South Korean construction companies invested in by Middle Eastern sovereign wealth funds around the same time have shown starkly different business performance, attracting attention. A strategic investor, which became a wholly owned subsidiary, had a synergy with winning overseas projects, while a financial investor, which acquired some portions of shares, saw its stock prices fall by more than half.
According to investment banking industry sources on May 8, Ssangyong Engineering & Construction Co., which has become a wholly owned subsidiary of the Investment Corporation of Dubai (ICD) after its 94 percent stake was acquired by the local sovereign wealth fund in January 2015, succeeded in making a turnaround. The company has been in the black in three years since it was on the verge of bankruptcy at the end of 2014 when its largest shareholder, the Military Mutual Aid Association, and the rest of shareholders, including Woori Bank, failed to reach an agreement on the self-rescue plan.
Ssangyong E&C saw its sales last year slightly decrease to 862.5 billion won (US$761.39 million) compared to three years before the acquisition, but its operating profit back swing back into the black to 28.4 billion won (US$25.07 million). The increase in profits was largely due to effective cooperation between the ICD and Ssangyong E&C. An official from Ssangyong E&C said, “There is no construction firm that can work on mega projects in Dubai. So, the ICD wanted to create a virtuous circle carrying out its own projects through Ssangyong E&C.” The ICD places its orders worth 22 trillion won (US$19.42 billion) a year. Ssangyong E&C won 1.9 trillion won (US$1.68 billion) worth of construction projects in December 2015, such as Dubai Royal Atlantis Hotel and Palm Gateway apartment complex.
On the other hand, POSCO Engineering & Construction Co. is struggling as the value of its equity have dropped by half after Saudi Arabia's sovereign wealth fund invested in the company. Saudi Arabia's sovereign wealth fund made a 1.24 trillion won (US$1.09 billion) investment in POSCO E&C to acquire a 38 percent stake in June 2015. POSCO E&C, an unlisted company, was expected to go public at that time and Saudi Arabia's sovereign wealth fund purchased a stake at 70,000 won (US$62) per share.
However, POSCO E&C’s share is currently traded at some 30,000 won (US$26) on the curb market. The main reason of falling share prices is its performance. POSCO E&C posted 323 billion won (US$285.13 million) in operating profit in the fourth quarter of 2014, but it recorded an operating loss of 509 billion won (US$449.33 million) in the fourth quarter of 2016. Its sale also decreased from 9.58 trillion won (US$8.46 billion) to 7.13 trillion won (US$6.29 billion) over the same period. This was largely due to losses coming from its overseas businesses. Brazil CSP Steel Plant, which was worth more than 4 trillion won (US$3.53 billion), brought up a loss of 421.9 billion won (US$372.44 million) to both POSCO E&C and its Brazil subsidiary in 2016. The sulphur railcar roaring facility project for the state-run oil giant Saudi Aramco also returned a loss of 99.3 billion won (US$87.66 million). However, Saudi Arabia's sovereign wealth fund doesn’t play much of a role. An official from the securities industry said, “Although the Middle Eastern sovereign wealth fund holds a stake in POSCO E&C, it doesn’t help the company to win more orders in Middle Eastern countries or to cut down its losses in projects.”
It is also impossible for Saudi Arabia's sovereign wealth fund to sell its stake now or directly manage the company after the purchase of more stakes. Saudi Arabia's sovereign wealth fund cannot sell the stake because POSCO E&C is too large in size. It also cannot acquire more stakes in POSCO E&C because POSCO, the major shareholder of the company, will not accept the plan. Accordingly, Saudi Arabia's sovereign wealth fund recently asked POSCO E&C for full details on business budgets, being fastidious.