TRIS Rating Co., Ltd. has revised the rating outlook of Hemaraj Land and Development PLC (Hemraj) to “negative” from “stable”, which reflects the deteriorating performance of the company as a result of the global economic recession and the prospect of lower demand for industrial land during the next several years. At the same time, TRIS Rating has affirmed the company rating of Hemraj at “A-”, which reflects its proven record in industrial estate development, reliable stream of utilities income, and healthy balance sheet.
According to the “negative” outlook, the deteriorating performance of Hemraj is due to the plunge in the industrial estate development industry while the company has also made large capital expenditure commitments. The outlook of Hemraj may be revised to “stable” if the general economy sustainably recovers close to the normal level while a prolonged economic recession and further deterioration of its financial position could lead to a rating downgrade.
TRIS Rating reported that Hemraj is one of the leading industrial estate developers in Thailand. It was established in 1988 and listed on the Stock Exchange of Thailand (SET) in 1992. As of 17 March 2009, the Horrungruang family held 15.4% of the total number of shares, followed by Credit Agricole (Suisse) SA, Singapore Branch (9.1%), and Nomura Singapore Ltd. (6.9%). In addition to industrial land and utilities sales, the company also developed a luxury condominium project in central Bangkok. During the past five years, revenue from industrial land sales constituted approximately 50% of total revenue, while utilities income and factory rent (21%) and condominium sales (26%) made up smaller portions.
Hemraj owns and operates six industrial estates located in Rayong, Chonburi, and Saraburi provinces with total gross area of 31,314 rai. During 2007-2008, the company’s industrial land sales averaged 1,400 rai per year with cumulative industrial land sales of 13,811 rai as of March 2009. Among 394 existing customers, 33% are in the automotive industry and 12% are in the petrochemical industry. Approximately 50% of the remaining salable area of 9,934 rai, as of March 2009, is located in Hemaraj Eastern Seaboard Industrial Estate (H-ESIE) which presently their major customers are in the automotive industry.
According to CB Richard Ellis (CBRE) report, Thailand’s industrial land sales during the first three months of 2009 were only 89 rai, much lower than the 1,192 rai sold in the same period of 2008. The sharp drop came as a result of unfavorable economic conditions hitting all industrial estate developers. During the first three months of 2009, the company’s industrial land sales plummeted to 6 rai. There is no need for plant expansions while the industrial capacity utilization rate, as of April 2009, remained low across many industries. The rates were 38.1% for auto-related, 52.3% for electronics, 34.5% for steel, and 46.4% for electrical appliance sectors. Despite the drop in land sales, the company continued to receive predictable utilities income from its customers. Recurring income from utilities for the first three months of 2009 was worth Bt172 million, up 10% from Bt155 million in the fourth quarter of 2008 and close to Bt169 million in the first quarter of 2008. Its condominium project construction is complete. The value of the remaining unsold units was Bt1,400 million. No condominium units and ready-built factories were sold during the first quarter of 2009, a condominium unit buyer cancelled the purchase and some factory leases were terminated early.
Hemraj’s funding needs for industrial and residential estates was low. However, the company has an equity commitment of Bt4,700 million for 35% holding in a 660-megawatt (MW) independent power producer (IPP) project. Hemraj has already set aside Bt2,060 million for the project while the remainder of around Bt2,600 million is due on 2010 and 2011. Though the investment in the IPP project will provide reliable dividend source for the company from 2012 onwards, the equity investment of Bt4,700 million made during an economic downturn remains a concern.
TRIS Rating said, Hemraj’s liquidity is moderate. As of March 2009, the company had Bt1,020 million in cash on hand and unused credit facilities of Bt300 million from various financial institutions. Term loan repayments will be approximately Bt300 million per year during 2009-2010, excluding short-term borrowings of Bt700 million as bills of exchange. As of March 2009, total debt was Bt3,548 million and the debt-to-capitalization ratio remained healthy at 30.26%. Given its recurring income from utilities, rental and services of approximately Bt1,000 million a year, the committed capital expenditures of approximately Bt1,800-Bt2,000 million and debt repayment of Bt300 million a year during 2009-2010, the company’s leverage level will rise, but remain below its policy to maintain debt to equity ratio of less than 1 times.
Severe global economic conditions have directly affected the industrial estate development industry while an unstable domestic political environment has further undermined investor confidence. Foreign investors have halted new investments and are not expanding existing investments. In the short term, prospects for the industrial estate development industry are significantly weaker, said TRIS Rating. -- End
Company Rating: Affirmed at A- Rating Outlook: Negative from Stable
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