Construction companies laughing at the 7% surge in exchange rates… tens of billions of won in foreign exchange gains

As the won-dollar exchange rate has shown a high rate of increase of close to 7% this year, major domestic construction companies with a high proportion of overseas business are expected to see foreign exchange gains amounting to tens of billions of won. When the exchange rate changes, the valuation of the company’s assets and liabilities overseas changes, so construction companies with many overseas assets see an increase in their assets when the value of the dollar rises. As the recent real estate recession continues, construction companies are moving away from the domestic housing business and increasing their proportion of overseas business.

On the 25th, the won-to-US dollar exchange rate in the Seoul foreign exchange market opened at 1,376.2 won, up 7 won from the previous day. This is a 6.8% increase from the closing price at the end of last year (1,288.0 won). The U.S. Federal Reserve’s rate cut is later than market expectations, and the exchange rate has continued to rise this year due to Middle East risks such as the Israel-Iran war.

As the exchange rate rose, the foreign exchange gains of domestic construction companies with overseas assets also increased. As a result of simply estimating the foreign exchange gains from the beginning of this year to the present based on the business reports of nine major construction companies disclosed in the Financial Supervisory Service’s electronic disclosure system, we found that Hyundai Engineering & Construction (KRW 64.1836 billion) will benefit the most.

In last year’s business report released earlier this month, Hyundai Engineering & Construction announced that, assuming all other variables are constant, ‘if the dollar exchange rate rises 10% from the end of 2023, there will be an increase in net assets of 94.277 billion won.’ Applying this to this year’s growth rate (6.8%), the pre-tax profit before corporate tax has increased by 64,183,600,000 won as of now.

Last year, Hyundai Engineering & Construction received an order for the ‘Amiral Project’ (worth $5 billion), a petrochemical plant project, in Saudi Arabia, and part of the ‘Neom City’ project (worth $500 million) to build a future city in northwest Saudi Arabia. We are accelerating our overseas business.

POSCO E&C also benefited greatly from the rise in exchange rates. The estimated increase in POSCO E&C’s overseas assets, which reflects the increase in the value of the dollar this year, amounts to 47.87812 billion won. In addition, DL E&C (KRW 34,447.16 million), Daewoo Engineering & Construction (KRW 19,479.28 million), Lotte Engineering & Construction (KRW 9,886.48 million), Hyundai Engineering (KRW 4,426.12 million), and Hoban Construction (KRW 94.52 million), which have a high proportion of overseas business, etc. Major construction companies are expected to see foreign exchange gains.

On the other hand, GS E&C (-61.918 billion won) and SK Eco Plant (-19.026 billion won) showed a decrease in net assets due to the rise in exchange rates. This is because the foreign currency liabilities of these companies are greater than the foreign currency assets they have. In the case of GS E&C, its foreign currency assets (consolidated basis) as of the end of last year amounted to $652.35 million, while its foreign currency liabilities amounted to $1.29767 billion. A GS E&C official explained, “As we have many subsidiaries operating overseas, this reflects the borrowings raised while doing business locally.”

Large construction companies are reducing the risk of losses due to exchange rate fluctuations through currency hedging. Foreign currency hedging is a type of financial product entered into with a financial institution while giving up the opportunity cost of foreign exchange gains during a period of rising exchange rates. For example, if the won-dollar exchange rate is 1,000 won per dollar and an order worth 100 million dollars is received, a forward exchange contract is entered into to fix the won conversion amount. In this case, regardless of whether the exchange rate soars to 1,400 won or falls to 900 won, the won converted order amount is fixed at 100 billion won.

An official at SK Eco Plant said, “Because we hedge foreign exchange when winning construction projects overseas, the actual profit or loss due to exchange rate fluctuations will be less than the figures in the report.”