Engineering News-Record’s top 30 contractors reported total revenue of US$775b (nearly 10% of global construction output), deployed US$1t of assets and employed almost two million people. In FY16, their performance was better than FY15 and, in some aspects better, than FY14 as well.
In FY16, combined revenue growth of the top 30 exceeded their income growth. Over the last three years, the revenue growth of the top 30 was on average 3%, slightly below the world growth figure as calculated by the International Monetary Fund. However, the contractors with high exposure to the oil and gas markets continue to post lower growth.
Chinese companies still on top
The leading 10 contractors continued their dominance in FY16 as well, with little or no change in their rankings. The Chinese companies, China Railway Group, China Railway Construction Corp Ltd. and China Communications Construction Co., Ltd. remained at the top of list. (China State Construction Engineering Corporation is actually number one on the ENR list but is omitted from our study as no full set of 2016 financial data was publicly available.)
Their continued lead in revenue growth was due to active international expansion and a rise in overseas order book due to the One Belt, One Road initiative and the “Go Out” policy. The country observed the onset of its 13th Five-Year Plan in 2016, which provides for a significant push toward the growth of the infrastructure sector within China.
Chinese contractors are actively seeking to enter new markets by way of acquiring local players in other countries. As an example, China Communications Construction Company Ltd. aims to increase its overseas sales to 50% of total revenue by 2035, from the current 19%, according to a November 2017 report in China Daily.
Overseas orders dropping for Korean contractors
The average international revenue as a percentage of total revenue for the top 30 remained at 46%, unchanged from prior years. South Korean contractors have been witnessing a steady drop in overseas orders. Their international orders were at a 10-year low in FY16, representing a year-on-year drop of 39%, mainly because orders from their main international markets in the Middle East and Asia saw a downward trend.
The South Korean Government is urging players to develop new and lucrative business models to generate a positive growth from overseas construction orders in the future. South Korean companies also have the longest cash conversion cycle, which, at more than three months, is much longer than the average of the top 30 global players.
International revenue of US-based contractors has also been declining. This is partly due to strong currency and low order levels from some international markets.
Reducing debt a key trend
The top 30 have been gradually reducing their debt levels and increasing their capital base, lowering their gearing ratio in FY16. Japanese contractors were the ones that reduced their debt levels the most. Nationwide, 58% of the listed companies in Japan became debt free by the end of 2016. Of these companies, construction players even witnessed a major increase in net cash.
European contractors have also seen a reduction in their net debt over the years we have been carrying out our study.
On average, it takes almost five months to get paid by a contractor. The full cash conversion cycle stands at a month for revenues to convert to cash after paying creditors. European construction companies in the study have a negative cash conversion cycle. This implies that they collect outstanding receivables much earlier than they make payment to their creditors.
From an efficiency perspective, we note a return on working capital of 46%, which is consistent with FY15. Asset turnover stands at 0.8 in all three years under review, confirming that the engineering and construction industry is very capital-intensive.
Technology spend remains low
From a technology perspective, all the top 30 have been quite actively deploying technologies, such as green concrete, lean construction, Building Information Modeling (BIM) and drones, to increase operational efficiency and cost effectiveness.
However, perhaps owing to the already thin margins in the construction industry, technology investment remains well below 1% of total revenues. In fact, our review of the top 30 global contractors shows that US and European contractors spend close to 0.1%, in contrast to Asian contractors, which spend well above 1%.
Employee productivity also remained low (on a weighted basis, less than US$400,000 per employee) compared with other sectors, confirming that the engineering and construction sector still lags behind on productivity.