General contractors recently released their much anticipated fiscal 2000 financial statements. These companies are widely believed to be among the firms most negatively affected by the prolonged economic slowdown, which is marked by falling real estate prices.

In general, however, major general contractors stabilized their balance sheets by increasing operating profits in fiscal 2000.

Taisei Corp., for example, reported consolidated operating profits of 66.747 billion yen, up 53 percent from the previous year.

Obayashi Corp. posted consolidated operating profits of 35.313 billion yen, a 22.6 percent rise over the year before, while Shimizu Corp. announced consolidated operating profits of 57.627 billion yen, up 30 percent from the previous year.

However Kajima Corp. posted a 0.1 percent drop in consolidated operating profits from the previous year to 51.576 billion yen.

“Major general contractors have independently sped up restructuring efforts, as well as efforts to reduce interest-bearing debts,” said Masato Nakagawa, a senior analyst at Daiwa Institute of Research’s equity research department.

According to Daiwa Institute, Taisei reduced its interest-bearing debts by 183.8 billion yen for the year to 777 billion yen. Obayashi reduced its interest-bearing debt by 84 billion yen for the year to 505.3 billion yen.

Shimizu eliminated 209.7 billion yen in interest-bearing debt in fiscal 2000, leaving it with 587.7 billion yen, while Kajima got rid of 53.2 billion yen in such debts in the same period, leaving it with a balance of 718.8 billion yen.

The ratio of interest-bearing debts to operating profits is very important in determining the financial health of a general contractor, according to Nakagawa.

Taisei’s ratio stood at 11.6-to-1 at the end of March, down from 22-to-1 the previous year, while the ratio of Obayashi was 14.3-to-1, down from 20.5-to-1 the previous year.

Shimizu recorded a 10.2-to-1 ratio at the end of March, down from 18-to-1 the previous year, while Kajima’s ratio was 13.9-to-1, down from 14-to-1 the previous year.

“Considering future growth in the industry, it is acceptable that (general contractors) have interest-bearing debts for investment. However, they should keep the ratio above 10-to-1, which is considered to be appropriate for maintaining financial health,” said Nakagawa.

General contractors should pay more attention to their balance sheets, rather than seeking a large volume of orders to strengthen financial standing, Nakagawa said.

Most general contractors consider large amounts of construction orders to be most important for success, resulting in the acceptance of loss-producing projects to appease major clients.

Profits from public-works projects have traditionally surpassed those from the private sector, so contractors were able to bear loss-producing private-sector projects. The government, however, is reviewing its expenditures on public-works projects.

Small and midsize general contractors, especially past recipients of debt waivers, are finding it especially difficult to revitalize themselves.

“It is estimated that 6.48 million people, about one-tenth of Japan’s workforce, are working for 580,000 construction firms. The excess of construction investment during the bubble era resulted in the enlargement of the industry, leading to a large number of firms in danger of bankruptcy,” said Yusuke Suzuki of Sumitomo-Life Research Institute.

Many banks have written off loans from some midsize general contractors, but it has not solved the problem, Suzuki said. Despite the debt waivers, 18 percent of loans extended to contractors by 16 major banks became problem loans as of September, he added.

General contractors have received debt waivers ranging between 14.3 billion yen and 640 billion yen. Recipient companies include Kumagai Gumi Corp., Fujita Corp., Aoki Corp., Hazama Corp., Mitsui Construction Co., Sato Kogyo Co. and Tobishima Corp. These companies, however, still have interest-bearing debts totaling 3.4 trillion yen.

“Many (general contractors) increased their revenues in fiscal 2000, but their profit margin on sales declined due to growing competition,” said Suzuki.

Considering the current economic slowdown and the government’s stance on reducing public-works investment, those firms are not expected to see drastic revenue increases soon, Suzuki said. The result will be that such companies will have difficulty repaying their interest-bearing debts, he added.

“Even if banks again wrote off loans, construction firms would still face reorganization in the industry,” said Suzuki.

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