* Builders’ losses sound alarm on low-margin foreign
projects
* Overseas projects to hit earnings
* Samsung Eng has biggest overseas order backlog – analyst
* GS E&C; falls 44 pct this month, Samsung Eng loses 33 pct
By Hyunjoo Jin and Joyce Lee
SEOUL, April 22 (Reuters) – South Korean construction stocks
have lost almost 20 percent of their value this
month, falling to levels last seen four years ago, after huge
losses at two firms sparked widespread fears of overseas
projects going sour.
After the 2008 financial crisis, South Korean builders such
as Samsung Engineering Co Ltd and GS Engineering &
Construction Corp won a raft of foreign orders,
particularly in the Middle East.
Some of those contracts have turned into losers as fierce
competition has driven down prices, and inexperience in new
areas has meant extra costs. Some builders’ earnings are likely
to suffer as many large-scale but low-margin projects approach
completion this year and next, analysts say.
“There is a high chance of more bad news for builders… It
is risky to invest in South Korean builders until they show
sustained earnings improvements,” said Byun Seong-jin, an
analyst at Mirae Asset Securities.
“After peaking in 2009, the petrochemical/refinery plant
markets shrank as China lost momentum, forcing builders to make
lower-priced bids and venture into new areas,” he said.
Samsung Engineering, which recently posted its first
quarterly operating loss since 2003, has the biggest order
backlog of 5.5 trillion won ($4.92 billion), including
hydrocarbon plants in the Middle East and other low-margin
overseas business it secured between 2009 and 2012, according to
an April report by brokerage Korea Investment & Securities.
Earlier this month the engineering unit of South Korea’s
biggest conglomerate Samsung Group reported an operating loss of
219.8 billion won.
Samsung Engineering said its earnings were hurt by
additional costs of about 300 billion won in two projects
including one to build a chlor-alkali plant in the United States
for a joint venture between Dow Chemical Co and Mitsui &
Co by the end of this year.
Lack of understanding of business conditions in new markets
and risk arising from moving into new products resulted in big
cost increases in some projects, the firm said in a statement.
“Other projects are on track according to our plans. We
foresee no problems in reporting yearly profits of an estimated
350-400 billion won before taxes in 2013, as profitability
steadily recovers from the second quarter,” said Charley Choi, a
spokesman for Samsung Engineering.
CONSERVATISM VS. AGGRESSION
Across the sector, the decision to chase foreign orders that
have turned out to be unprofitable is expected to hurt bottom
lines in the coming quarters as they near completion.
“South Korean construction firms adopted low-cost,
aggressive order strategies in 2009, 2010, and 2011 to a lesser
extent,” said Heu Moon-wook, an analyst at KB Investment &
Securities. “As overseas projects on average take about three
years for completion, low-cost orders are expected to weigh on
earnings until the first half of 2014,” he said.
GS E&C; has an order backlog of 4.1 trillion won and Daelim
Industrial Co Ltd has 3.4 trillion won, according to
the report by Korea Investment & Securities.
Despite market expectations that it would make money, GS E&C;
said on April 10 that it had swung to an operating loss of 535.5
billion won in the first quarter from a year earlier, hit by
massive losses on its overseas projects. The biggest factor was
a loss of 405 billion won at two projects in the United Arab
Emirates, due for completion early next year.
GS E&C; estimated it will sustain about 800 billion won in
operating losses this year.
“The effect of low-priced projects that GS E&C; took on
between 2009 and 2010 are expected to last only until the first
half of 2014. Projects taken on since then have tended to better
conditions,” said Son Jaun, a spokesman for GS E&C.;
Shares in GS E&C; were down 44 percent in the past month as
of Friday, while Samsung Engineering has slumped 33 percent.
By contrast, their rival Daelim Industrial beat market
expectations with first-quarter operating profit of 124 billion
won, reaping the benefit of a more conservative approach which
shied away from risky orders, analysts said.
“We focused our efforts on relatively profitable power
plants in Southeast Asia, reducing dependence on hydrocarbon
plants in the Middle East where competition intensified. Rather
than recklessly venturing into new markets, we have focused on
products in which we have a track record,” the company said in a
statement.
A Daelim Industrial spokesman declined to comment further.
($1 = 1118.4500 Korean won)
(Editing by Daniel Magnowski)
