Doosan Group hit by credit downgrades

Doosan Group Chaimran Park Yong-maan

By Lee Hyo-sik

Doosan Group, which is struggling to revive its deteriorating construction and heavy equipment businesses, has been hit by credit downgrades as its main units continue to lose money.

A slowdown in China and other emerging economies, among others, has dealt a blow to the conglomerate, which does business in 16 countries across the globe.

According to some industry analysts, the latest credit reduction could adversely affect the group’s bid to win a license to operate a duty free shop in Seoul as the authorities may question its financial ability to raise funds, amounting to hundreds of billions of won, to open and run the store.

The Korea Investors Service (KIS), affiliated with the Moody’s, cut its credit ratings by one notch Friday for Doosan Infracore and Doosan Engine to BBB+ from A-. The agency also lowered the credit worthiness of Doosan Engineering & Construction (E&C) to BBB- from BBB.

KIS cut its outlook for Doosan Corp., the group’s holding firm, and Doosan Heavy Industries from “stable” to “negative,” while maintaining the ratings. The agency said it will downgrade the ratings for the two companies if their bottom lines further deteriorate.

KIS pointed out that the conglomerate headed by chairman Park Yong-Maan, who is also chairman of the Korea Chamber of Commerce and Industry, continues to suffer declining sales in China and other emerging economies. As a result, the group spent more than it earned, aggravating its financial health.

For instance, Doosan Heavy Industries earned 8.2 trillion won in the first half of 2015, down 6.1 percent from the same period last year. Its operating profit plunged 21.7 percent to 381 billion won, while posting a net loss of 114 billion won.

The company has to service corporate bonds worth 210 billion won, which will expire over the next year. Doosan Infracore, Doosan Corp. and Doosan E&C also have to pay back maturing bonds, amounting to 405 billion won, 210 billion won and 50 billion won, respectively.

“It is true that the group’s construction and heavy equipment manufacturing units have been struggling because of the global economic downturn,” a Doosan Group official said. “But we are doing everything we can to make things better. All group units have taken restructuring measures to improve their bottom lines and more effectively cope with unfavorable business environments.”

Can Doosan win a duty free license?

In September, Doosan announced its plan to open a large-scale duty free shop at Doosan Tower in Dongdaemun, eastern Seoul, a shopping district frequently visited by Chinese and other Asian tourists. The group has vowed to take one of Lotte’s two licenses, which will expire in December.

The group has pledged to transform the Doosan Tower into the country's largest duty free store, pledging to sell more goods produced by small companies and to promote a partnership with nearby merchants.

However, a duty free industry official, who declined to be named, said Doosan’s worsening financial health could adversely affect its entry into the duty free business – dubbed the “golden goose” of the retail industry.

“Duty free business requires an operator to invest a significant amount of money in advance to open a store and secure luxury goods and other items,” the official said. “The Korea Customs Service is certainly looking at bidders’ financial soundness during the selection process. Everybody knows that Doosan’s credit downgrades are not a good sign.”

KCS is scheduled to announce a list of winners for three duty free shops in November.

Lotte runs the country's largest duty free shop at the Lotte Department Store in downtown Seoul and another at the Lotte World Mall in southern Seoul. SK Networks operates a duty free shop at the Sheraton Walkerhill Hotel in eastern Seoul,

However, Doosan downplayed such concerns, stressing that Doosan Corp., which will run a duty free shop once it wins a license, remains financially sound.

“Doosan has been operating one of Korea’s largest shopping malls, drawing thousands of Korean and non-Korean visitors every day,” the official said. “We have been considering entering the duty free business for quite some time. Doosan Corp. has know-how and the financial means to successfully run a large-scale store.”