Reviewing the top 25 global contractors for 2015

E x e c u t i v e s u m m a r y 1

T h e c o m b i n e d p e r f o r m a n c e o f t h e t o p 25 g l o b a l c o n t r a c t o r s i n 201 5 — a s r a n k e d b y Engineering News-Record (ERN)2 — w a s a b i t m o r e s u b d u e d t h a n i n 201 4. T h e w o r s t h i t w e r e t h e c o n t r a c t o r s w i t h h i g h e x p o s u r e i n o i l a n d g a s c o n t r a c t s . T h e o r d e r b o o k o f t w o l a r g e c o n t r a c t o r s d r o p p e d b y m o r e t h a n 20% i n 201 5 b e c a u s e o f a d e c l i n e i n c o n t r a c t s f r o m o i l a n d g a s c l i e n t s . T h e a v e r a g e g r o w t h i n r e v e n u e f o r t h e t o p 25 d r o p p e d f r o m 5 % i n 201 4 t o 1 .4% i n 201 5 . H o w e v e r , t h e a v e r a g e n e t m a r g i n i n c r e a s e d 60 b a s i s p o i n t s i n 201 5 . C h i n a - b a s e d c o n t r a c t o r s c o n t i n u e d t h e i r l e g a c y o f e a r n i n g t h e h i g h e s t r e v e n u e s a n d l a r g e o r d e r b o o k s ; t h e y a l s o s p e n d m o r e t h a n t h e o t h e r c o n t r a c t o r s i n r e s e a r c h a n d d e v e l o p m e n t . A c c o m p a n y i n g t h e C h i n e s e w e r e t h e S o u t h K o r e a - b a s e d c o n t r a c t o r s w i t h p o s i t i v e o r d e r - b o o k g r o w t h . H o w e v e r , u n l i k e t h e K o r e a n s , t h e C h i n a - b a s e d c o n t r a c t o r s h a d h i g h p a y a b l e s a n d i n v e n t o r y d a y s o u t s t a n d i n g .

I n t e r m s o f s i z e a n d r a n k i n g s , t h e t o p s e v e n c o n t r a c t o r s h a v e r e m a i n e d u n c h a n g e d i n l a s t t w o y e a r s . T h e w e i g h t e d a v e r a g e r e t u r n o n w o r k i n g c a p i t a l r e m a i n e d t h e s a m e i n 201 5 a t 20%.

T h e E u r o p e a n c o n t r a c t o r s c o n t i n u e d t o b e t h e m o s t geographically diversified; Italy-based contractors m a i n t a i n t h e i r l e a d . T h e s u r p r i s e e l e m e n t w a s t h e C h i n a - b a s e d c o n t r a c t o r s , a s t h e y w i t n e s s e d a n i n c r e a s e i n t h e i r i n t e r n a t i o n a l r e v e n u e s , p o t e n t i a l l y r e a l i z i n g t h e benefits of geographical diversification. Along with the C h i n e s e , t h e F r a n c e - b a s e d c o n t r a c t o r s a r e a l s o t h e l e a s t geographically diversified, earning low international r e v e n u e s c o m p a r e d t o t h e o t h e r s . H o w e v e r , i n 201 5 , t h e t h r e e F r e n c h c o n t r a c t o r s r e p o r t e d a n i n c r e a s e i n i n t e r n a t i o n a l r e v e n u e a s a p r o p o r t i o n o f t o t a l r e v e n u e o v e r 201 4. A m i x o f o r g a n i c a n d a c q u i s i t i o n - b a s e d g r o w t h s t r a t e g i e s i s b e i n g u s e d b y t h e c o n t r a c t o r s t o e x p a n d t h e i r g e o g r a p h i c a l f o o t p r i n t .

T h e c o n s t r u c t i o n i n d u s t r y i s c h a r a c t e r i z e d a s a h e a v i l y l e v e r a g e d o n e d u e t o t h e e n o r m o u s s i z e a n d l o n g t e r m p e r i o d o f t h e c o n t r a c t s . T h e t o p 25 c o n t i n u e d t o h a v e l a r g e d e b t s o n t h e i r b a l a n c e s h e e t s . A l t h o u g h t h e a v e r a g e n e t g e a r i n g r a t i o o f t o p 25 c o m b i n e d d r o p p e d f r o m 49% ( 201 4) t o 40% ( 201 5 ) , t h i s w a s , i n e s s e n c e , d u e t o a n i n c r e a s e i n e q u i t y o f a f e w m a j o r c o n t r a c t o r s , w h i c h l e d t o t h e o v e r a l l d r o p i n l e v e r a g e a s t h e d e b t l e v e l s w e r e m o r e o r l e s s u n c h a n g e d i n 201 5 . T h e c o n t r a c t o r s , h o w e v e r , a r e d o i n g t h e i r b e s t i n c o n t r o l l i n g costs and improving efficiency. The average selling, g e n e r a l a n d a d m i n i s t r a t i v e ( S G & A ) e x p e n s e s o f t h e t o p 25 c o m b i n e d d r o p p e d b y 1 % i n 201 5 , l e d b y t h e t r a n s f o r m a t i o n a n d c o s t s a v i n g p r o c e s s f o l l o w e d b y m o s t of the contractors. One excellent example of efficiency is r e p o r t e d b y t h e K o r e a - b a s e d c o n t r a c t o r s ; t h e y h a v e t h e h i g h e s t r e v e n u e p e r e m p l o y e e , e x c e e d i n g t h e a v e r a g e o f t h e t o p 25 .

A d d i t i o n a l l y , c o n t r a c t o r s a r e g r a d u a l l y i n c r e a s i n g t h e i r f o c u s t o c u r b h a r m f u l e m i s s i o n s . M o s t o f t h e E u r o p e -b a s e d c o n t r a c t o r s f o l l o w t h e G r e e n h o u s e G a s P r o t o c o l , r e p o r t i n g t h e i r e m i s s i o n s i n t e r m s o f d i f f e r e n t s c o p e s a n d c l a s s i f y i n g a n e m i s s i o n a s d i r e c t l y o r i n d i r e c t l y e m i t t e d . C o n t r a c t o r s g l o b a l l y a r e i m p l e m e n t i n g I S 0 1 4001 , t h e E n v i r o n m e n t M a n a g e m e n t S y s t e m s t a n d a r d , w h i c h p r o v i d e s a f r a m e w o r k t h a t a n o r g a n i z a t i o n c a n f o l l o w t o s e t u p a n e f f e c t i v e e n v i r o n m e n t a l m a n a g e m e n t s y s t e m . T h e y a r e d e p l o y i n g t e c h n o l o g i e s , c o n d u c t i n g r e s e a r c h a n d i n t r o d u c i n g e n e r g y m a n a g e m e n t s y s t e m s t o c u t e m i s s i o n s .

1 A n n u a l r e p o r t s a n d E Y a n a l y s i s .2 “ E n g i n e e r i n g N e w s - R e c o r d T o p 25 0 G l o b a l C o n t r a c t o r s 1 - 1 00, ” E N R w e b s i t e , w w w .e n r .c o m / t o p l i s t s / 201 5 _ T o p _ 1 5 0_ G l o b a l _ C o n t r a c t o r s 1 N o t e : O u r

l i s t o f 25 c o m p a n i e s w a s t a k e n f r o m E n g i n e e r i n g N e w s - R e c o r d ’ s ( E N R ) T o p 25 0 G l o b a l C o n t r a c t o r s l i s t . T h e t o p 25 c o m p a n i e s s e l e c t e d f o r t h i s analysis were chosen on the basis of size (revenue), after which the following criteria was applied to arrive at the final list: 1. They are group companies which publish their financial statements on a consolidated basis. 2. The companies follow the calendar year as their fiscal year. 3. Their financial statements are published in English.

O i l p r i c e s t a k e t o l l o n g l o b a l c o n s t r u c t i o n

2 | R e v i e w i n g t h e t o p 25 g l o b a l c o n t r a c t o r s f o r 2015

R e v e n u e g r o w t h f o r m a n y c o m p a n i e s has been significantly and negatively affected by declining oil prices

T h e t o p 25 c o n t r a c t o r s s p a n a c r o s s g e o g r a p h i e s a n d r e g i o n s . F r o m t h e U S ( t h r e e c o n t r a c t o r s ) a n d t h e U K ( o n e ) t o t h e F a r E a s t , including China (five) and Korea (four), global contractors have a p r e s e n c e a c r o s s t h e w o r l d . I n 201 4, t h e t o p t h r e e C h i n e s e c o n t r a c t o r s l e d t h e g l o b a l c o n s t r u c t i o n i n d u s t r y i n t e r m s o f r e v e n u e . A l t h o u g h t h e y c o n t i n u e t o l e a d w i t h t h e i r l a r g e r e v e n u e and order-book figures, their top- and bottom-line performance in 201 5 d i p p e d . C h i n a R a i l w a y G r o u p ’ s r e v e n u e g r o w t h d r o p p e d f r o m 1 0.1 % i n 201 4 t o 1 .7 % i n 201 5 , w h i l e S i n o p e c r e p o r t e d n e g a t i v e r e v e n u e g r o w t h .3

P erf orm anc e of t he c ont rac t ors in t he t op 2 5 : av erag e y ear-ov er- y ear rev enue g row t h c om paris on ( % )

P erf orm anc e of t he 5 Chines e c ont rac t ors in t he t op 2 5

3 A n n u a l r e p o r t s a n d E Y a n a l y s i s .4 “ S a i p e m c u t s 8 , 8 00 J o b s A m i d P r i c i n g T r o u b l e , ” Forbes website,

h t t p : / / w w w .f o r b e s .c o m / s i t e s / c h r i s t o p h e r c o a t s / 201 5 / 07 / 29/ s a i p e m - c u t s - 8 8 00- j o b s -amid-pricing-trouble/#453fd45a508e, accessed on 7 July 2016.

The European contractors (12 in total, with 3 from Spain and 4 from F r a n c e ) c o n t i n u e d t o e x p e r i e n c e m u t e d r e v e n u e g r o w t h i n 201 5 a s w e l l . T h e h i s t o r i c f a l l i n c r u d e a n d o i l p r i c e s h i t s o m e c o n t r a c t o r s w i t h e x p o s u r e t o e x p l o r a t i o n a n d p r o d u c t i o n o f o i l , l e a d i n g t o c a n c e l l a t i o n o f o r d e r s . I t a l y - b a s e d S a i p e m w i l l r e p o r t e d l y r e d u c e i t s w o r k f o r c e b y 8 , 8 00 i n t h e n e x t t w o y e a r s f o r p l a n n e d s a v i n g s o f EUR1.3 billion by 2017.4

A v erag e y ear- ov er- y ear rev enue g row t h c om paris on ( % )

2014

2015

8 . 9 %

1 . 2 %

Average year over year rofit gro th co arison ( )

2014

2015T h e o u t l i e r s f o r 201 5 w e r e t h e 4 S o u t h K o r e a n c o n t r a c t o r s i n the top 25. While Hyundai Engineering & Construction benefited m a i n l y f r o m l a r g e o v e r s e a s o r d e r s , t h e o t h e r s , D a e w o o , D a e l i m a n d G S E n g i n e e r i n g & C o n s t r u c t i o n , e x p e r i e n c e d s t r o n g g r o w t h f r o m d o m e s t i c o r d e r s . L o w b o r r o w i n g c o s t s i n t h e c o u n t r y l e d t o a n i m p r o v e d h o u s i n g m a r k e t , w h i c h h e l p e d t h e h o u s i n g b u s i n e s s d i v i s i o n o f t h e c o n t r a c t o r s . T h e a v e r a g e r e v e n u e g r o w t h o f t h e f o u r c o n t r a c t o r s c o m b i n e d w a s t h e h i g h e s t ( r e g i o n - w i s e ) a t 5 .8 % i n F Y 1 5 , a t a t i m e w h e n t h e c o u n t r y ’ s e c o n o m y h a d t h e s l o w e s t g r o w t h

5 . 2 %

Europe

2014

20153 . 8 %

8 . 0 %

Korea

2014

20155 . 8 %

U S

2014- 5 . 4 %

2015- 1 2 . 1 %

R e v i e w i n g t h e t o p 25 g l o b a l c o n t r a c t o r s f o r 2015 | 3

since 2012. The Korean contractors are aiming to benefit from t h e l i f t i n g o f s a n c t i o n s a g a i n s t I r a n . T h e m o v e i s e x p e c t e d t o b r i n g m o m e n t u m t o t h e K o r e a n e c o n o m y a s i t s c o n t r a c t o r s a r e e x p e c t e d to benefit from winning mega infrastructure projects in Iran.5

How will diversification help?While the majority of the contractors understand the benefit of diversification, some of them — including France- and China-based contractors — have had significantly less international exposure as c o m p a r e d t o t h e i r g l o b a l p e e r s . H o w e v e r , t h e y e a r 201 5 s h o w e d c h a n g e , w i t h a h u g e i n c r e a s e i n t h e i n t e r n a t i o n a l r e v e n u e e a r n e d b y c o n t r a c t o r s f r o m C h i n a a n d s o m e f r o m F r a n c e . I n p a r t i c u l a r , F r e n c h a n d S p a n i s h c o n t r a c t o r s a r e t a r g e t i n g o v e r s e a s g r o w t h , b o t h b y m e a n s o f a c q u i s i t i o n s a n d o r g a n i c g r o w t h .

O f t h e t h r e e m a j o r g a i n e r s o f i n t e r n a t i o n a l r e v e n u e , o n e w a s C h i n a -b a s e d ( r e p o r t i n g a n i n c r e a s e o f m o r e t h a n 6% i n i t s i n t e r n a t i o n a l r e v e n u e v e r s u s i t s t o t a l r e v e n u e i n 201 5 ) ; o n e w a s F r e n c h (generating 40% of its revenue from overseas for the first time e v e r i n 201 5 ) ; a n d o n e w a s S p a n i s h ( w h i c h a i m s t o e a r n 8 5 % o f i t s revenue from overseas markets by 2020, up from the current 83%).6

5 “ S o u t h K o r e a ’ s G r o w t h R a t e R e t r e a t s F r o m a F i v e - Y e a r H i g h , ” Bloomberg website, http://www.bloomberg.com/news/articles/2016-03-24/south-korea-s-growth-rate-retreats-from-a-five-year-high, accessed on 6 July 2016; “Korea to benefit from l i f t i n g o f I r a n s a n c t i o n s , ” The Korea Times, h t t p : / / w w w .k o r e a t i m e s .c o .k r / w w w / n e w s /b i z / 201 6/ 01 / 48 8 _ 1 95 61 5 .h t m l , a c c e s s e d o n 6 J u l y 201 6.

6 A n n u a l r e p o r t s a n d E Y a n a l y s i s .7 A n n u a l r e p o r t s a n d E Y a n a l y s i s .

I nt ernat ional rev enue as a perc ent of t ot al rev enue: U S - b as ed c ont rac t ors in t he t op 2 5

65 .3%5 6.6%63.5 % 5 6.6%

48 .5 %35 .0%

201 4 201 5

C o n t r a c t o r 1 C o n t r a c t o r 2 C o n t r a c t o r 3

D e b t p o s i t i o n o f t h e t o p 25T h e o v e r a l l a v e r a g e n e t g e a r i n g r a t i o o f t h e t o p 25 c o m b i n e d w a s 40% ( 201 5 ) , w h i c h d r o p p e d f r o m 49% ( 201 4) . T h e w o r s t p e r f o r m e r w a s a F r a n c e - b a s e d c o n t r a c t o r w i t h a s m u c h a s t h r e e t i m e s n e t d e b t t o e q u i t y , a n d t h e b e s t p e r f o r m e r w a s a U S - b a s e d c o n t r a c t o r w i t h a n e t c a s h p o s i t i o n ( c a s h g r e a t e r t h a n t o t a l d e b t ) .

The net gearing ratio of the top five companies (in terms of revenue) w a s c o n s i d e r a b l y r e d u c e d i n F Y 1 5 f r o m F Y 1 4, w h i l e f o r t h e o t h e r s , it remained almost the same. So what happened to the top five? Did they pay all their debts? Did they increase their cash or equity?

Three out of the top five reported an increase in their shareholders’ e q u i t y , w h i c h l e d t o a d e c l i n e i n t h e i r n e t g e a r i n g r a t i o . T h e r i s e i n equity for two out of those three was due to issuance of financial a s s e t s . O n e c o m p a n y i s s u e d p e r p e t u a l n o t e s , a n d t h e o t h e r i s s u e d p r e f e r e n c e s h a r e s . B o t h c o n t r a c t o r s a r e C h i n a - b a s e d . T h e r e f o r e , i t c a n b e s a i d t h a t t h e d e b t o f t h e c o n t r a c t o r s d i d n o t r e a l l y s e e a d e c l i n e . F o r t h e c o n s t r u c t i o n s e c t o r , d e b t i s t h e w a y t o r u n t h e b u s i n e s s . H a v i n g a b a l a n c e d g e a r i n g i s i m p o r t a n t r a t h e r t h a n h a v i n g a l o w e r o n e .

T op 2 5 l ev erag e rat ios f or 2 0 1 5 v ers us 2 0 1 4

W hil e t he c ont rac t ors g enerat ing hig her rev enue had a d rop in t heir net g earing rat io, t he s m al l er ones report ed t he s am e s c enario in b ot h F Y 1 4 and F Y 1 5 . W it h l ow er rev enue, t hey s pend m ore w it h c as h and ab s t ain f rom ov er- l ev erag ing .

* T h e t o p 5 , m i d d l e 1 0 a n d b o t t o m 1 0 a r e r e v e n u e b a s i s .

M id d l e 1 0T op 5 B ot t om 1 0

67 %45 %

201 4201 5

60%

201 4201 5

5 9%

201 4201 5

21 % 24%

T hree of t he t op 2 5 c ont rac t ors d o not report t heir g eog raphic al rev enue s eg m ent at ion in t heir annual report .

O f t he 2 2 c ont rac t ors t hat report g eog raphic rev enues , 1 7 report ed an inc reas e in int ernat ional rev enue as a proport ion of t ot al rev enue, and 5 report ed a d rop.

O f t he 1 7 t hat report ed an inc reas e, 1 2 al s o report ed an inc reas e in t heir ov eral l rev enue.

O n t h e t r a i l i n g s i d e w e r e a l l t h r e e U S - b a s e d c o n t r a c t o r s . T h e a v e r a g e d r o p i n i n t e r n a t i o n a l r e v e n u e f o r t h e t h r e e c o m b i n e d w a s a b o u t 1 0% i n F Y 1 5 . T h e s e c o n t r a c t o r s r e p o r t e d a d r o p i n r e v e n u e f r o m t h e i r A u s t r a l i a a n d C a n a d a g e o g r a p h i c s e g m e n t s .7

I nt ernat ional rev enues report ed

4 | R e v i e w i n g t h e t o p 25 g l o b a l c o n t r a c t o r s f o r 2015

O v e r a l l , t h e a v e r a g e n e t g e a r i n g r a t i o s o f t h e t o p 25 c o m p a n i e s d r o p p e d i n 201 5 . I t i s d e b a t a b l e w h e t h e r s o m e o f t h e s e c o m p a n i e s a r e m a i n t a i n i n g a c o n s e r v a t i v e a p p r o a c h t o a c q u i r i n g d e b t i n a s t i l l - r e c o v e r i n g e c o n o m i c e n v i r o n m e n t o r t h e y h a v e b e g u n t o p a y d o w n t h e i r d e b t s a s t h e y g r o w a n d r e c o v e r f r o m t h e r e c e s s i o n .

S i m i l a r t o 201 4, a r o u n d 25 % o f t h e c o m p a n i e s o n t h e l i s t h a d m o r e c a s h t h a n o u t s t a n d i n g d e b t s , r e s u l t i n g i n a p o s i t i v e n e t c a s h p o s i t i o n , r a t h e r t h a n a n e t d e b t p o s i t i o n f o r t w o c o n s e c u t i v e y e a r s . A l m o s t 5 0% o f t h e c o n t r a c t o r s o n t h e l i s t r e d u c e d t h e i r n e t d e b t p o s i t i o n s o v e r t h e y e a r .8

T h e a v e r a g e n e t d e b t t o e a r n i n g s b e f o r e i n t e r e s t , t a x e s , d e p r e c i a t i o n a n d a m o r t i z a t i o n ( E B I T D A ) r a t i o o f t h e t o p 25 r e m a i n e d a l m o s t t h e s a m e i n 201 4 ( 1 .9) a n d 201 5 ( 2.1 ) . T h e a v e r a g e E B I T D A f o r a l l c o n t r a c t o r s w i t n e s s e d a s l i g h t d e c l i n e o f 1 % i n 201 5 . T h e o n l y U K - b a s e d c o n t r a c t o r i n t h e t o p 25 h a d a n e g a t i v e E B I T D A i n 201 5 , a n d t h e r e s t a l l h a d p o s i t i v e E B I T D A .

R e t u r n o n w o r k i n g c a p i t a lC o n s t r u c t i o n i s o n e o f t h e m o s t c a p i t a l - i n t e n s i v e s e c t o r s , making working capital management a very significant driver for o p e r a t i n g p e r f o r m a n c e . S h o r t - t e r m l i q u i d i t y b e i n g e s s e n t i a l f o r t h e c o n t r a c t o r s , d e l a y s i n c o l l e c t i n g r e c e i v a b l e s a n d s h o r t e n e d p a y a b l e s c a n s t r e t c h a c o m p a n y ’ s b a l a n c e s h e e t a n d m a y r e s u l t i n a s i t u a t i o n where a contractor might have to finance high working capital p o s i t i o n s w i t h d e b t , l e a d i n g t o u n n e c e s s a r y a n d a v o i d a b l e c o s t s . I t i s t h e r e f o r e n o t s u r p r i s i n g t h a t m a n y c o m p a n i e s m e n t i o n w o r k i n g c a p i t a l m a n a g e m e n t a s o n e o f t h e i r p r i o r i t i e s . W h i l e r a i s i n g w o r k i n g capital finance is not exactly a bad move, increasing leverage in any f o r m c o u l d w o r k a g a i n s t a c o m p a n y ’ s g r o w t h , c o n s i d e r i n g t h a t t h e i n d u s t r y i s a l r e a d y d e b t - r i d d e n .

8 A n n u a l r e p o r t s a n d E Y a n a l y s i s .

R e v i e w i n g t h e t o p 25 g l o b a l c o n t r a c t o r s f o r 2015 | 5

Return on working capital across geographies

USA

UK

Europe

Positive returns

Mixed (positive/negative) return

Negative returns

6 | Reviewing the top 25 global contractors for 2015

The Chinese (all five) and South Korean (all four) companies have positive return on working capital.

For both FY14 and FY15, three of the top seven contractors with above-average working capital returns were European — all three Spain-based.

Four European contractors consistently yielded negative returns for both 2015 and 2014. Two of them had operating losses, while the other two had current liabilities greater than current assets.

The only UK contractor in the top 25 was also the only one with both operating losses as well as a negative working capital position.

The average return of working capital for the US-based contractors improved in 2015. While two of them had operating income, the third one reported operating losses.

ChinaSouth Korea

Reviewing the top 25 global contractors for 2015 | 7

C a s h c o n v e r s i o n c y c l e sA l t h o u g h t h e K o r e a n c o n t r a c t o r s h a d a p o s i t i v e r e t u r n o n t h e i r w o r k i n g c a p i t a l , t h e y f a c e a t r i c k y s i t u a t i o n m a n a g i n g t h e i r cash flows. Three out of the four Korean c o n t r a c t o r s i n t h e t o p 25 m a k e t h e i r c r e d i t o r ’ s p a y m e n t b e f o r e t h e y c o l l e c t t h e i r r e c e i v a b l e s . I n s p i t e o f t h i s s i t u a t i o n , t h e K o r e a n e c o n o m y h a s c o m p a n i e s i n s e v e r a l s e c t o r s w i t h l a r g e c a s h s u r p l u s e s a n d b e t t e r m a n a g e m e n t o f t h e i r c a s h c o n v e r s i o n c y c l e s t h a n c o m p a n i e s i n o t h e r A s i a n e c o n o m i e s .

F o r t h e t o p 25 , 20% o f c o n t r a c t o r s h a d h i g h e r a v e r a g e r e c e i v a b l e d a y s t h a n t h e i r a v e r a g e p a y a b l e d a y s i n 201 5 , i m p l y i n g a l e s s efficient management of funds and disrupting t h e c a s h c o n v e r s i o n c y c l e . H o w e v e r , t h e s i t u a t i o n h a s i m p r o v e d f r o m 201 4, w h e r e t h e s a m e w a s r e p o r t e d b y a b o u t 25 %.

E u r o p e - a n d C h i n a - b a s e d c o n t r a c t o r s h a v e b e e n c o n s i s t e n t i n m a n a g i n g t h e i r c a s h c o n v e r s i o n b e t t e r t h a n t h e i r K o r e a n c o u n t e r p a r t s . H o w e v e r , t h e C h i n a - b a s e d c o n t r a c t o r s h a v e t h e h i g h e s t i n v e n t o r y a s a p e r c e n t a g e o f s a l e s ; 2 o f C h i n a ’ s t o p 5 c o n t r a c t o r s i n t h e t o p 25 h a v e a l a r g e n u m b e r o f p r o p e r t i e s u n d e r d e v e l o p m e n t .

I n 201 5 , s e v e n c o n t r a c t o r s h a d n e g a t i v e w o r k i n g c a p i t a l , m e a n i n g t h e y h a d m o r e c u r r e n t l i a b i l i t i e s t h a n c u r r e n t a s s e t s . O f t h e s e s e v e n , f o u r h a d a d e c l i n e i n t h e i r t r a d e r e c e i v a b l e s d u e t o w e a k e r s a l e s .9

E l e v e n o f t h e t o p 25 r e p o r t e d a n i n c r e a s e i n t h e i r w o r k i n g c a p i t a l i n F Y 1 5 , a n d 1 4 r e p o r t e d t h e o p p o s i t e . W h i l e f o u r C h i n a - b a s e d c o n t r a c t o r s r e p o r t e d a d e c l i n e i n r e t u r n o n w o r k i n g c a p i t a l i n F Y 1 5 , t h e r e w e r e s e v e n E u r o p e - b a s e d c o n t r a c t o r s . T h e K o r e a n c o n t r a c t o r s f a l l o n e a c h s i d e o f t h e c o i n , w i t h t w o o f t h e m h a v i n g m o r e w o r k i n g c a p i t a l i n 201 5 a n d t w o l e s s .

Chang e in ret urn on w ork ing c apit al : num b er of c ont rac t ors b y reg ion

9 A n n u a l r e p o r t s a n d E Y a n a l y s i s .

EfficiencyI t a p p e a r s t h a t c o n t r a c t o r s a r e b e c o m i n g i n c r e a s i n g l y c o s t -c o n s c i o u s . A s a r e s u l t , t h e a v e r a g e s e l l i n g , g e n e r a l a n d a d m i n i s t r a t i v e ( S G & A ) e x p e n s e s o f t h e t o p 25 c o n t r a c t o r s d e c r e a s e d b y 1 1 0 b a s i s p o i n t s i n 201 5 . T h e f o l l o w i n g c o n t i n u e d c o s t - s a v i n g m e a s u r e s a r e y i e l d i n g p o s i t i v e r e s u l t s f o r t h e t o p 25 c o n t r a c t o r s :

• T r a n s f o r m a t i o n a n d r e s t r u c t u r i n g

• L a y o f f s

• Mandatory evaluation of the financing of each potential tender

• P r o m o t i o n o f a l e a n s t r u c t u r e

O u r a n a l y s i s s u g g e s t s t h a t t h e a v e r a g e S G & A s p e n d o f a E u r o p e -b a s e d c o n t r a c t o r i s m o r e t h a n t h a t o f a c o n t r a c t o r b a s e d i n C h i n a o r K o r e a — a t r e n d t h a t w a s a l s o e v i d e n t i n 201 4. H o w e v e r , s p e n d i n g b y t h e E u r o p e a n c o n t r a c t o r s d e c r e a s e d i n 201 5 o v e r 201 4, w h i l e t h e C h i n e s e a n d K o r e a n c o n t r a c t o r s m a i n t a i n e d a s t a t u s q u o . T h i s d e c r e a s e f o r t h e E u r o p e a n c o n t r a c t o r s w a s m a i n l y d u e t o r i g o r o u s c o s t - s a v i n g i n i t i a t i v e s a n d t u r n a r o u n d s t r a t e g i e s i n p l a c e . A s a result, they are becoming more efficient and increasing their growth p r o s p e c t s f o r t h e l o n g r u n .

E u r o p eT h e U KT h e U SC h i n aK o r e a5

12

12

I n c r e a s e

7

14

2

D e c r e a s e

8 | R e v i e w i n g t h e t o p 25 g l o b a l c o n t r a c t o r s f o r 2015

E m p l o y e e u t i l i z a t i o nI t i s i n t e r e s t i n g t o n o t e t h a t t h e K o r e a n c o n t r a c t o r s h a v e n o t o n l y t h e l o w e s t S G & A s p e n d , b u t a l s o t h e h i g h e s t e m p l o y e e u t i l i z a t i o n r a t e . I n t e r m s o f r e v e n u e p e r e m p l o y e e , a l l f o u r K o r e a n c o n t r a c t o r s o u t p e r f o r m e d t h e r e s t o f t h e g r o u p i n 201 5 a n d w e r e w e l l a h e a d o f t h e c o n t r a c t o r in the fifth position in the list in terms of e m p l o y e e u t i l i z a t i o n r a t e .

1 0 A n n u a l r e p o r t s a n d E Y a n a l y s i s .

I n n o v a t i o nO n a v e r a g e , c o n t r a c t o r s s p e n d l e s s t h a n 1 % o n r e s e a r c h a n d d e v e l o p m e n t , w h i c h i s a m o n g t h e l o w e s t w h e n c o m p a r e d t o a l l o t h e r i n d u s t r i e s . S o m e o f t h e k e y a r e a s o f r e s e a r c h s p e n d i n g i n c l u d e : 1 0

• M a i n t a i n i n g a l l i a n c e s w i t h u n i v e r s i t i e s t o c o n d u c t r e s e a r c h p r o g r a m s

• U s i n g d i g i t a l t e c h n o l o g y t o c r e a t e v i r t u a l s i m u l a t o r s

• I m p l e m e n t i n g b u i l d i n g i n f o r m a t i o n m o d e l i n g

• Using and developing 3D printers, 3D mapping

• U s i n g r e s e a r c h f o r p r e s e r v i n g t h e e n v i r o n m e n t a n d i m p l e m e n t i n g e c o - f r i e n d l y p r a c t i c e s

4.4%

3.9%

20.6%

China

Korea

Europe

A v erag e S G & A s pend : b y c ont rac t or reg ion

R e v i e w i n g t h e t o p 25 g l o b a l c o n t r a c t o r s f o r 2015 | 9

G r o w t h s t r a t e g yC o n t r a c t o r s a r e u s i n g a m i x o f o r g a n i c a n d a c q u i s i t i o n - b a s e d g r o w t h s t r a t e g i e s t o e x p a n d b e y o n d t h e i r d o m e s t i c m a r k e t s . I n t h e l a s t c o u p l e o f y e a r s , m a n y a c q u i s i t i o n s h a v e b e e n m a d e i n t h e O c e a n i a r e g i o n . W h i l e t w o S p a i n - b a s e d c o n t r a c t o r s f o c u s o n g r o w t h t h r o u g h b o t h o r g a n i c a n d a c q u i s i t i o n - b a s e d m e a n s , a l a r g e F r a n c e - b a s e d c o n t r a c t o r h a s a t w o - s t e p s t r a t e g y f o r t h e s a m e . I t r e l i e s o n o r g a n i c g r o w t h i n s o m e c o u n t r i e s a l o n g w i t h a c q u i s i t i o n s o f s t r o n g l o c a l p l a y e r s i n i n t e r n a t i o n a l m a r k e t s . I n t h e p a s t , i t h a s d o n e m a n y acquisitions; currently, however, the contractor is facing difficulty finding overseas concessions fitting with its investment criteria. A n o t h e r F r a n c e - b a s e d c o n t r a c t o r i s m e r g i n g w i t h a U S - b a s e d p r o v i d e r o f t e c h n o l o g i e s a n d s e r v i c e s t o t h e o i l a n d g a s i n d u s t r y t o c r e a t e a r o b u s t , s t r o n g e n t i t y .

A C h i n a - b a s e d c o n t r a c t o r a i m s t o u s e m e r g e r s a n d a c q u i s i t i o n s ( M & A ) a s a p r e f e r r e d w a y t o u s e i t s c a s h . I t w a n t s t o e x p a n d i n t o t h e E u r o p e a n a n d N o r t h A m e r i c a n m a r k e t s a n d i s l o o k i n g f o r c o m p a n i e s w i t h d e p r e s s e d v a l u a t i o n s . A K o r e a - b a s e d c o n t r a c t o r i s a l s o v y i n g f o r n e w g r o w t h b u s i n e s s e s t h r o u g h a c q u i s i t i o n s .

While M&A helps companies reap the benefits of increased g e o g r a p h i c a l p r e s e n c e , t h e y c a r r y u n c e r t a i n t y a n d r i s k s w i t h t h e m . O n e c o n t r a c t o r i n t h e t o p 25 i s s t i l l r e c o v e r i n g f r o m t h e p r o b l e m s o f d i s i n t e g r a t i o n o f a r a p i d a c q u i s i t i o n i t m a d e . P r o p e r i n t e g r a t i o n o f t h e c o m p a n i e s a n d t h o r o u g h d u e d i l i g e n c e a r e p a r t i c u l a r l y i m p o r t a n t f o r a n a c q u i s i t i o n t o b e a s u c c e s s .1 1

E n v i r o n m e n t f a c t o r sI n t h e U S a n d E u r o p e , b u i l d i n g s c o n s u m e a b o u t 40% o f t o t a l e l e c t r i c i t y .1 2 W h i l e i t i s a c h a l l e n g e t o m a k e e x i s t i n g b u i l d i n g s g r e e n a n d m o r e e c o - f r i e n d l y , i t i s a l s o a n o p p o r t u n i t y f o r c o n t r a c t o r s a s a n e w p o t e n t i a l b u s i n e s s .

C o n t r a c t o r s a r o u n d t h e w o r l d h a v e s t a r t e d f o c u s i n g o n g r e e n c o n s t r u c t i o n i n a b i g w a y . I n E u r o p e , g r e e n c o n s t r u c t i o n p a t e n t filings increased threefold during 2000–2011. In China, all g o v e r n m e n t - f u n d e d c o n s t r u c t i o n a n d p u b l i c b u i l d i n g p r o j e c t s l a r g e r t h a n 20, 000 s q u a r e m e t e r s m u s t c o m p l y w i t h C h i n e s e g r e e n b u i l d i n g s t a n d a r d s . T h e c o u n t r y a i m s t o m a k e a t l e a s t 20% o f a l l new building construction compliant with specific green building r e q u i r e m e n t s .13

1 1 A n n u a l r e p o r t s a n d E Y a n a l y s i s .1 2 “ F r e q u e n t l y A s k e d Q u e s t i o n s , ” U.S. Energy Information Administration website,

http://www.eia.gov/tools/faqs/faq.cfm?id=86&t=1, accessed on 6 July 2016; “ B u i l d i n g t h e f u t u r e : F o u r i n n o v a t i o n t r e n d s t h a t a r e s h a p i n g g r e e n c o n s t r u c t i o n , ” European Patent Office website, h t t p s : / / w w w .e p o .o r g / n e w s - i s s u e s / t e c h n o l o g y /s u s t a i n a b l e - t e c h n o l o g i e s / g r e e n - c o n s t r u c t i o n .h t m l , a c c e s s e d o n 6 J u l y 201 6.

13 “ 201 6 T o p M a r k e t s R e p o r t B u i l d i n g P r o d u c t s a n d S u s t a i n a b l e C o n s t r u c t i o n C o u n t r y C a s e S t u d y , ” International Trade Administration website, h t t p : / / t r a d e .g o v /t o p m a r k e t s / p d f / B u i l d i n g _ P r o d u c t s _ C h i n a .p d f , a c c e s s e d o n 5 J u l y 201 6.

1 4 A n n u a l r e p o r t s a n d E Y a n a l y s i s .

T h e t o p 25 c o n t r a c t o r s i n o u r s t u d y a r e a l s o a c t i v e l y i n v o l v e d i n r e d u c i n g t h e i r c a r b o n e m i s s i o n s . T h e E u r o p e - b a s e d c o n t r a c t o r s i n o u r a n a l y s i s f o l l o w t h e G r e e n h o u s e G a s P r o t o c o l i n r e p o r t i n g t h e i r e m i s s i o n s , w h i l e t h e m a j o r i t y o f t h e A s i a n c o n t r a c t o r s d o n o t r e p o r t t h e i r e m i s s i o n s . T h e G r e e n h o u s e G a s P r o t o c o l c a t e g o r i z e s e m i s s i o n s i n t h r e e b r o a d s c o p e s , d e p e n d i n g u p o n w h e t h e r t h e y a r e d i r e c t o r i n d i r e c t .1 4

E m b r a c i n g g r e e n t e c h n o l o g i e sC o n t r a c t o r s a r e f o r g i n g a l l i a n c e s , e s t a b l i s h i n g t o o l s a n d i m p l e m e n t i n g t h e I S O 5 0001 ( e n e r g y m a n a g e m e n t ) a n d I S O 1 4001 ( e n v i r o n m e n t a l m a n a g e m e n t ) s t a n d a r d s .

T h e f o l l o w i n g a r e a f e w e x a m p l e s w h i c h i n d i c a t e t h a t c o n t r a c t o r s h a v e t a k e n s t e p s t o e m b r a c e g r e e n t e c h n o l o g i e s t o r e d u c e t h e e m i s s i o n o f h a r m f u l g a s e s :

• A c o n t r a c t o r h a s e s t a b l i s h e d a t o o l c a l l e d F u e l T r a c k e r t o l o w e r t h e f u e l c o n s u m p t i o n a n d C O 2 e m i s s i o n s o f i t s p a s s e n g e r c a r a n d commercial vehicles fleet.

• A n o t h e r c o n t r a c t o r i s c o n d u c t i n g r e s e a r c h t o a d o p t o r c r e a t e n e w h y d r a u l i c b i n d e r s w i t h l o w C O 2 e m i s s i o n s .

• A F r a n c e - b a s e d c o n t r a c t o r i s i n v o l v e d i n t h e d e v e l o p m e n t o f p r o p r i e t a r y l a r g e s c a l e v o r t e x b u r n e r s f o r t h e f u r n a c e s u s e d i n s t e a m m e t h a n e r e f o r m i n g t o y i e l d u l t r a - l o w N O x c o n c e n t r a t i o n s .

• A K o r e a n c o n t r a c t o r h a s i n t r o d u c e d e n e r g y m a n a g e m e n t s y s t e m s t o c u t g r e e n h o u s e gases by 30% by 2018 using solar, wind a n d o t h e r r e n e w a b l e s o u r c e s f o r i t s r e s i d e n t i a l u n i t s .

1 0 | R e v i e w i n g t h e t o p 25 g l o b a l c o n t r a c t o r s f o r 2015

As the US$ gained significantly against other c urrenc ies in 2 0 1 5 , m any c om panies , in s pit e of hav ing rev enue g row t h in 2 0 1 5 , d is pl ay a d rop in g row t h af t er U S $ c onv ers ion in 2 0 1 5 rat es . T o av oid t his , w e hav e us ed c ons t ant U S $ 2 0 1 4 ex c hang e rat es f or our anal y s is and t o c om pare w it h 2 0 1 4 res ul t s .

A l s o, res t at ed 2 0 1 4 res ul t s hav e b een us ed f or t his anal y s is .

Not

e

1 5 “ ‘ B r e x i t ’ w o u l d e x a c e r b a t e U K c o n s t r u c t i o n s e c t o r c r i s i s : N o r t h a c r e C E O , ” CNBC website, h t t p : / / w w w .c n b c .c o m / 201 6/ 06/ 21 / b r e x i t - w o u l d - e x a c e r b a t e - u k -c o n s t r u c t i o n - s e c t o r - c r i s i s - n o r t h a c r e - c e o .h t m l , a c c e s s e d o n 8 J u l y 201 6.

1 6 “ E u r o p e a n e c o n o m i c g u i d e , ” The Economist website, h t t p : / / w w w .e c o n o m i s t .c o m /b l o g s / g r a p h i c d e t a i l / 201 6/ 02/ t a k i n g - e u r o p e - s - p u l s e , a c c e s s e d o n 8 J u l y 201 6.

1 7 “Sector Update – Construction,” Samsungpop website, h t t p : / / n u m s .s a m s u n g p o p .c o m / r e p o r t / 201 60407 08 465 5 22E _ 01 _ 06.p d f , a c c e s s e d o n 1 1 J u l y 201 6.

1 8 “ G l o b a l c o n s t r u c t i o n o u t l o o k , ” Oxford Economics, S u m m e r 201 6, a c c e s s e d o n 1 1 J u l y 201 6.

F i n a l r e m a r k s T h e i n d u s t r y i s u n d e r g o i n g a p l e t h o r a o f c h a n g e s . C o n t r a c t o r s a r e f a c i n g d i s r u p t i v e t e c h n o l o g i e s a n d e m b r a c i n g t e c h n o l o g i c a l advancements (though at a sluggish speed). They are finding ways t o l o w e r t h e i r c a r b o n e m i s s i o n a n d , m o s t i m p o r t a n t , e x p a n d i n g t h e i r g e o g r a p h i c a l r e a c h f o r s u s t a i n a b l e g r o w t h . E v e n c o n t r a c t o r s that were not quite diversified earlier have started diversifying, considering the benefits diversification offers.

W h i l e t h e c o n t r a c t o r s a r e m o v i n g f o r w a r d , t h e y c o n t i n u e t o f a c e s o m e c h a l l e n g e s , b e t h e y i n t e r n a l o r d u e t o e x t e r n a l f a c t o r s , s u c h a s e c o n o m i c a n d p o l i t i c a l d e v e l o p m e n t s . T h e U K ’ s c o n s t r u c t i o n s e c t o r c o u l d t a k e a b l o w f r o m B r e x i t d u e t o a p o t e n t i a l h a l t o n i m m i g r a t i o n , w i t h t h e s e c t o r a l r e a d y f a c i n g a s h o r t a g e o f s k i l l e d l a b o r . M i g r a n t w o r k e r s c u r r e n t l y a c c o u n t f o r a r o u n d 1 2% o f t h e a p p r o x i m a t e l y 2.9 m i l l i o n c o n s t r u c t i o n s e c t o r j o b s i n t h e c o u n t r y . T h e l a b o r s h o r t a g e w o u l d l e a d t o a r i s e i n c o n s t r u c t i o n c o s t s , c a u s i n g a h i t t o a f f o r d a b l e h o u s i n g m a r g i n s .1 5

T h e E u r o p e a n e c o n o m y h a s i t s o w n w o e s : s l u g g i s h g r o w t h ( s t i l l n o t a t t h e p r e - r e c e s s i o n l e v e l ) , c o n c e r n s o v e r e m e r g i n g m a r k e t s d u e t o E u r o p e ’ s e x p o r t d r i v e n e c o n o m y , c o n t i n u e d s h o r t a g e o f a l a b o r f o r c e a n d s o o n .1 6

O n t h e A s i a n s i d e , a l t h o u g h t h e K o r e a n c o n t r a c t o r s p e r f o r m e d w e l l i n 201 5 , t i g h t e r a c c o u n t i n g s t a n d a r d s i n t h e c o u n t r y , a l o n g w i t h m a n d a t o r y d i s c l o s u r e s , c o u l d a f f e c t t h e m . F o r c o n t r a c t s e q u a t i n g t o a t l e a s t 5 % o f s a l e s g u i d a n c e , t h e g o v e r n m e n t h a s m a n d a t e d q u a r t e r l y d i s c l o s u r e s o f 1 ) p r o g r e s s r a t e s a n d e s t i m a t e d l o s s e s , 2) accounts receivable and bad debt provisioning and 3) accrued r e c e i v a b l e s a n d a c c u m u l a t e d i m p a i r m e n t l o s s e s . T h e c o n s t r u c t i o n industry in Korea recognizes sales and profits on a percentage o f c o m p l e t i o n b a s i s a n d t h e s e c h a n g e s w i l l i m p r o v e t r u s t i n t h e a c c o u n t i n g s t a n d a r d s .1 7

G i v e n t h e u b i q u i t o u s c h a l l e n g e s f a c e d b y t h e i n d u s t r y , i t i s f o r e c a s t to grow in the 3%–4% range around the world. Government stimulus i n C h i n a , s t r o n g g r o w t h i n G e r m a n y a n d t h e r e a l i z a t i o n o f u p g r a d e s t o i n f r a s t r u c t u r e i n t h e U S s h o u l d p r o v i d e a l o n g - t e r m i m p e t u s t o t h e i n d u s t r y a n d i t s r e c o v e r y .1 8

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A b out EYE Y i s a g l o b a l l e a d e r i n a s s u r a n c e , t a x , t r a n s a c t i o n a n d a d v i s o r y s e r v i c e s . T h e i n s i g h t s a n d q u a l i t y s e r v i c e s w e d e l i v e r h e l p b u i l d t r u s t a n d c o n f i d e n c e i n t h e c a p i t a l m a r k e t s a n d i n e c o n o m i e s t h e w o r l d o v e r . W e d e v e l o p o u t s t a n d i n g l e a d e r s w h o t e a m t o d e l i v e r o n o u r p r o m i s e s t o a l l o f o u r s t a k e h o l d e r s . I n s o d o i n g , w e p l a y a c r i t i c a l r o l e i n b u i l d i n g a b e t t e r w o r k i n g w o r l d f o r o u r p e o p l e , f o r o u r c l i e n t s a n d f o r o u r c o m m u n i t i e s .

E Y r e f e r s t o t h e g l o b a l o r g a n i z a t i o n , a n d m a y r e f e r t o o n e o r m o r e , o f t h e m e m b e r f i r m s o f E r n s t & Y o u n g G l o b a l L i m i t e d , e a c h o f w h i c h i s a s e p a r a t e l e g a l e n t i t y . E r n s t & Y o u n g G l o b a l L i m i t e d , a U K c o m p a n y l i m i t e d b y g u a r a n t e e , d o e s n o t p r o v i d e s e r v i c e s t o c l i e n t s . F o r m o r e i n f o r m a t i o n a b o u t o u r o r g a n i z a t i o n , p l e a s e v i s i t e y .c o m .

A b out EY ’ s G l ob al R eal Es t at e, H os pit al it y & Cons t ruc t ion S ec t orT o d a y ’ s r e a l e s t a t e s e c t o r m u s t a d o p t n e w a p p r o a c h e s t o a d d r e s s r e g u l a t o r y r e q u i r e m e n t s a n d f i n a n c i a l r i s k s w h i l e m e e t i n g t h e c h a l l e n g e s o f e x p a n d i n g g l o b a l l y a n d a c h i e v i n g s u s t a i n a b l e g r o w t h . E Y ’ s G l o b a l R e a l E s t a t e , H o s p i t a l i t y & C o n s t r u c t i o n S e c t o r b r i n g s t o g e t h e r a w o r l d w i d e t e a m o f p r o f e s s i o n a l s t o h e l p y o u s u c c e e d — a t e a m w i t h d e e p t e c h n i c a l e x p e r i e n c e i n p r o v i d i n g a s s u r a n c e , t a x , t r a n s a c t i o n a n d a d v i s o r y s e r v i c e s . T h e S e c t o r t e a m w o r k s t o a n t i c i p a t e m a r k e t t r e n d s , i d e n t i f y t h e i r i m p l i c a t i o n s a n d d e v e l o p p o i n t s o f v i e w o n r e l e v a n t s e c t o r i s s u e s . U l t i m a t e l y , t h i s t e a m e n a b l e s u s t o h e l p y o u m e e t y o u r g o a l s a n d c o m p e t e m o r e e f f e c t i v e l y .

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