Tuesday, May 26, 2020
Outward Growth with Limited Profitability
Increasing overseas orders are expected to offset the domestic private sector’s weak performance
Outward Growth with Limited Profitability
  • By matthew
  • January 15, 2010, 12:16
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The Korean economy seemed to recover in the second half of 2009 with the execution of a new, expansive financial policy. Since the government is actively progressing with public projects, such as the Four Rivers Restoration Project and the Seoul Metropolitan Transportation Expansion Project, civil engineering orders are expected to increase significantly.

The government’s early budget execution on public project sector in the first half of 2009 helped the liquidity and assets of major construction companies increase. Although liquidity is expected to decrease once the fund is spent, since major government-led projects are expected to continue in 2010, the decrease is expected to be small. Furthermore, while the public project sector contributes to the cash flow, its profitability is not very high, and therefore will not help construction companies in terms of profits. In regards to the civil engineering sector, in which competition is based on low prices, construction companies do not see it as a sufficient growth engine due to its low profitability.

The number of unsold housing has been gradually decreasing since March 2009, but the Korean construction market is still in the process of eliminating bubbles. Since the number of unsold housing is still high, and 90% of them are located outside of Seoul, the number is forecasted to remain at high in 2010. In 2009, the number of new housing projects approved and houses sold remained at their lowest in the first half of 2009, while the number of houses scheduled to be sold during the fourth quarter of 2009 was approximately 140,000; double that of the same period the year before according to the Construction and Economy Research Institute of Korea. This strong performance was not caused by an increase in demand but rather the active involvement of the government.

Following the trend of record breaking numbers in 2008, overseas orders for the second half of 2009 have steadily maintained good figures. Therefore, overseas orders are forecasted to continue to increase gradually in 2010. The number of overseas orders and oil price are interrelated. As the oil price has been constantly rising from $US 36/bbl in January 2009 to $US 80/bbl recently, overseas orders are expected to resume. That means as the once halted orders derived from the fallen oil prices in early 2009 are likely to surge during the first half of 2010 and the momentum of major Korean construction companies participating in bids is expected to increase.

In summary, the increase in overseas orders is expected to offset the weak performance of the domestic private sector. In terms of public housing sector, the government is focusing on promoting “Nest Housing,” however, its low supply price is not expected to contribute to the project’s profitability.