Lower-priced deals to strain Korean builders

By 김영원
  • Published : May 9, 2013 - 19:53
  • Updated : May 9, 2013 - 19:53

Korean construction companies are likely to be hurt by lower-priced deals they clinched in the Middle East in recent years, analysts said.

The builders bagged a combined $112.5 billion worth orders in the Middle East between 2009 and 2011, according to data compiled by the International Contractors Association of Korea and financial companies.

The move came as the builders sought to win orders in overseas markets following the 2008 global financial crisis that dealt a heavy blow to the local construction market.

For decades, oil-rich Middle Eastern countries have been the largest market for Korean builders.

Still, some South Korean builders clinched lower-priced deals overseas in the Middle East during the cited period due to heated competition among their local rivals. The low-priced deals could cut into the bottom line of the builders this year and next year, according to analysts.

Byun Seong-jin and Kim Jung-hwoan, both analysts at Mirae Asset Securities, said the uncertainties surrounding earnings estimates for Korean builders should continue through 2014, noting most of the Middle Eastern projects received between 2009 and 2011 are slated to be completed by 2014.

"We believe that a 1 percent rise in the expected average cost ratio for the Middle East projects would drive down four (major) companies' combined operating profits by 465 billion won (US$428 million)," Byun and Kim said in an English language report posted on the Web site of FnGuide, an online financial information provider.

They also said they "remain conservative on the constructor sector," noting most of the Middle Eastern projects won by South Korea's four major builders in 2009-2011 are expected to be completed between 2013 and 2014.

The assessment comes weeks after two major South Korean builders posted net losses.

GS Engineering & Construction, Korea's fourth-largest builder, said last month its net loss reached 386 billion won in the first three months through March 31, a sharp decline from a profit of 74.6 billion won a year earlier.

Samsung Engineering, one of Korea's largest industrial plant builders, said its net loss reached 180.4 billion won during the cited period, a sharp decline from a profit of 144.4 billion won a year earlier.

Meanwhile, domestic orders won by South Korean builders totaled 16.5 trillion won in the January-March period, down from 25.4 trillion a year earlier, according to the Construction Association of Korea.

The association expressed hope that the frontloading of an extra budget will help revitalize the real estate market in a country where many people are unwilling to buy homes out of concern that housing prices could drop further amid a prolonged property market slump.

The National Assembly passed a 17.3 trillion won supplementary budget bill earlier this week to try to jump-start the economy that has been losing steam in the face of tough economic conditions at home and abroad. (Yonhap News)