beginning
Forecasts for Housing Division
Accumulation of unsold housings has continuously slowed down the housing market
and liquidity risks resulting from unoccupied houses still exist
Although unsold houses have gradually decreased with discount sales and a shift into leasing, problems with unoccupied houses have not been resolved with a slowdown in housing transactions and a drop in housing demand. Under these circumstances, approximately 150,000 apartments will be newly occupied nationwide by March 2011
Accordingly, construction companies face different risks caused by a slowdown in the housing market such as a risk in operating cash flow, a risk in financial strength resulting from increased external borrowing and subrogation payment risks of PF contingent liability for which joint and several guarantee is pledged upon bankruptcy of a developer
Bipolarization between large companies and SMEs in terms of housing projects will be deeper
Construction companies have minimized their own projects and subcontracting and have proceeded with housing projects with focus on improvement projects in Seoul and the metropolitan area with low risks for fear of unoccupied houses and PF contingent liability due to unclear forecasts for the housing market. Such improvement projects are monopolized by a small number of large construction companies with high brand awareness and strong financing abilities
More houses will be provided by the public sector with the Bogeum Jari Housing and
construction of the 2nd New Town. However, the government announced its plan to adjust housing supply with the August 29th Policy. Accordingly, if the private sector in the market is able to absorb standby demands of mid-income class and working class that have delayed housing purchase until houses are provided though the Bogeum Jari Housing, the private housing market will improve
Forecasts for Overseas Project Division
Overseas construction contracts are on the rise with an increase in investment of oil
producing nations in the Middle East in infrastructure and plant construction contracts
with inflow of oil money
The amount of overseas construction contracts executed by Korean companies have increased 45.6% on average on an annual basis for the past five years: US$ 47.6 billion in 2008 and US$ 49.1 billion in 2009, posting a record high every year. If oil prices are maintained, the amount will break the record of US$ 60 billion this year
Considering global construction market amounting to over US$ 6 trillion as of 2009 and an estimated 5% of annual growth rate and improving competitiveness of domestic construction companies on winning orders, external and profit contributions of Korea's MS and overseas project divisions will gradually increase
Due to concerns over tougher competition on winning orders in the Middle East
caused by Europe's countermeasures and China's advance into the market, domestic
companies need to diversity overseas projects
China is accumulating experiences by having significant influence mainly in Africa with its government's financial support and actively participating in civil engineering and SOC projects. It is likely to advance into the Iranian construction market on which economic sanction has been imposed
As orders for construction have fallen off in the region due to the financial crisis and
economic recession, European companies with its price competitiveness resulting from weak euro are actively trying to win orders for construction in the Middle East where domestic construction companies are key players
Domestic construction companies need to advance into non-Middle Easter states instead of Middle Eastern nations which are highly sensitive to oil prices
Forecasts for Public Civil Engineering Project Division
Favorable conditions for investment in civil engineering projects with increased public
investment in key projects like the Four Rivers Project continue
With a slowdown in public order growth, orders for civil engineer have sharply dropped. However, the amount of orders received for civil engineering in 2010 1H hit the record high in ten years except that for 1H of the previous year and the volume of such orders remains favorable
Since budge will be executed between 2010 and 2011, the amount to be received through the execution of civil engineering projects will be on the rise
The Four Rivers Project leads to a boom in the civil engineering market
It would be favorable that construction companies facing liquidity problems caused by an increase in unsold houses reduce the total fixed cost and improve cash flow by winning more orders because a boom in the public civil engineering market guarantees stable contract payment. However, as tougher competition on winning orders droves down bid price rate, profitability is likely to decrease
Since a large number of bidding for the Four River Project is in the form of turnkey contracts, large companies with advantages in terms of sales skills, financing abilities and project execution experiences will first benefit from the Four River Project
However, as the government encourages SMEs by diversifying contract delivery methods and increases participation of local companies located close to a site, local construction companies will be able to win some orders
Conclusion and Implications
Overseas projects and public projects have led the construction market, but large
construction companies enjoy most benefits
Housing projects will focus on improvement projects and house supply by the public sector. Despite a bright forecasts for winning orders for overseas projects, tough competition between domestic and foreign companies are likely. Winning orders for public civil engineering projects will help improve liquidity, not profitability
Overseas projects and public projects will lead the construction market for the time being. While large construction companies will enjoy most benefits, SMEs are likely to be marginalized
Due to deeper bipolarization between large companies and SMEs, SMEs should seek
'strategies for the future survival'
Since most D grade companies are small- to mid-sized construction companies, their sales environment is getting worse and bipolarization between large companies and SMEs in the domestic construction market will be deeper
With their lower credit ratings, weaker financing abilities and less civil engineering experiences, it is hard for SMEs to win the government's favorable turnkey projects. Since they do not have other construction branches, it is impossible to stably win construction projects from a parent company and expect financial flexibility between a parent company and affiliates
SMEs that have survived corporate restructuring, especially those with high dependence on housing projects, should secure liquidity through sales and financial activities in the short term and diversify business portfolio in the long term
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