TRIS Rating has affirmed the company and senior debenture ratings of TICON Industrial Connection PLC (TICON) at “A” with “stable” outlook. The ratings reflect the company’s proven record of developing ready-built factories (RBFs) and warehouses for rent, plus the recurring cash flows it receives from rental contracts. However, the heavy capital expenditures, plus the uncertainty surrounding the timing and strength of the economic recovery, which affects investment activities worldwide, are the rating concern. The “stable” outlook reflects the expectation that TICON will be able to maintain its leadership position in the niche market of providing rental factories and warehouses. Despite heavy investment for warehouse space and RBF in new locations, this will help diversify TICON’s portfolio to be less reliant on its assets in Ayudhya province.
TICON is the leading provider of RBFs in Thailand. It was established in 1990 and listed on the Stock Exchange of Thailand (SET) in 2002. The company expanded its business scope and started providing warehouse space for rent in 2005. As of June 2013, the company’s portfolio comprised 110 leased factories and 71 leased warehouses, with leased space totaling 581,908 square meters (sq.m.). Its facilities are located in major industrial estates and along the main logistics routes in Thailand. During the past few years, approximately 30% of TICON’s total revenue was generated by the rental of factories and warehouses. The major portion of revenue (more than 60%) came from selling assets to property funds. Revenues from the sales of assets to TICON Property Fund (TFUND) and TPARK Logistics Property Fund (TLOGIS) amounted to Bt1,500-Bt2,200 million per year between 2007 and 2010. However, due to the severe flooding in late 2011, TICON shifted some of its asset sales planned for 2011 to 2012. As a result, the value of assets sold to property funds in 2011 declined to Bt944 million but increased to Bt4,333 million in 2012.
As of April 2013, TICON’s major shareholders remained Rojana Industrial Park PLC (20.6%), City Realty Group (6.6%), and TICON’s management (6.5%). The company’s competitive advantage stems from its proven record of providing quality RBFs to customers and its cost advantage in building standard factories at competitive prices by using an in-house construction team. TICON’s portfolio of RBFs and warehouses is geographically diversified. Currently, the company provides RBFs for rent in 15 locations and provides warehouses for rent in 16 locations. TICON remains the leading provider of RBFs in Thailand, according to CB Richard Ellis (CBRE). TICON and TFUND had a combined market share in factory leased area of 56% as of March 2013. This share is far higher than its competitors, such as Hemaraj Land and Development PLC (17%), Pinthong Industrial Park Co., Ltd. (10%), Amata Corporation PLC (10%), and Thai Factory Development PLC and Thai Industrial Fund 1 (7%). Moreover, the company is the largest provider of warehouse space in Thailand. According to CBRE data and the data compiled by TRIS Rating, as of March 2013, TICON and its property funds accounted for 40% of the total warehouse leased area, followed by WHA Corporation PLC (32%).
In 2012, the size of TICON’s portfolio of RBFs shrank slightly. The reduction in size was largely due to the effects of the widespread flood in late 2011. Excluding the assets sold to the property funds, TICON’s total leased area in RBFs in 2012 fell by 5%. However, the size of TICON’s warehouse portfolio increased by 44% in 2012. As a result, the company’s total leased area grew by 15%. The strong performance of the rental warehouse segment helped offset a drop in the RBF segment in 2012. For the first half of 2013, TICON’s total leased area increased by 12%, rising from 518,948 sq.m. at the end of 2012 to 581,908 sq.m. at the end of June 2013. The growth was driven by a 16% increase in leased space in the RBF portfolio and an 8% increase in the amount of leased space in warehouse portfolio. The RBF segment recovered strongly in the eastern part of Thailand, while warehouse segment seemed to slow down during the first six months of 2013.
Despite the rises in leased area and rental income in 2012 through the first quarter of 2013, the occupancy rate (OR), excluding preleased area, for all of TICON’s tenants decreased to 67% at the end of June 2013, compared with 73% at the end of 2012 and 94% at the end of 2011. The decrease in OR was primarily due to an aggressive expansion of warehouse space and RBF in new locations during 2012 and 2013 and high vacancy of properties in Ayudhya province.
TICON’s rental income improved during 2012 through the first quarter of 2013. Rental income rose by 20% to Bt1,053 million in 2012, from Bt880 million in 2011. For the first three months of 2013, rental income continued to grow, rising to Bt269 million, a 26% y-o-y increase from Bt214 million during the same period of 2012. The gross margin of rental income rebounded to 67% in the first quarter of 2013, rising from a bottom at 63% during the post-flood period in 2012. However, this level continued to be lower than gross margin of 72%-77% achieved in 2008-2011, due to increasing repair and maintenance expenses following the floods.
Since 2011, TICON’s capital expenditures have increased substantially. The company has expanded its RBF and warehouse portfolio in the eastern region and other large provinces in order to serve rising demand in these regions. As of March 2013, TICON’s debt level stood at Bt13,069 million, rising from Bt6,176 million as of December 2010. The company’s total debt to capitalization ratio deteriorated to 60.8% at the end of March 2013, from 52.5% at the end of 2010. TICON’s leverage is expected to remain high in the short term and fall gradually. The company plans to spend about Bt12,000 million for capital expenditures in 2013 and Bt8,000-Bt9,000 million per year in 2014 and 2015. Most of capital expenditure in 2013 will be used to buy land in major provinces and along main logistics routes, such as Khonkaen province, Suratthani province, and Bangna-Trad road. The capital expenditure will be partially funded by the proceeds from the sales of asset to property funds and/or Real Estate Investment Trust (REIT). TICON plans to sell factories and warehouses worth about Bt6,000 million during the second half of 2013.
After the strong post-flood recovery in 2012, Thailand faces critical challenges this year. Exports are weakening due to softening demand worldwide and a slowdown in private consumption domestically. The Bank of Thailand (BOT) recently lowered its GDP growth rate forecast. Despite expectations for modest economic growth, Thailand remains an attractive location as a manufacturing base for a number of industries, especially automobile industry. The value of projects, which have applied for the Board of Investment’s (BOI) promotional privileges rose by 47%, compared with the same period of last year. The value of the projects reached Bt632 billion during the first half of 2013. Thailand is appealing to foreign investors because of the nation’s international trade promotion policies and good infrastructure, together with its desirable geographic location, especially as the implementation of the ASEAN Economic Community (AEC) draws near.
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