TRIS Rating Co., Ltd. has affirmed the company and issue ratings of Quality Houses PLC (QH) at “A-” with “stable” outlook. The ratings are based on QH’s long track record in the property development market, strong position in middle- to high-income residential property segments and recurring income from commercial properties. The strengths are partially offset by the current slowing economy which will cause a downturn in the property industry, cyclical nature of the property development industry, commercial banks’ tighter credit policies which limit homebuyers to access mortgage financing, expansion of the condominium segment during an economic downturn, and the relatively high level of financial leverage.
The “stable” outlook reflects the expectation that QH will maintain its strong market positions in both the middle-income and high-end segments during the slow demand period. Profitability is expected to be favorable, benefiting mainly from the government tax incentives. Investments are expected to be less aggressive, while preserving substantial cash for debt repayment and sufficient working capital. Leverage is expected to drop after QH releases a large amount of its residential property inventory to the market.
TRIS Rating reported that QH is one of the leading property developers in Thailand and has well-established brands in the medium- to high-income segments. It was established in 1983 by Land & Houses PLC (LH), the largest listed residential developer in Thailand. As of April 2008, QH’s major shareholders were the LH Group (25%) and the Government of Singapore Investment Corporation Pte. Ltd. (13%). QH’s competitive edge stems from its strong position in the high-end residential property market, the high quality of its portfolio of rental properties that generates recurring income, including Q-House office buildings and Centrepoint serviced apartments, and the growing presence of its mid-priced residential project brand, Casa Ville. The average unit price across QH’s residential project portfolio fell to Bt6.9 million, reflecting a strategic shift towards the medium-priced segment. As of December 2008 the company had 21 residential projects on hand, with remaining units worth approximately Bt19,000 million. Residential sales accounted for around 89% of total revenue, while rental income from office space and serviced apartments accounted for 3% and 8%, respectively, in the first nine months of 2008. In 2009, QH plans to launch two condominium projects worth around Bt6,000 million, which are expected to contribute a significant portion of revenue in 2010.
TRIS Rating said, QH’s operating performance remained satisfactory in the first nine months of 2008. Revenue continued to increase, rising from Bt7,448 million in the first nine months of 2007 to Bt8,281 million in the same period of 2008. Profitability improved significantly, as operating profit margins increased from 18% in 2007 to 21% in the first nine months of 2008. This was due to the tax incentives from the government stimulus packages that helped developers save as much as 4% on property prices from reductions in the special business tax and transfer fees. QH’s profitability will benefit from this tax incentive scheme until the end of the first quarter of 2010, when the tax incentives expire. Despite its outstanding debt increasing from Bt12,638 million at the end of 2007 to Bt13,353 million at the end of September 2008, QH’s financial leverage improved as a result of Bt1,400 million in new equity from the exercise of warrants. The debt to capitalization decreased from 58.6% at the end of 2007 to 54.9% at the end of September 2008. QH is expected to maintain a high level of liquidity and available credit facilities to meet a substantial amount of capital expenditures required for two prebuilt condominium projects, due to be launched by the end of 2009. The level of its debt is expected to gradually decline after the completion of those condominium projects.
TRIS Rating also said that the residential property market was volatile over the past year, as a result of both the political and global financial crisis. Although residential demand improved in mid-2008, following the launch of the government stimulus packages early in the year, it contracted by year-end as a number of negative factors simultaneously hit the market. Despite the more stable political situation, the slowing economy will negatively impact demand in the residential property market. Moreover, as banks have widely implemented more stringent credit policies on granting mortgage loans during the economic downturn, this will limit some homebuyers to access credits for their new house purchase. Although the new tax incentives will allow a new house transaction up to Bt300,000 to be tax-deductible in personal income tax calculation, it is anticipated that the residential market in the Greater Bangkok will drop by around 10%-20%, whereas the gross domestic product is anticipated to grow in the range of 0%-2% or possibly contract in 2009. To maintain their credit quality, developers must prudently manage their liquidity and preserve sufficient flexibility to meet their obligations during a slowing economy. -- End
Company Rating: Affirmed at A- Issue Ratings: QH097A: Bt1,000 million senior debentures due 2009 Affirmed at A- QH09DA: Bt1,000 million senior debentures due 2009 Affirmed at A- QH107A: Bt1,000 million senior debentures due 2010 Affirmed at A- QH10NA: Bt3,000 million senior debentures due 2010 Affirmed at A- QH113A: Bt1,400 million senior debentures due 2011 Affirmed at A- QH11OA: Bt1,200 million senior debentures due 2011 Affirmed at A- QH123A: Bt600 million senior debentures due 2012 Affirmed at A- Up to Bt1,300 million senior debentures due within 2013 Affirmed at A- Rating Outlook: Stable
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