INDUSTRY OUTLOOK: NEUTRAL
TRIS Rating expects the construction market to maintain the growth prospect in the next few years. The construction activities in the public sector will be driven by a number of major infrastructure projects. We believe that the private sector construction will rise, as a result of an expansion in public infrastructures and a recovery in residential property construction.
However, competition will remain fierce. Some domestic contractors have partnered with foreign firms to enhance their competitiveness. Foreign contractors typically have higher capital bases, greater skills and technology. We expect more cooperation between local and foreign contractors in high value large infrastructure projects.
MARKET RECAP
In 2017, the construction industry in Thailand was approximately 8% of Thai gross domestic product (GDP) or about Bt1.2 trillion. In the first nine months of 2018, the construction market was Bt977 billion, a 2.8% year-on-year (y-o-y) increase in real terms. This improved from 2017, when construction activities dropped by 2.2% from a year earlier.
In 2017, the real value of public sector construction fell by 3%. The drop was due to more stringent regulations from the new Government Procurement and Supplies Management Act. The new regulation requires central, regional, and local state agencies and other government affiliated organizations to follow the state procurement process. It took time for the organizations to learn and implement the new procedures. As a result, government budget disbursements in the fourth quarter of 2017 and the first half of 2018 were much lower than expected.
The real value of private sector construction projects improved in the first nine months of 2018, growing by 4% y-o-y. This is the third consecutive quarter of growth, after staying relatively flat in the past few years. A recovery in residential property construction and improved private investor confidence underpinned the rise.
KEY OUTLOOK FACTORS
Public sector construction is likely to lead the market in the next few years
Large infrastructure projects will drive activities in the industry. There were nine mega projects, worth around Bt276.5 billion, starting construction in 2018. Most of the construction works in the first half of 2018 were land clearing. Thus, the growth of public sector construction was marginal in the first nine months of 2018, only 1.9% y-o-y. However, we expect the value of construction activities will grow faster in the second half of 2018 once the projects are fully underway.
Another eight mega projects, worth Bt901 billion, will open for bids within 2019. Some projects may start construction in 2019, such as the Denchai-Chiang Khong double-track rail project, and the Rama III road-western outer ring road motorway. Other projects, such as the high-speed railway connecting the Eastern Economic Corridor (EEC), U-Tapao airport, and the third phase of Laem Chabang port, could be delayed. These projects must first finish the environmental impact assessment (EIA) and the bidding process before construction can begin.
Residential property construction recovers
Residential property development has always accounted for the majority of construction activities in private sector. For example, around 56% of private sector construction was residential construction during 2013 to 2017. The number of housing units sold in Bangkok and vicinity grew by 5.5% in 2017. The residential property market in 2018 is expected, at least, to maintain the growth from 2017. Value of presale, project backlogs, and new launches of major developers also rose by 25%-30% in 2017. The value of housing units sold significantly rose faster than the number of units sold because major developers are marketing toward the higher-end segment. This shift has boosted investment and construction value. The growth prospects reflect an improving economy in 2018. Moreover, the new infrastructure projects open up the possibility of new housing development along the new mass transit lines.
Competition remains high as some contractors increased their competitiveness
Competition in the industry remains high. The industry is fragmented, with over 10,000 contractors, according to the number of contractors registered at the Department of Business Development. Big contractors continued to dominate the market. The top five contactors (by revenues) accounted for 10% of total construction activities in 2017.
Many contractors are increasing their expertise and capital bases. Some companies have formed joint ventures with foreign partners. More contractors from abroad, especially China, are competing for big infrastructure projects. Many have competitive cost structures and large capital bases. For example, Unique Engineering and Construction PLC (UNIQUE) has partnered with Sinohydro Corporation, a Chinese contractor specializing in hydropower construction, and won several infrastructure projects. KS-C Joint Venture is another example of cooperation between the Thai and Chinese contractors. This joint venture won one double-track rail construction contract. Recently, a number of foreign contractors and several new Thai firms bought the bidding documents for the high-speed rail lines linking the three airports. The project value is huge, therefore these construction companies partnered up when submitting bid tenders on 12 November 2018.
FINANCIAL HIGHLIGHTS
There are various types of construction work. Some contractors specialize in certain areas while others are generalists. Typically, the top-tier construction companies will be more diversified both in terms of construction work and investment in other businesses. Small- or medium-sized contractors, in the meantime, cover fundamental construction work. The financial profiles of companies in the industry vary, considerably due to the use of different business models and different levels of expertise. For example, contractors that focus on the petrochemical sector suffered during the recent downturn in the petrochemical industry.
Operating margins will be steady in the next few years
TRIS Rating forecasts the weighted average of operating margin of rated construction firms to average at approximately 5% over the next few years. The weighted average of the operating margins was 5.9% in the first nine months of 2018. For comparison, the weighted average was 5.3% during 2013-2017. The construction industry by nature has low margins. The critical skills that most strongly affect profit margins are the ability to control cost and finish projects on time.
Margins will improve as private sector investment and construction activities rebound. In general, the margin for a private sector project could be two times higher than the margin for a public sector construction project. However, public sector construction contracts are generally larger and longer.
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