TRIS Rating Co., Ltd. has affirmed the company and current issue ratings of Quality Houses PLC (QH) at “A-”. At the same time, TRIS Rating has assigned the rating of “A-” to QH’s proposed issue of up to Bt2,500 million in senior debentures. The rating outlook is “negative”. The ratings reflect QH’s long track record in the property development industry, strong position in the middle- to high-income housing market and diverse sources of revenue with recurring income from commercial properties. The strengths are partially offset by the slowing economy, which will cause a downturn in the property development industry; the cyclical nature of the property development industry; commercial banks’ tighter credit policies, which limit access by homebuyers to mortgage financing; expansion of the condominium segment during the current economic downturn; and the relatively high level of financial leverage. The ratings also take into consideration a financial flexibility from the liquidity of strategic investments in associated companies and recurring income assets, which are debt-free and can serve as cushion, when necessary.
The “negative” outlook reflects QH’s higher leverage than expected due to the slow housing demand and the company’s heavy investments in land and condominium projects. QH’s rating may be revised down if the operating performance deteriorates further and the company cannot reduce the debt level as planned.
TRIS Rating reported that QH was established in 1983 by Land & Houses PLC (LH). The company is now one of the leading property developers in Thailand and has well-established brands in the medium- to high-income segments. As of April 2009, QH’s major shareholders were the LH Group (25%) and the Government of Singapore Investment Corporation Pte. Ltd. (11%). QH’s competitive edge stems from a strong position in the high-end housing market; the quality of its portfolio of rental properties which generate recurring income, including Q-House office buildings and Centrepoint serviced apartments; and the growing market presence of its mid-priced housing brand -- Casa Ville. The average unit price across QH’s housing portfolio fell to Bt6.8 million, reflecting a strategic shift to enlarge the customer base by entering the middle-income segment. As of March 2009, the company had 22 single detached house (SDH) and townhouse projects on hand, with unsold remaining units worth approximately Bt19,000 million. Housing sales accounted for around 90% of total operating income in 2008, while rental income from office space and serviced apartments accounted for the remaining 10%.
QH recently launched a condominium project in the second quarter of 2009 and plans to open another project in late 2009. Both condominium projects, together worth around Bt5,600 million, are under construction with a plan to be completed in late 2009 to 2010. The revenue contribution from these two condominiums will be concrete in 2010-2011. Compared with peers, QH’s asset differs since around a quarter of total assets are commercial rental properties and strategic investments in associates. QH’s rental assets not only provide stability through recurring income and stable cash flows, but also serve as flexibility as the properties could be sold to a property fund. Strategic investments in four associates, of which three are traded on the Stock Exchange of Thailand (SET) while another is planning to be listed, will also provide a short-term liquidity from dividends and complement as a long-term financial cushion.
TRIS Rating said, QH’s operating performance remained steady in 2008 and the first three months of 2009. Revenue slightly increased by 4% to Bt10,620 million in 2008 but dropped by 6% year-on-year (y-o-y) to Bt2,212 million in the first quarter of 2009. Though the government tax incentives would allow developers to save as much as 4% of the property prices through reductions in the special business tax and transfer fees, profitability only improved slightly. Operating profit margins increased to 21% in 2008 and to 19% in the first three months of 2009 from 18% in 2007. The company invested heavily in inventory in 2008. As a consequence, outstanding debt rose because its operating cash flow was not sufficient to fund such a large investment. To improve its balance sheet, the company recently began to reduce inventory by lowering the inventory turnover target from three months to one month. Outstanding debt increased to around Bt15,000 million at the end of 2008 and the first three months of 2009 from Bt12,638 million at the end of 2007. However, the debt to capitalization ratio remained steady at 56%-57% for 2008 through the first three months of 2009. This was partly due to a capital increase of Bt1,382 million from the exercise of warrants, which strengthened QH’s equity base. QH’s liquidity position is supported by available unused credit lines of around Bt7,900 million as of March 2009 and the capability to access the capital market. The level of debt is expected to gradually decline after the completion of the two condominium projects in mid-2010.
TRIS Rating also said that the residential property market was volatile over the past year, reflecting national political instability and the global financial crisis. Despite the government tax incentives, which allow a new house transaction of up to Bt300,000 to be deducted from personal income tax, the residential property market in Greater Bangkok is expected to track the overall economy, and will remain sluggish in 2009. To maintain credit quality, developers must prudently manage liquidity and preserve sufficient financial flexibility to meet 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- QH123B: Bt1,300 million senior debentures due 2012 Affirmed at A- Up to Bt2,500 million senior debenture due within 2012 A- Rating Outlook: Negative
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