On Monday, the International Contractors Association of Korea said that Korean construction firms’aggregate new order wins from overseas markets during the first eight months of 2016 dropped 45% from a year earlier to $17 billion, the lowest level since 2009 during the global financial crisis.

The credit-negative decline in new overseas orders (see exhibit) will reduce Korean construction companies’ revenue, earnings and cash flow since overseas markets account for a significant portion of revenue and earnings. Overseas revenue for Korea’s largest construction company, Hyundai Engineering & Construction (unrated), accounted for 61% of its total revenue in 2015. In contrast, POSCO Engineering & construction’s (Baa3 review for downgrade) overseas business contributed 26% of its standalone revenue in 2015.

The immediate effect on the builders’ revenue and earnings is limited because most leading companies havesizable order backlogs that can cover two to three years of overseas revenue. However, we expect this unfavorable situation to persist and the effect to become more material over the next one to two years as the order backlog begins to shrink. In addition, the contraction in new orders likely will heighten price competition among contractors, which would undermine their profitability.

In response to the decline of overseas orders and given the rebound in domestic housing prices, Korean construction companies have expanded their domestic homebuilding business. The 10 largest builders plan to launch housing projects comprising about 170,000 units in the second half of this year, up 57% from 108,000 in the first half of the year. However, the increased housing supply could significantly increase unsold inventory over the next 12-18 months.

The decline in order wins is due partly to sluggish new order placements in the Middle East, which is the key overseas market for Korean builders. The low oil price environment has reduced these countries’ financial resources available to fund large scale infrastructure/plant projects.

Korean contractors’ new order wins in the Middle East decreased by 33% to $4.7 billion in first-half 2016 from $7.1 billion a year earlier, and by 81% from $24.7 billion in first-half 2014. New order wins in Asia also declined by 47% to $6.9 billion from a year earlier.

*Above is an article from “Moody’s Credit Outlook”, 18 August, 2016 issue.