Hyosung Heavy Industries' annual profit in the construction institutional sector is expected to decrease by about 50 billion won this year. This is because Hyosung Heavy Industries acquired or is set to acquire nearly 200 billion won in debt through a 'responsible completion' commitment that compensates for expenses if construction is not completed by the designated date. Currently, Hyosung Heavy Industries has 37 responsible completion commitments (10 rehabilitation projects and 27 other projects), with a total agreement amount of approximately 6.3 trillion won. As this situation became known, Hyosung Heavy Industries' stock price plummeted by over 7% in one day, and its market capitalization decreased by nearly 30 billion won.
As construction companies' responsible completion commitments for project financing (PF) establishments deteriorate, leading to increased losses among major construction companies, it seems that the Hyosung construction institutional sector has also entered the influence of responsible completion risks.
According to the Financial Supervisory Service, the construction industry, and Hyosung Heavy Industries on the 26th, there are three PF establishments that Hyosung Heavy Industries has acquired or plans to acquire debt from.
On the 20th, Oncheon-dong DIA Corp. announced it would early repay the loan principal and interest for the Busan Oncheon-dong mixed-use project (debt assumption amount of 103.8 billion won). This amount accounts for 8.48% of Hyosung Heavy Industries' own capital (1.22 trillion won). Although the responsible completion deadline for the establishment awarded in June 2022 is 2026, the company acquired the operation rights by assuming the debt early. A representative from Hyosung Heavy Industries noted, "There is no possibility of completing the project by the 2026 responsible completion deadline, and the interest expenses are only increasing, so we paid off the debt early and acquired the operation rights," and added, "We judge there is business viability and plan to convert it into an internal project."
On the same day, Hyosung Heavy Industries also acquired debt from the Daegu Sinchon-dong mixed-use project led by HanYoung I&P. The acquisition amount is 43.6 billion won (3.56% of own capital). As the responsible completion deadline (January 2, 2025) approaches, the debt has been assumed. The total debt assumption amount for the Oncheon-dong and Sinchon-dong projects is 147.4 billion won. A representative from the financial investment sector said, "In January of next year, an additional debt assumption of about 50 billion won for a PF establishment is expected, bringing the total debt assumption for the three cases to around 200 billion won."
The atmosphere in the financial investment sector and securities market is that the decrease in Hyosung Heavy Industries' annual profit is a foregone conclusion. The estimated non-operating loss due to the three debt assumptions is about 50 billion won and is expected to be reflected in the fourth-quarter results.
On the 23rd, global investment bank (IB) JPMorgan released a report on responsible completion related to Hyosung Heavy Industries through researcher Stephen Tsui and analyzed the risk of downward performance this year. The report stated, "Hyosung Heavy Industries announced the acquisition of construction debt of about 14.7 billion won, which accounts for 11% of the total debt. It is expected that the net debt ratio for the third quarter will rise from 87% to 99%." It also mentioned, "If the company is assumed to set aside a provision of 50 billion won, the earnings per share (EPS) for 2024 will decrease by about 26%."
On the 24th, concerns about Hyosung Heavy Industries were also reflected in the securities market. On that day, Hyosung Heavy Industries' stock price fell by 7.42% (31,500 won) to close at 393,000 won, breaking below the 400,000 won mark. Its market capitalization also decreased by 293.7 billion won to 3.66 trillion won.
A representative from the financial investment sector remarked, "In addition to the 50 billion won non-operating loss being reflected in this year's annual results, it is currently difficult to predict how much more responsible completion-related debt assumptions will occur and how much the loss scale will expand."
Concerns about responsible completion related failures are spreading in the construction industry. As of the end of the third quarter, the top 10 construction companies based on construction capability evaluation have committed to responsible completion for PF loans totaling 68.57 trillion won, an increase of 29.55 billion won from the end of last year. Major construction companies such as Kumho Construction (Suwon office building construction project - 61.2 billion won) and GS Engineering and Construction (Busan branch global general industrial complex development project - 131.2 billion won) assumed debt under responsible completion obligations in February and April, respectively. On the 27th of last month, the seventh-ranked Mugunghwa Trust (trust assets of 44 trillion won) received a management improvement order from financial authorities due to continued deterioration of financial structure amid ongoing failures in real estate project financing (PF) as they expand their responsible completion type trust business.