Dismal report for builder firms in Q1

The construction industry is in shock.

The first quarter performance of major construction firms, including GS E&C, which previously posted solid growth largely thanks to overseas orders even when the local market showed no signs of life, is expected to be dismal.

According to FnGuide, a stock information company, the operating profits of eight major construction companies between January and March are estimated to be 197.7 billion won ($175 million).

This is a 75.2 percent plunge compared to a year earlier. In the first three months of last year the combined operating profits were 798.7 billion won.

The eight major construction companies are Hyundai E&C, Samsung C&T, Daelim Industrial, Hyundai Development, Doosan E&C, GS E&C, Samsung Engineering and Daewoo E&C.

On Wednesday, the market went into crisis mode when GS E&C, which was the first among the eight companies, announced its first quarter performance.

Contrary to a year ago, when it was posting profits, in the first quarter of this year GS E&C reported an operating loss of 535 billion won. Its net profit also resulted in a loss of 386 billion won.

The company predicts a 674 billion won loss in the first half and 124.4 billion won loss in the second half. As a result, the stock value of GS E&C on Thursday and Friday fell at its daily limits, closing the week at 35,700 won, a nearly 30 percent drop from the 49,800 won the shares closed at last Monday.

GS E&C’s disappointing results also affected the shares of other companies, including Hyundai E&C, Samsung C&T and Daelim Industrial, which fell between 1.5 percent and 3 percent.

Other major construction companies are expected to suffer similar fates, including Hyundai Development. Although Hyundai Development is unlikely to post a loss on its operating profit in the first quarter, it is expected to shrink nearly 30 percent on-year.

Doosan E&C expects a similar fate, with its operating profit down 20 percent. Samsung Engineering and Daewoo E&C are likely to see a 13 percent and 11 percent decline in their profits.

Only three of the eight are expected to post an increase on their operating profit and net profit.

Samsung C&T is projected to post the biggest increase on its operating profit from a year earlier by expanding 42 percent.

The nation’s leading construction firm Hyundai E&C is expected to follow with a 24-percent increase, while Daelim Industrial is expected to post a 12 percent increase in its operating profit.

Although the struggling domestic construction market that has been in the doldrums since the global crisis in late 2008 is partly to blame, industry experts say for major construction companies, including GS E&C, the primary cause this time was the profit-easing competition among such large construction companies on overseas orders.

They said the Korean construction companies were fiercely competing with one another to win overseas orders that they were offered at an extremely low price.

“The falling operating profits [of major construction companies] are unlikely to improve this year,” said a Hanwha Securities analyst. “We expect an adjustment on the cost rate as the overseas orders that have been excessively sought between 2010 and 2011 are near completion.”

Another analyst noted the GS E&C earning shock has shaken the market’s faith on overseas orders, which are the primary source for large companies to weather the struggling domestic construction market.

However, some analysts are not too pessimistic. They believe the situation will likely turn around in the second quarter.

“As orders are persistently coming in we expect the situation to improve in the second quarter,” said Lee Kwang-soo, an HMC Investment & Securities analyst.

Others note the government’s 17 trillion won supplementary budget will play a significant role in boosting the construction market.

The supplementary budget is expected to go before the National Assembly for approval tomorrow after it undergoes a final review at a cabinet meeting earlier in the day.

By Lee Ho-jeong [ojlee82@joongang.co.kr]