The financial investment sector's distrust of Hyundai E&C and Hyundai Engineering, which recorded an earnings shock of over 1.2 trillion won, is spreading. The two companies, which are bound by consolidated financial statements, disclosed their provisional results for 2024 on the 22nd, revealing a billion won operating loss. This marks the first time they have recorded an annual operating loss since 2001, when the operating loss amounted to 386 billion won.
In particular, the corporate value of Hyundai Engineering, which the company cited as the reason for its deficit, is expected to continue to be a topic of controversy in the financial investment sector. When Hyundai Engineering attempted an initial public offering (IPO) in 2021, it was in a situation where it could not bill construction costs to the client, leading to unbilled construction receivables, and it had billed the construction costs but had not received payment, resulting in accrued construction receivables. One of the large-scale projects for which losses were processed this time was also one that was contracted and under construction at the time of the IPO.
Experts advise that the uncertainty is significant for overseas business sites, as the construction can often take years to complete. This implies that corporations pursuing overseas plants or civil engineering contracts in the future will need to approach the situation more cautiously than in regular manufacturing. Some voices have expressed concern that the spread of distrust regarding construction companies' profit levels could negatively impact their future IPO efforts.
According to the financial investment sector, the Financial Supervisory Service, and Hyundai Engineering on the 23rd, the point at which Hyundai Engineering actively pursued listing on the securities market was April 2021. On April 9, it sent requests for proposals (RFPs) to major securities firms and in May, selected Mirae Asset Securities, KB Securities, and Goldman Sachs as joint underwriters. Some in the market forecast that the corporate value could exceed 10 trillion won after the listing, with expected increases in equity value for Chung Eui-sun, chairman of Hyundai Motor Group (11.72 percent ownership, 8,903,270 shares), and Chung Mong-koo, honorary chairman of Hyundai Motor Group (4.68 percent ownership, 3,552,340 shares).
The issue is that during this time, Hyundai Engineering's receivables (amounts not received from clients) and unbilled construction receivables (amounts not billed to clients for construction costs) had significantly increased. In 2021, Hyundai Engineering's unbilled construction receivables rose to 989 billion won, more than double from 430.1 billion won the previous year. Receivables also increased by 13.3 percent (94.3 billion won) from the previous year's 706.2 billion won to 800.5 billion won. They effectively attempted an IPO during a time when unpaid amounts and unbilled amounts were accumulating.
According to the securities registration statement submitted to the financial authorities in December 2021, when pursuing the IPO, Hyundai Engineering did not mention the uncertainties of overseas plant projects to investors but referred to improvements in the plant market conditions. The investment risk mentioned by the company was primarily that it could lose its skilled plant workforce to other companies.
The spread of distrust regarding the profit levels of overseas plant and civil engineering projects is a more significant issue. The main reason Hyundai Engineering recorded an annual operating loss of 1.2 trillion won is due to two projects: the 'Indonesia RDMP Balikpapan Refinery' (contracted in 2018) and the 'Saudi Jafurah Project Package 2' (contracted in 2021).
Typically, the amounts of receivables or unbilled construction fees become public through disclosures from the Financial Supervisory Service, corporate performance reports, and other means. However, to determine the extent of losses incurred from overseas projects, one must look beyond these receivables and unbilled amounts to the contracts themselves. This is because contracts are often made under lump sum contracts or fixed-price contracts, which stipulate payment of a defined amount upon successful completion of the project, thereby defining what the construction company can expect to receive.
For instance, a contract may stipulate that if a refinery is constructed over five years as per the design, a payment of 3 trillion won would be made. The 3 trillion won would be paid in installments according to the progress of the construction. However, if raw material prices rise sharply due to inflation, the costs of building the plant may increase beyond the original estimates, leading to losses that can accumulate in the billions of won, as seen in the case of Hyundai Engineering. The uncertainty surrounding profit levels is considerably greater than in other industries.
Kwon Se-won, a professor at Ewha Womans University, noted, "Since the timing of recognizing revenues, profits, and losses from overseas projects, as well as the progress of construction, is determined based on the company's estimates, accounting practices can often be decided by the company's discretion to inflate revenue or, conversely, to reflect losses more heavily. In situations where the construction duration is long and variables such as exchange rates and inflation are numerous, it implies that it is challenging for external parties, like investors, to gauge the future profit levels of the company."
Jeong Do-jin, a professor at Chung-Ang University, stated, "When losses are recognized all at once, akin to a big bath, it often results in subsequent performance announcements being perceived as a substantial improvement, leading to 'earnings surprises.' However, even with the announcement of such earnings surprises, one should not view the qualitative level of profit as being high. This suggests that the company may have processed certain losses initially but later added recovered amounts to profits, thereby creating earnings surprises. He added that 'the price-to-earnings ratio (PER), a key indicator of corporate value, is determined by belief in the sustainability of profits, and companies with such fluctuations in profits will inevitably see declines in their PER and maintain low stock prices.'
Park Sung-jin, representative of Ian Investment Consulting, also mentioned, "Industries like construction, which involve bidding, often have construction periods spanning several years, inherently possessing such issues; thus, investors must take these uncertainties into consideration."
A representative of the financial investment sector expressed concern, saying, "Not only Hyundai Engineering but also other construction companies such as SK Eco Plant are pursuing listings, and the market may find it difficult to accept the fact that sudden losses in the trillions of won could emerge in the form of a big bath. I am worried that investors' distrust toward construction companies may grow."