Eleven Construction, a leading domestic developer focused on the Yongsan UN Command site, has returned to profitability for the first time in three years. The company reported a consolidated net profit exceeding 180 billion won, driven by the performance of its key subsidiary, Yongsan Eleven. However, over 100 billion won in cash flowed out from operating activities. To translate this accounting rebound into real financial improvement, the company must recover funds from office-tel sales and residential rental deposits to reduce its 1.3 trillion won in project financing (PF).
According to an audit report disclosed on the Financial Supervisory Service's electronic disclosure system on July 26, Eleven Construction recorded consolidated sales of 407.6 billion won and a net profit of 183.7 billion won last year, marking a return to profit after consecutive losses since 2022.
The rebound in performance was largely attributed to Yongsan Eleven, a special purpose company (SPC) responsible for the UN Command site development. Yongsan Eleven recognized sales from office-tel sales last year, generating 216.1 billion won in revenue and a net profit of 133.2 billion won. A significant portion of the consolidated net profit stemmed from the Yongsan project.
The net profit also reflected the recognition of deferred tax assets related to carryforward losses. As the potential for taxable income arises, corporate tax expenses decrease, leading to an increase in net profit. While operating profit improved, it is important to note that the entire increase in net profit cannot be viewed as a direct result of cash inflow from operations.
Amid a sluggish real estate market and tightening in the PF sector, Eleven Construction has focused its efforts on the UN Command site development rather than expanding into new projects. The company's flagship project, 'The Parkside Seoul,' is a mixed-use development that includes residential units, office-tels, hotels, and commercial facilities on a 44,935 square meter site in Itaewon, Yongsan District, purchased from the Korea Land and Housing Corporation (LH) for 1.05 trillion won in 2017. Hyundai Engineering & Construction is overseeing the construction, which is expected to be completed in 2027.
The first test of this strategy was the high-end office-tel 'The Parkside Suite,' which recorded an average subscription competition rate of 1.67 to 1 last year. However, the project's success will depend on the speed of actual contracts and the collection of sales proceeds. Timely receipt of down payments, interim payments, and final payments is crucial for smooth repayment of PF principal and interest and for subsequent construction costs.
The company's next major focus is a residential project comprising 420 units. This high-end housing product, primarily featuring larger units, is set to be offered under a private rental scheme in September. The structure involves operating the units as rentals for a period before converting them to sales.
By supplying the units as private rentals, the company can set prices according to market conditions and product appeal, avoiding the constraints of price ceilings. However, the immediate cash flow will depend more on the rental deposits collected from tenants than on the future conversion price. The timing of the residential supply and the influx of deposits coincides with the maturity of the PF, making the securing of rental demand a key variable for improving the financial structure.
Despite the accounting profit, cash flow remains a concern. Last year, the consolidated cash flow from operating activities recorded a net outflow of 106.7 billion won, marking the third consecutive year of negative cash flow. This indicates that the funds invested in business expenses and construction costs exceeded the cash generated from operations.
Inventory assets also exceed 2 trillion won. According to the audit report, unfinished housing amounts to 565.4 billion won, while land holdings total 1.2352 trillion won. Accounts receivable from sales also stand at 160.9 billion won, indicating a lag between recognized sales and actual cash inflow.
Consolidated borrowings are approximately 1.7 trillion won, with a debt ratio around 200%. Funds borrowed from related parties have also increased to about 100 billion won. The main PF for the Yongsan development, amounting to 1.3 trillion won, is set to mature in 2027.
The speed at which cash generated from the UN Command site is applied to reduce borrowings will significantly impact interest burdens and the capacity for new projects. Delays in collecting final payments from office-tel sales and rental deposits for the residential units could lead to increased financial costs during the maturity extension or refinancing process.
Cash recovery is also needed from existing projects outside Yongsan. There are still unsold units and accounts receivable in the 'Parkrest Haenam' project in Jeonnam and the 'Gochon Central Xi' project in Gimpo, Gyeonggi Province. Even if substantial profits are recognized from Yongsan, the overall improvement in cash flow for the company may be limited if funds remain tied up in other projects.
Through its focused approach to the UN Command site, Eleven Construction has succeeded in achieving a rebound on its income statement. However, with over 2 trillion won in inventory assets and 1 trillion won in PF remaining, the completion of its recovery will depend on the actual cash inflow rather than just sales and net profit.
If the collection of office-tel sales proceeds and residential rental deposits leads to PF repayments and a reduction in borrowings, the UN Command site could remain a flagship project that rescued Eleven Construction from crisis. Conversely, delays in cash recovery could increase the company's exposure to risks tied to the timelines of a single project and the financial market conditions.
* This article has been translated by AI.
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