TRIS Rating has assigned a rating of “A-” to the proposed issue of up to Bt3,500 million in senior unsecured debentures of Quality Houses PLC (QH). At the same time, TRIS Rating has affirmed the company rating and the current senior unsecured debenture ratings of QH at “A-”. The outlook remains “stable”. The company will use the proceeds from the new debentures to repay some of its existing loans. QH’s ratings reflect the company’s established track record in the property development industry, strong position in the middle- to high-income segment of the housing market, and the financial flexibility from its investments in marketable securities. The strengths are partially offset by the cyclical nature of the property development industry, QH’s relatively high level of financial leverage, concerns over the relatively high household debt level, and the slowdown in the domestic economy.
The “stable” outlook reflects the expectation that QH’s business profile will remain strong in the medium term. The company’s debt to capitalization ratio is expected to stay below 55% for the next three years. QH’s ratings and/or outlook could be revised downward should its financial profile deteriorate dramatically. For example, a prolonged market slump, leading to lower sales, would raise the debt to capitalization ratio above 60% on a sustainable basis. In contrast, the ratings could be revised upward if the company can improve its operating performance significantly from the current levels while keeping its debt to capitalization ratio lower than 50% on a sustainable basis.
QH was founded in 1983 and was listed on the Stock Exchange of Thailand (SET) in 1991. As of September 2016, QH’s major shareholders were Land and Houses PLC (LH, owning a 25% stake) and the Government of Singapore Investment Corporation Pte. Ltd. (11%). QH’s business profile is strong and the company is one of the leading property developers in Thailand. Over the past five years, it has been one of the five largest SET-listed property developers, based on revenue. QH has a strong market position, particularly in the segment of single-detached houses (SDH) priced over Bt5 million per unit. Over the past few years, the company has also delivered an acceptable performance in the lower-priced housing segment, with a price range between Bt1-Bt3 million per unit. The company’s housing brands are well-known and accepted by buyers.
QH’s financial profile remained in line with TRIS Rating’s expectation. Revenue in the first half of 2016 stood at Bt10,692 million, up 27% compared with the same period in 2015, thanks to the Thai Government’s real estate stimulus program. Presales of QH in the first half of 2016 stood at Bt8,360 million, down 21% from the same period a year ago. The drop in presales was due to no condominium project launched in the first half of 2016. About 93% of its presales came from housing projects. The operating margin (operating income before depreciation and amortization as a percentage of revenue) in the first half of 2016 was 12.3%, increase from 11.7% in the same period of 2015. The total debt to capitalization ratio at the end of June 2016 was 53.7%, down from 55.4% at the end of 2015.
Early in 2015, the company also launched a large condominium project, “Q Sukhumvit”, worth Bt10,754 million. As of June 2016, presales of Q Sukhumvit were only 16% of the total project value, lower than our target of around 30%. At the end of June 2016, QH’s backlog of condominium units was worth Bt5,705 million. The condominium units in the backlog are expected to be delivered to customers are worth around Bt750 million in the remainder of 2016, Bt2,700 million in 2017, and Bt2,240 million in 2018. The Q Sukhumvit project accounted for 31% of the total backlog.
During 2016-2019, TRIS Rating’s base-case scenario expects QH to generate revenues of Bt20-Bt25 billion per annum. Revenues from housing projects should account for 65%-75% of total revenues. The operating margin is expected to hold at 12%-14%. The total debt to capitalization ratio is expected to stay below 55%, taking into account the company’s plan to launch new real estate development projects worth approximately Bt20 billion per annum. Funds from operations (FFO) is expected to hold above Bt2 billion per annum.
QH’s liquidity profile remains acceptable. At the end of June 2016, QH had debts due over the next 12 months of Bt5,400 million. All due amounts are debenture redemptions. Most of the debts are expected to be refinanced with new debentures. QH’s liquidity sources included Bt2,234 million in cash and Bt2,237 million in undrawn long-term credit facilities as at the end of June 2016. The company’s liquidity position is enhanced by its sizeable portfolio of marketable securities. QH holds stakes in two SET-listed companies and two property funds: Home Product Center PLC (HMPRO) (a 19.9% stake), LH Financial Group PLC (LHBANK) (21.3%), Quality Houses Leasehold Property Fund (QHPF) (25.7%), and Quality Houses Hotel and Residence Freehold and Leasehold Property Fund (QHHR) (31.3%). These four firms provide dividends to QH on a recurring basis. At the end of June 2016, the portfolio carried a fair value of Bt34.3 billion, or about 1.3 times of the company’s total debt. During 2016-2019, the EBITDA (earnings before interest, tax, depreciation, and amortization) interest coverage ratio is expected to stay above 4 times. The FFO to total debt ratio is expected to range from 9%-12%.
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