6 minute read 1 Jan 2018
A commuter train streaks alongside a river and a city in China.

How the world’s top contractors are preparing for a new era of growth

By

US Americas

Multidisciplinary professional services organization

6 minute read 1 Jan 2018

Engineering News-Record’s report reveals how the world’s top-30 contractors performed in FY16.

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.

Key financials — revenue and profitability growth

The top 30 contractors witnessed a varying range of revenue growth in FY16. While some performed exceptionally well, others reported negative revenue growth.

About 50% of the contractors in the top 30 reported a decline in revenue in FY16, but only 25% incurred a drop in profits.

  •  Chinese contractors mainly had single-digit revenue growth, ending their period of meteoric growth.
  •  The historic fall in crude and oil prices hit some contractors with exposure to exploration and production of oil, leading to continued cancellation of orders.
  •  All four Japanese contractors in the top 30 experienced double-digit profit growth in the past two years.
  • The only Indian contractor on the list achieved both revenue and income growth in FY16.
  •  South Korean contractors witnessed the highest year-on-year average revenue growth (25%). This was largely skewed by Samsung C&T, which executed a large-scale merger in the second half of 2015. Excluding the effects of merger, this growth drops to a mere 3%.

Fifteen contractors reported a decline in revenue growth. However, only 2 of these 15 contractors witnessed a drop in profit as well. This demonstrates the effect of tighter cost controls, as well as of the low interest rates in Europe and the US, contributing to better bottom-line growth.

Key regional trends

  • Europe
    Topline growth for European contractors remained muted for the third year in a row. Some contractors, however, have been able to post higher returns enabled by overseas orders.
  • Japan
    A booming residential market, mainly in Tokyo, led to growth for the contractors amid low labor-cost increases. However, labor costs are anticipated to rise as shortages intensify.
  • South Korea
    Except for Samsung C&T, whose recent merger led to an exceptional revenue increase, the performance of South Korean players has been mixed. International orders were at a 10-year low.
  • US
    Although growth shown by contractors was positive, it was at a lower level than in FY15. In FY15, an acquisition was made by Aecom, which led to an exceptional rise in revenue, making the overall growth higher.
  • Our study does not take into account private companies, companies that have not published a complete set of English financial statements, or subsidiaries of other ENR top 30 contractors.

    ENR’s 2016 Top 250 global contractors list, published in August 2016, was used as a reference.

    Our rankings are based on revenues converted into US$ 2014 constant exchange rates, against ENR’s list based on actual revenues from engineering and construction activities.

    Annual reports investigated either have a 30 September 2016, 31 December 2016, or 31 March 2017 year-end, depending on the fiscal year of the company under review.

Summary

Rising urbanization, the demand for housing and the cyclical recovery of the global economy put the construction industry in a good spot. But to overcome its many challenges — including late deliveries and low productivity — the industry needs to invest more in technology.

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US Americas

Multidisciplinary professional services organization