TRIS Rating Co., Ltd. has affirmed the company rating of Hemaraj Land and Development PLC (Hemraj) at “A-” and has revised the rating outlook to “stable” from “negative”. The rating continues to reflect the company’s proven record in industrial estate development, growing base of recurring income from utilities services and its healthy balance sheet. The “stable” outlook reflects the ongoing recovery of economic activities in major manufacturing sectors and the expected global economic revival which will subsequently lead to growing demand for industrial property. The increasing contribution from the utilities services and rental businesses are expected to provide more reliable cash flow streams for Hemraj to counterbalance the fluctuations in industrial land sales. In addition, TRIS Rating expects the company to continue its conservative business policy and be able to maintain the debt to capitalization ratio below its stated policy of 50%. However, the political uncertainty and the Map Ta Phut (MTP) problem remain rating concerns.
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 May 2010, the Horrungruang family held 8.9% of the total number of the company’s shares. In addition to industrial land and utilities sales, the company also developed a luxury condominium project in central Bangkok. Except for 2009 when demand for industrial land was severely affected by the global economic slump, property sales including condominium sales typically accounted for 60%-75% of the company’s total revenue, while recurring income mainly from utilities and rental income made up the remainder. Hemraj owns and operates six industrial estates located in Rayong, Chonburi, and Saraburi provinces with total gross area of 32,380 rai. Among 412 existing customers as of March 2010, 34% were in the automotive industry and 15% were in the petrochemical industry. Approximately 40% of the remaining salable area of 9,563 rai, as of March 2010, was located in Hemaraj Eastern Seaboard Industrial Estate (H-ESIE). Major customers in this estate are in the automotive industry.
The total revenue of Hemraj has been volatile due to the nature of industrial land sales which hinges on economic conditions and investor confidence. In 2009, the global economic slump cut Hemraj’s land sales to only 144 rai, compared with an average of 1,400 rai per year during 2007-2008. The 76% drop in land sales revenue caused total revenue to slide by 54% to Bt2,050 million in 2009. However, with the global economic recovery and sales of a big land plot to an automotive customer, the company’s land sales recovered significantly to 565 rai in the first quarter of 2010. Total revenue rose to Bt1,197 million, a jump of 190% over the same period of last year. In the second quarter of 2010, however, with falling investor confidence from unprecedented political turmoil in Thailand during April and May 2010, land sales were weak and amounted to only 58 rai. Looking forward, the outlook of export appears promising. The average industrial utilization rate rose to 67.2% in the first six months of 2010, approaching the levels of 70%-75% recorded before the global economic slump. These two indicators point to firms’ need to expand and a resultant rise in demand for industrial land sales.
TRIS Rating said, Hemraj’s recurring income was resilient and also increased gradually. Despite a sluggish global economy in 2009, Hemraj continued to receive higher utilities income from its existing customers. Recurring income from utilities for 2009 was Bt768 million, up by 12% over 2008. In the first three months of 2010, utility income continued to rise, climbing to Bt217 million or a 26% increase over the same period of last year. The ready-built factories business, which softened in 2009, also showed improved performance in the first quarter of 2010. Rented areas increased by 6,634 square meters (sq.m.) or a 7% increase in rented area, compared with a 10% decrease in 2009. The recovery in the general economy also improved sales of Hemraj’s condominium project after a few years of stalled sales. Hemraj could sell seven units worth Bt385 million in the first six months of 2010. The value of the unsold units is Bt1,200 million.
The court decision to suspend 76 industrial projects in the MTP area has increased concern over the regulatory risks of doing business in Thailand and delayed the expansion of the manufacturing industries. One expansion phase of H-ESIE and one expansion phase of Hemaraj Eastern Industrial Estate (EIE) were on the list of suspended projects. However, the expansion of H-ESIE has currently received a permission to continue operation from relevant government agency. The expansion project received its operating permit before the 2007 Constitution took full effect in August 2007. EIE now is in the process of preparing an Environmental and Health Impact Assessment (EHIA) study. The lengthy EHIA approval process may halt the expansion projects in the petrochemical industry as well as the development in EIE. This might limit the company’s growth potential but will have a minimal impact on Hemaraj’s ability to service its obligations.
Hemraj’s liquidity improved following the recovery in industrial land sales during the first quarter of 2010. Total debt fell to Bt3,700 million as of March 2010 and the company also had Bt1,700 million cash on hand. The scheduled loan repayments of approximately Bt600-Bt700 million per year during 2010-2011 can be accommodated by its funds from operations (FFO) of about Bt700-Bt900 million per year. In addition, Hemraj successfully issued three to seven years debentures worth Bt5,362 million in the second and the third quarter of 2010. The proceed is for the planned investment worth Bt4,500 million in various projects including GHECO-One Co., Ltd. and the expansion of the industrial estate and the utilities businesses. Even though this sizeable debenture issuance would increase the company’s leverage, the investment in the GHECO-One, an independent power producer (IPP) project, will provide reliable dividends for the company from 2012 onwards, said TRIS Rating. -- End
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