[비즈한국] Lotte E&C is facing a sluggish performance this year. Due to its project financing (PF) guarantees, there is also an assessment that its future outlook remains highly uncertain. For Lotte E&C, a turning point is urgently needed. Amidst this situation, some in the construction industry are raising the possibility of Lotte E&C participating in the Gadeokdo New Airport construction project. Given that the Gadeokdo New Airport is a large-scale project, participation as a contractor could significantly impact its revenue. However, there is also analysis suggesting that since construction costs are insufficient, the actual benefits might not be significant even if they do participate.
Lotte E&C’s Unstable Situation
On November 26, a rumor circulated on social media (SNS). The rumor stated, "There is a widespread rumor in the industry that a large construction company 'A,' known by everyone, and a trust company are about to enter rehabilitation proceedings," and added, "Concerns are mounting over a second Legoland-style crisis." Many social media users speculated that construction company 'A' was Lotte E&C.
Lotte Group responded immediately. Lotte Group stated, "We clarify that the recent rumors of insolvency from an unknown source are groundless," adding, "As this is an act that causes serious damage to Lotte E&C's credit, we have filed a complaint against the original author and distributors of the rumors for defamation of character."
Regardless of the rumors, it is true that Lotte E&C's recent performance has been poor. According to its quarterly report, Lotte E&C's revenue fell from 6.0284 trillion won in the first three quarters of last year to 5.8372 trillion won in the same period this year, a 3.17% decrease. During the same period, operating profit dropped from 163.2 billion won to 91.7 billion won, a 43.64% decline.
Lotte E&C's future outlook is also considered highly uncertain. In particular, Homeplus is expected to act as a variable. Lotte E&C has participated as a contractor in numerous Homeplus store development projects and has provided PF loan guarantees. A PF guarantee means that a third party, such as the contractor, guarantees the loan when the developer borrows funds. The problem is that while Homeplus is currently undergoing rehabilitation, no potential buyers have emerged. Some have even cautiously mentioned the possibility of Homeplus's bankruptcy.
Kim Sang-soo, a senior researcher at Korea Investors Service, explained, "In the case of PF guarantees related to Homeplus development projects, Lotte E&C is providing guarantees for subordinated PF loans. With the exception of the Bucheon Sang-dong branch, which is currently closing, and the Dongdaemun branch, for which development plans have been confirmed, specific development plans for most stores have not been finalized." He added, "If the lease agreements for these stores are terminated during Homeplus's corporate rehabilitation process due to business suspension or unpaid rent, and the loans go into default leading to asset disposal via public auction, there is a risk of loss for Lotte E&C, which provided the subordinated PF guarantees."
Even setting aside the Homeplus issue, evaluations of Lotte E&C's prospects remain dim. Kwon Joon-sung, a lead researcher at NICE Investors Service, assessed, "Due to the lack of a demand base following the polarization of the housing market, the possibility of regional project sites recovering in the short term appears limited, which leads to the judgment that business uncertainty has increased compared to the past." He continued, "Amidst this, borrowings and financial costs have increased significantly since the second half of 2022 due to the policy of maintaining cash liquidity to respond to liquidity risks and the expansion of working capital burdens."
Will They Participate in Gadeokdo New Airport Construction?
As such, Lotte E&C is in a situation where it needs a turning point due to its recent negative atmosphere. Within the construction industry, rumors are circulating about Lotte E&C's participation in the Gadeokdo New Airport construction. Participating as a contractor for a massive project like Gadeokdo New Airport would allow them to expect significant revenue. There is also the symbolic significance of having participated in a landmark national infrastructure project.
Lotte E&C has the advantage of being selected as the contractor for the first section of the Gadeokdo New Airport access railway, making coordination with the main airport construction easier. Lotte E&C attended an information session on the Gadeokdo New Airport site preparation project held by the Gadeokdo New Airport Construction Authority in November. However, since over 50 construction companies attended the session, it is difficult to consider this as something specific to Lotte E&C.
Initially, a consortium led by Hyundai E&C000720 was selected as the contractor for Gadeokdo New Airport. However, Hyundai E&C withdrew from the consortium in May of this year citing construction costs and timelines, and around the same time, POSCO E&C, which was a consortium member, also declared its non-participation. Consequently, the Ministry of Land, Infrastructure and Transport increased the Gadeokdo New Airport construction budget from approximately 10.5 trillion won to 10.7 trillion won and extended the construction period from 84 months to 106 months. The Gadeokdo New Airport Construction Authority stated, "By reflecting the increase in construction budget and securing an appropriate construction period, project risks have been significantly mitigated, and we expect a lot of interest from the industry in the site preparation bidding."
Conversely, there is considerable analysis that the actual benefits of the Gadeokdo New Airport project are not that great. Although the Ministry of Land, Infrastructure and Transport raised the construction budget to reflect inflation, critics point out that the budget is still insufficient when considering the rise in material costs. While it is true that Lotte E&C needs a turning point, there is still uncertainty involved in blindly participating in the Gadeokdo New Airport construction.
A Lotte E&C official said regarding the participation in the Gadeokdo New Airport project, "Nothing has been finalized yet, but we are reviewing our participation positively."