TRIS Rating affirms the company rating on Central Plaza Hotel PLC (CENTEL) and the ratings on CENTEL’s outstanding senior unsecured debentures at “A”. The ratings reflect CENTEL’s strength in its hotel and quick service restaurant (QSR) businesses, its low but rising level of financial leverage, and support from the Central Group. However, these strengths are partially offset by the cyclical nature susceptible to event risks in the hotel industry and by the intense competition in the QSR industry.
KEY RATING CONSIDERATIONS
Strong tourism growth in Thailand
TRIS Rating expects the tourism industry in Thailand to remain strong. Tourist arrivals to Thailand grew sharply during the past three years at an average rate of 13% per year, to 35.4 million inbound tourists in 2017. The number of tourists continued to grow 12.7% year-on-year to 19.5 million arrivals in the first half of 2018. Chinese tourists have played a large part in the flourishing of tourism in Thailand, growing at an average of 28% per year during 2014-2017. The Chinese contributed 28% of total arrivals in 2017.
We believe that CENTEL will benefit from strong growth in Thai tourism as most of CENTEL’s properties are situated in key tourist destinations in Thailand. At the end of the first quarter of 2018, CENTEL owned and operated 15 hotels in Thailand and two hotels overseas, and managed 18 hotels in Thailand and three hotels abroad. It derived 80% of total hotel revenue from hotels in Thailand.
Despite the good prospects for the Thai tourism industry, we see that CENTEL is susceptible to event risk given that its hotel segment mainly relies on the Thai tourism industry. We also see the increasing reliance on Asian tourists (mainly Chinese) could potentially affect future performance if they shift their preferred destination to other countries or if there is economic stagnation in their countries.
More diversified sources of hotel revenue expected in five years
We forecast the overseas hotel income contribution will rise to one-third of CENTEL’s total hotel revenue by 2022, against the current contribution of one-fifth of total hotel revenue. Overseas hotels in the pipeline include two owned hotels in the Maldives and a hotel under joint-venture partnership in Dubai.
Apart from overseas expansion, CENTEL’s new affordable lifestyle hotel under the “COSI” brand adds a new segment to its portfolio. The company opened its first COSI hotel in late 2017 and plans to add more hotels under the COSI brand, both under its own investment and under hotel management contracts.
The company plans to enlarge its hotel portfolio and revenue from the hotel business over the next couple of years, after having remained stable for the past five years. We expect the number of owned hotel rooms will reach 5,000 rooms by 2022, from 4,179 rooms at the end of the first quarter of 2018.
Intense competition in the restaurant segment
In TRIS Rating’s view, we see strong competition in the restaurant industry in Thailand will continue to put pressure on CENTEL’s growth, as there are a growing number of choices available to consumers and a low barrier to entry into the restaurant industry. CENTEL’s same store sales growth in the food segment was slightly negative over the past several years. However, overall food revenue grew 4% to Bt10,888 million in 2017 driven mainly by new store expansion.
We expect “KFC” to continue to dominate CENTEL’s food portfolio. KFC operations as a franchise contributed more than half of CENTEL’s food segment revenue and earnings before interest, tax, depreciation and amortization (EBITDA) during 2014-2017. Some other small brands in the portfolio showed good potential. For example, “Pepper Lunch” sales grew at an average of 38% and same store sales grew in the mid-single digits in 2016-2017. The tonkatsu and katsudon restaurant, named “Katsuya”, also showed decent growth in recent years. Yet, each small brand contributed only a fraction of less than 4% of total sales. For this reason, it will take time to broaden CENTEL’s food revenue base across more brands.
Rising leverage from looming investments
TRIS Rating forecasts the company’s leverage indicated by adjusted total debt to capitalization ratio to rise to 58% in 2020 from 49% in 2017. This is due to sizable investments of around Bt18,000 million over 2018-2020, of which around 80% will be investment in new hotels and renovation of existing hotels. The rest will be used to add new food outlets and maintain existing food outlets. We expect CENTEL’s average revenue growth of 5% per annum and EBITDA to range between Bt4,800-Bt5,400 million during 2018-2020, mainly driven by new food outlet expansion as some hotel properties will still be under major renovation and some hotels in the pipeline will not yet have started operations. Adjusted debt to EBITDA ratio will rise and hold below 3.2 times during those years, compared with 2.0 times in 2017.
RATING OUTLOOK
The “stable” outlook reflects our expectation that the company will maintain its market positions in the hotel and QSR businesses.
RATING SENSITIVITIES
CENTEL’s ratings could be revised upward if the company further enlarges and diversifies each of its business portfolios while maintaining a satisfactory financial leverage. On the other hand, a rating downside could occur if CENTEL’s operating performance deteriorates for a prolonged period or if the company makes a large, overly aggressive debt-funded investment.
COMPANY OVERVIEW
CENTEL was founded by the Chirathivat family in 1980 to operate the hotel business in Thailand. The company was listed on the Stock Exchange of Thailand (SET) in 1990. The company expanded into the QSR business in 1994. CENTEL is a member of the Central Group, a leading retailer in Thailand. As of December 2017, the Chirathivat family held a majority stake of 63% in CENTEL’s shares outstanding.
CENTEL is one of the major hoteliers and restaurant chain operators in Thailand. As of March 2018, the company operated 38 hotels with a total 7,293 rooms in key tourist destinations in Thailand and four other countries (the Maldives, Vietnam, Sri Lanka, and Oman). CENTEL’s hotel portfolio consists of 17 hotels it owns directly, including a hotel leased back from a property fund and a hotel leased from a state enterprise and 21 hotel properties operated under management contracts. Owned hotels accounted for 57% of its total room supply and managed hotels made up the rest. CENTEL’s food segment has multiple products under 11 brands sold through 899 outlets nationwide as of March 2018. In 2017, revenues from the hotel segment accounted for 45% of total revenue, while the food segment contributed 55%. The hotel business generated 68% of CENTEL’s EBITDA and the rest came from the food business.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2098-3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2018, 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, without the prior written permission of TRIS Rating Co., Ltd. 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.