TRIS Rating Co., Ltd. has assigned the rating of “A-” to the proposed issue of up to Bt2,000 million in senior debentures of Quality Houses PLC (QH). At the same time, TRIS Rating has affirmed the company and current issue ratings of QH at “A-”. The outlook remains “stable”. The proposed debentures replace QH’s existing senior debentures worth up to Bt1,000 million announced the rating on 10 May 2010. The ratings reflect QH’s long track record in the property development industry, strong position in the middle- to high-income housing market and diverse revenue sources with recurring income from commercial properties. The ratings also take into consideration the company’s financial flexibility from strategic investments in associated companies. The strengths are partially offset by political instability, the cyclical nature of the property development industry, and the relatively high level of financial leverage compared with industry peers.
The “stable” outlook reflects QH’s improved operating performance due to a recovery in housing demand. TRIS Rating expects the company to sustain its leading market share in the high-end segment and balance its product mix to capture changes in the demand for housing. QH’s leverage level remains a concern. The resumption of project expansion plans should not jeopardize efforts to strengthen its balance sheet.
TRIS Rating reported that QH was established in 1983 by Land & Houses PLC (LH). QH is one of the leading property developers in Thailand and has well-established brands in the medium- to high-income segments. At the end of 2010, QH’s major shareholders were LH (25%) and the Government of Singapore Investment Corporation Pte. Ltd. (11%). QH’s competitive edge stems from a strong position in the high-end housing market, stable sources of recurring income from a portfolio of rental properties including Centrepoint serviced apartment and Q-House office buildings, and a growing market presence in the mid-priced housing segment under the Casa Ville and Casa City brands. Housing and condominium sales accounted for 93% of QH’s total revenues for the first nine months of 2010, while rental income from office buildings and serviced apartments accounted for the remaining 7%. In 2010, the average unit price across QH’s housing portfolio should stay in the range of Bt7- Bt8 million, steadily declining from over Bt10 million in 2006. The drop in the average unit price reflects a strategy to expand customer base in the middle-income segment. At the end of September 2010, QH had inventory residential units worth approximately Bt20,524 million. Compared with peers, TRIS Rating said that QH’s asset composition differs since around a quarter of total assets are commercial rental properties and strategic investments in associated companies. The rental assets not only provide recurring income and cash flows, but also enhance financial flexibility as the properties can be sold to a property fund. The strategic investments in three associated companies, of which two are traded on the Stock Exchange of Thailand (SET) while another is to be listed on the SET, generate cash dividends of around Bt300-Bt400 million per annum. The dividend receipts are an additional source of funding and serve as a long-term financial cushion.
QH’s revenue for the first nine months of 2010 was Bt10,039 million, up 20% from the same period last year. Operating margin before depreciation and amortization for the first nine months of 2010 was 17.7%, down from 20.3% in 2009 due partly to the expiration of government tax incentives. Total debt at the end of September 2010 stood at Bt15,216 million, up from Bt12,936 million by year end 2009. During the same period, the debt to capitalization ratio was at 54.2%, up from 51.1%. Leverage was driven up by an increase in land purchases. The leverage is expected to rise slightly further as a result of land purchases during late 2010 to early 2011 and an investment of Bt1.1 billion in LH Financial Group PLC, a holding company of Land and Houses Retail Bank PLC. QH’s liquidity and financial flexibility are supported by cash on hand of Bt1,452 million, unused long-term credit lines of Bt3,814 million at the end of September 2010 and the ability to access the capital market.
The residential property market recovered in the second half of 2009; the momentum was sustained throughout 2010. However, the market in 2010 was partly affected by the local political turmoil during the second quarter of 2010 and the expiration of the government tax incentives in June 2010. Major developers continue to increase market share at the expense of smaller developers. Almost all large developers have set aggressive expansion plans for the next few years. The prices of land at appropriate locations will likely be more expensive. After the government tax incentives expired, demand for residential property will depend heavily on consumer confidence and the pace of economic recovery. The changes in loan- to-value policy (LTV ratio) announced by the Bank of Thailand and upward trend of interest rates are expected to reduce speculative demand and promote a healthier growth for residential property from 2011 onwards, said TRIS Rating. -- End
Company Rating: Affirmed at A- Issue Ratings: QH113A: Bt1,400 million senior debentures due 2011 Affirmed at A- QH11OA: Bt1,200 million senior debentures due 2011 Affirmed at A- QH123A: Bt600 million senior debentures due 2012 Affirmed at A- QH123B: Bt1,300 million senior debentures due 2012 Affirmed at A- QH127A: Bt1,500 million senior debentures due 2012 Affirmed at A- QH127B: Bt1,000 million senior debentures due 2012 Affirmed at A- QH135A: Bt1,000 million senior debentures due 2013 Affirmed at A- QH136A: Bt1,000 million senior debentures due 2013 Affirmed at A- QH144A: Bt2,000 million senior debentures due 2014 Affirmed at A- Up to Bt2,000 million senior debentures due within 2014 A- Rating Outlook: Stable
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