Bangkok--30 Nov--TRIS Rating TRIS Rating Co., Ltd. has affirmed the company rating of Sino-Thai Engineering & Construction PLC (STECON) at “BBB-” with “stable” outlook. The rating reflects STECON’s market position as one of Thailand’s top three construction contractors, its specialization in the civil construction of power and petrochemical plants, and lengthy track records in both the private and public sectors. However, these strengths are partially offset by the risks of cost overruns, the inherent risk of fixed unit price contracts, continued pressure on construction margins and intense competition resulting from slowdown on demand from both public and private construction. The “stable” outlook reflects TRIS Rating’s expectation that STECON’s operating performance will gradually improve in the second half of 2008 and STECON will be able to maintain a conservative balance sheet. The rating could be lowered if contraction in domestic construction activities is longer than expected and the company is unable to secure new orders with improved margins. TRIS Rating reported that STECON is one of the top three construction contractors in Thailand, with a strong market position in public works construction. The company is ranked as a class 1 licensed contractor for almost all government authorities and state enterprises. In addition to infrastructure construction, the company specializes and is well-recognized in power plant and petrochemical plant construction. Since 2004, STECON has been awarded six power plant contracts worth Bt12,199 million. The ratio of revenue from three divisions (infrastructure: building: energy) shifted from 40:39:14 in 2005 to 43:23:26 in 2006. Approximately 66% of the company’s construction revenue in 2006 was generated from public projects. As of September 2007, STECON’s backlog was Bt16,651 million, down by 33% from Bt24,979 million as of December 2006.TRIS Rating said, although the industry is fragmented, a few major contractors benefit from the high barriers to entry, only pre-qualified contractors are able to bid for large public projects. The government's policy of increased public spending to boost the economy is likely to benefit only the top tier contractors based on their proven track records and strong support from financial institutions. However, the mega projects are not likely to come into effect in the next six months. Margins are expected to remain weak due to intense competition, unless several new projects are launched at the same time. It is likely that STECON will focus more on power plants and petrochemical plant expansion projects, which are expected to be announced soon. These projects tend to have better margins than public infrastructure projects. STECON’s financial profile used to be better than average as it had lower leverage and higher margins than the industry averages. However, the company’s financial strength gradually declined resulting from weaker operating performance due to low and negative margins on some large public projects. As most of the company’s projects are under fixed unit price contracts, it faces the risk of cost overruns, especially on large, lengthy, and complex projects. Under the percentage of completion accounting method, the company must reassess its project costs regularly. Once there is sufficient and reasonable confidence that the costs vary from the budget, the new estimated costs must be used in the income statement. These changes may reverse previously reported profits. In 2006, STECON reported a net loss of Bt1,780 million due to construction losses of major projects. The loss wiped out all retained earnings, leaving a retained loss of Bt1,279 million at the end of 2006. However, with the proceeds from a capital increase of Bt1,885 million in the first quarter of 2006, total shareholders’ equity decreased by only 4.98% from the end of 2005 to Bt3,796 million as of December 2006. TRIS Rating said, STECON’s financial performance in the first nine months of 2007 improved, compared with 2006. Adjusted operating margin improved from -8.81% for 2006 to 4.29% in the first nine months of 2007.However, the company reported an operating loss of Bt12 million on construction activities for the three month period ending September 2007. The loss was caused by many projects that have higher costs than previously estimated due to rising construction materials costs and energy prices. Despite a weak operating performance, its financial leverage remains low. As of September 2007, total debt was Bt1,440 million, down by Bt439 million from Bt1,879 million as of December 2006. The debt was lower because STECON’s significantly financed its business with suppliers’ credit and advance payment received from its clients. Unbilled payable substantially increased from Bt188 million as of December 2005 to Bt1,041 million as of December 2006 and Bt2,137 million as of September 2007. Advance payment considerably increased from Bt2,918 million as of December 2005 to Bt4,039 million as of December 2006 and dropped to Bt2,719 million as of September 2007. As of September 2007, total debt to capitalization ratio was strong at 26.05%. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio during the first nine months of 2007 was 8.57 times. With an expectation that the debt levels will increase with higher interest costs and continued pressure on operating performance, TRIS Rating anticipates that STECON’s cash flow protection will be weaker than the present level.