TRIS Rating Co., Ltd. has assigned a rating of “A-” to the proposed issue of up to Bt3,000 million in senior debentures of Quality Houses PLC (QH). At the same time, TRIS Rating has affirmed the company and current senior debenture ratings of QH at “A-”. The outlook remains “negative”. The company will use the proceeds from the new debentures to replace some short-term borrowings and for working capital. The ratings reflect the company’s established track record in the property development industry, strong position in the middle- to high-income housing market, and recurring income from commercial properties and investments in marketable securities. The strengths are partially offset by the cyclical nature of the property development industry, pressures from higher raw material and labor costs, and a high financial leverage in the medium term. The “negative” outlook reflects QH’s weakened credit profile due to the flood impacts. The outlook could be revised back to “stable” should the company be able to lower its total debt to capitalization ratio below 55%, or secure a backlog at the level that will help alleviate higher leverage risk. However, the ratings could be downgraded if QH’s total debt to capitalization ratio is expected to stay above 55% for an extended period without a commensurate level of secured future cash flows.
TRIS Rating reported that QH was established in 1983 by Land & Houses PLC (LH). QH is one of the leading property developers in Thailand. As of June 2012, QH’s major shareholders were LH (25%) and the Government of Singapore Investment Corporation Pte. Ltd. (11%). QH has a strong market position, particularly in single-detached house (SDH) segment with pricing above Bt5 million per unit. Over the past two years, the company has also delivered an acceptable performance in offering competitive product platforms in the lower pricing segments.
TRIS Rating said, excess low-rise residential units and uncertain shifts in market behaviors in the aftermath of the flood crisis pose a significant challenge for QH to adjust its business models and re-build consumer confidence. QH’s flood-impacted projects accounted for approximately 28% of the company’s total real estate inventory at the end of 2011. The average unit price of the impacted projects was Bt8 million. During the first two quarters of 2012, presales from the impacted projects recovered by around 30%. TRIS Rating believes that a number of households in the mid- to upper-income segments will likely hold their home buying decisions until the end of 2012. If the flooding situation is proven to be manageable this year, QH should be able to resume normal sale pace for projects in the flood-prone areas by 2013.
QH’s financial profile weakened noticeably in 2011, largely due to a fall in profit margin and higher leverage. QH’s sales are expected to recover slower than lesser-impacted industry peers due to a heavy exposure on low-rise segment and a relatively low high-rise backlog. At the end of June 2012, QH’s condominium backlog was Bt3.7 billion. About Bt1.6 billion of the backlog is expected to be transferred in 2012, while most of the remaining units will be transferred in 2013.
QH’s operating profit margin should remain under pressure in the short run from rising operating costs. At the end of June 2012, its debt to capitalization ratio stayed at 64.2%, up from 52.4% in 2010. QH expects to receive net cash around Bt2 billion in the third quarter of 2012 from the set up of a property fund. Nonetheless, QH’s leverage is expected to stay elevated in the medium term to support new projects worth approximately Bt20 billion per annum. High-rise projects, which require around two-year development periods, will account for a third of total project value. QH’s liquidity profile weakened, but still remained satisfactory. The company’s liquidity was enhanced by a portfolio of marketable securities with a fair value of Bt20 billion at the end of June 2012.
Due to the heavy flooding in late 2011, the sale of residential properties is expected to slow down, especially for the heavy flooded zones. The government’s tax incentive scheme and zero-rate mortgage financing plan may not have a significant effect on the demand for residential property in the coming quarters due to the negative consumer sentiment. Global economic uncertainties, the threat of rising costs from minimum-wage hike, and elevated leverage levels of most property developers are key downside risks for the industry, said TRIS Rating. — End.
Company Rating: Affirmed at A- Issue Ratings: QH12DA: Bt1,300 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- QH143A: Bt2,000 million senior debentures due 2014 Affirmed at A- QH144A: Bt2,000 million senior debentures due 2014 Affirmed at A- QH152A: Bt1,600 million senior debentures due 2015 Affirmed at A- QH164A: Bt2,212 million senior debentures due 2016 Affirmed at A- QH168A: Bt1,400 million senior debentures due 2016 Affirmed at A- Up to Bt3,000 million senior debentures due within 2017 A- Rating Outlook: Negative
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2012, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.