TRIS Rating Co., Ltd. has assigned the company rating of CH. Karnchang PLC (CK) at "A-" with a "stable" outlook. The rating reflects the company's leading position in Thailand's engineering and construction (E&C) industry, its proven record in government infrastructure projects, and recurring income from its concession investments. These strengths are partly offset by the cyclicality of the E&C industry and increasing risks from rising construction material prices. The "stable" outlook reflects the expectation that the company will continue to maintain its competitiveness in government infrastructure projects. The company's dividend income and capital gains from its investments in concession companies are expected to improve its liquidity and leverage level.
TRIS Rating reported that, established in 1972 by the Trivisvavet's family, CK is the second-largest construction contractor in Thailand. As of August 2004, the Trivisvavet's family held 55% of CK's shares and the remainders were held by Thai Military Bank (TMB) (10%) and others (35%). CK's construction works range from typical civil works to large scale infrastructure works. The company has specialized skills and proven record in elevated expressways and mass transit infrastructure works. Public construction projects are CK's prime revenue earners, contributing approximately 70%-90% of total construction revenues over the past 10 years. The public works enable CK to minimize risks in revenue collection and offer potential investment opportunities. Public works, especially for highly technical sectors such as underground construction, require capable contractors and offer higher margins. As of June 2004, CK's backlog amounted to Bt21,997 million, increasing from Bt4,199 million in 2003. The South Outer Ring Road Project accounts for 66% of CK's entire backlog. The current backlog should help secure its revenues for at least two years.
The company's strategy to form joint ventures with reputable and specialized partners should enhance its bidding capability while enabling it to obtain advanced construction technology and shift its business operations toward sophisticated work. As one of the two contractors of the first underground mass transit infrastructure, CK should have the high potential to be among the successful bidders for future mass transit projects. CK has diversified its business into concession investment. Participation in concession company complements CK's core construction business by not only providing construction revenue (worth a total of Bt58,000 million during construction period) but also by providing a more regular source of income that is not affected by construction industry cycles. As of June 2004, its concession investments were worth Bt6,538 million. The investments include 14% holding in Bangkok Expressway PLC (BECL), 23% holding in Bangkok Metro Co., Ltd. (BMCL), 29% holding in Pathum Thani Water Co., Ltd. (PTW) and 15% holding in Thai Tap Water Co., Ltd. (TTW). For 2003 operation, BECL contributed Bt165 million of dividend income to CK. CK's profitability is relatively competitive amongst its peer. Its adjusted operating margin increased from 7.3% in 2001 and 9.3% in 2002 to 12.9% in 2003. Total debt to capitalization were relatively high at 62.6% as of June 2004 due to the expansion of its concession business and its debt burdens from the past projects. Out of CK's debt of Bt6,163 million in 2003, 62% was from the Bangna-Bangplee-Bang Pakong Project.
The E&C industry is a competitive and cyclical sector, depending largely on government spending policy and private investment. The intense competition is partially mitigated by the government's plans to invest in large new infrastructure projects. The continued increase in construction material costs will have a negative impact on contractors' margin. However, the escalator factor (K factor) partially mitigates exposure to material price fluctuation for most public projects while bids on the new projects should include the effect of rising material prices, TRIS Rating said. - End
CH. Karnchang PLC (CK) Company Rating: A- Rating Outlook: Stable