TRIS Rating has affirmed the company and senior unsecured debenture ratings of TICON Industrial Connection PLC (TICON) at “A” with “stable” outlook. The ratings reflect TICON’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 ratings are partially offset by increasing leverage caused by hefty capital expenditures during 2013-2015. The political uncertainties in Thailand, which affect domestic consumption and investments, are rating concerns. The “stable” outlook reflects the expectation that TICON will be able to maintain its leading position in the niche market of providing rental factories and warehouses. The company is expected to gradually increase its occupancy rate and properly manage its funding to keep its leverage at manageable level during expansions.
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 March 2014, the company’s portfolio comprised 78 leased factories and 38 leased warehouses, with leased space totaling 391,796 square meters (sq.m.). Its facilities are located in major industrial estates and along the main logistics routes in Thailand.
As of March 2014, TICON’s major shareholders remained Rojana Industrial Park PLC (20.5%), City Realty Group (7.1%), and TICON’s management (6.7%). The company’s competitive advantage stems from its proven record of providing quality RBFs to customers and the cost advantage it obtains by using an in-house construction team to build standard factories at competitive prices. 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 29 locations. TICON remains the leading provider of RBFs and warehouses in Thailand, according to CB Richard Ellis (CBRE). TICON and its affiliated property funds had a combined market share of 52%, based on leased area, as of December 2013. This share is far higher than its competitors, such as Hemaraj Land and Development PLC (25% share), and Pinthong Industrial Park Co., Ltd. (9%). In terms of warehouse, TICON is one of the two main operators in warehouse for rent business. TICON and its affiliated property funds supplied about 51% of the total warehouse area, as of December 2013.
During 2013 through the first quarter of 2014, the size of TICON’s portfolio increased moderately. TICON added 134,860 square meters (sq.m.) of leased area (before subtracting the space sold to property funds) in 2013 and 43,283 sq.m. in the first quarter of 2014. The amount of leased area in its RBFs increased by 56,000 sq.m. in 2013 and 22,540 sq.m. in the first quarter of 2014, compared with an average annual net increase of 60,000-100,000 sq.m. during 2010 and 2011. The increase in RBF’s leased area is mainly stemmed from demand in the eastern region of Thailand, while demand for space in flood-prone areas (Ayudhya and Pathumthani provinces) remains stagnant. During the same period, the leased area in TICON’s warehouses increased by 78,860 sq.m. in 2013 and 20,743 sq.m. in the first quarter of 2014, compared with an average annual net increase of 160,000 sq.m. during 2011 and 2012. TICON successfully sold industrial property with a total area of 310,695 sq.m. to its affiliated property funds during 2013 through the first quarter of 2014 to raise fund worth Bt6,159 million.
TICON’s rental income increased slightly, rising by 5% year-on-year (y-o-y) to Bt1,110 million in 2013 from Bt1,053 million in 2012. However, rental income declined by 25% y-o-y to Bt202 million, during the first three months of 2014. The drop came because TICON’s sold a number of assets to property funds in December 2013. Revenue from assets sold to property funds remains the largest portion of the company’s revenue. Revenue from assets sales amounted to Bt4,663 million in 2013 and Bt498 million in the first quarter of 2014.
The gross margin of rental income rebounded to 76% in 2013 and 75% in the first quarter of 2014. Excluding the effect of the accounting policy change regarding depreciation, the gross margin of rental income was 68% in 2013 and improved to 72% for the first three months of 2014. The gross margin in the first quarter of 2014 is close to the level the company achieved in 2010-2011, the pre-flood period.
During the past few years, TICON’s capital expenditures have increased substantially. The company has expanded its RBF and warehouse portfolio in the eastern region and other major provinces, in order to serve rising demand in these regions. Aggressive expansion caused occupancy rate (excluding pre-leased areas) to fall to only 52% as of March 2014 from 73% at the end of 2012. However, TRIS Rating expects the occupancy rate will improve gradually, given the strong demand from warehouse for rent. As of March 2014, there were pre-lease tenants, totaling 181,212 sq.m. These tenants will gradually move into the provided space during the second half of 2014.
The company’s total debt to capitalization ratio deteriorated to 65.5% at the end of March 2014, from 57.3% at the end of 2012 due to massive capital expenditures. TICON plans to spend about Bt8,000 million per year in 2014 and 2015. Nevertheless, TICON’s flexibility in raising funds via capital increase and property sales would help improve its leverage and maintain cash flow protection at acceptable level. TICON plans to sell assets worth Bt5,000-Bt6,000 million to the real estate investment trusts (REITs) in 2014 and raise funds via the issuance of Transferable Subscription Rights (TSRs) worth approximately Bt2,700 million in mid-2014.
The prolonged political deadlock has cut domestic consumption and investment activities in Thailand. On 22 May 2014, General Prayuth Chan-ocha declared coup d’?tat, following a declaration of martial law two days earlier. In TRIS Rating’s view, the coup will have a negative effect on investor confidence and tourism, at least in the short term. However, the longer term effects of the coup on the Thai economy depend on the policies executed by the National Council for Peace and Order (NCPO), plus the success of the political and social reforms that the NCPO introduces. The political and social reforms aim to restore unity to the Thai society. If the policies of the NCPO lead to an end of the prolonged political conflict and bring peace, economic sentiment will improve substantially. The NCPO recently put forth its roadmap to propel the country towards democracy and its economic roadmap to stimulate domestic consumption and investment. These roadmaps thus far have met positive receptions from the public and investors.
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