Bangkok--17 Apr--TRIS Rating TRIS Rating Co., Ltd. has assigned the rating of “BBB+” to CH. Karnchang PLC’s (CK) proposed up to Bt2,000 million senior debentures. At the same time, TRIS Rating has also affirmed the company and current issue ratings of CK at “BBB+”. The rating outlook remains “stable”. The ratings reflect CK’s status as one of the leading engineering and construction companies in Thailand, its proven record in government infrastructure projects, and ability to generate recurring income from concession investments. However, the ratings are partially offset by negative credit implications from loss in the dispute between BBCD joint venture (BBCD) and the Expressway Authority of Thailand (EXAT), its high financial leverage due to investments in concessions, and declining profit margins as a result of increasing construction costs and sluggish domestic construction market. The “stable” outlook reflects the expectation that CK still has some flexibility to pursue its growth strategy by using internal cash flow to fund investments in good quality concessions, so as not to further deteriorate its financial profile from the current level. TRIS Rating reported that CK is one of the top-three general contractors in Thailand. Its business involves construction and concession investments. The construction business has typically contributed around 80%-90% of total revenue and earnings before interest, tax, depreciation, and amortization (EBITDA). However, this pattern is expected to change in the future after several concessions become more profitable. The company’s revenue from construction has grown rapidly during the past few years, rising from Bt6,852 million in 2004 to Bt13,440 million in 2007. However, its gross profit margin has been squeezed from 20.4% to 8.3% during the same period, due mainly to cost overruns on the South Outer Ring Road project and higher competition in both public and private project biddings. As of year end 2007, CK’s backlog was Bt18,705 million, with 62% concentrated in the Nam Ngum II Dam project. The company plans to use proceeds from this new debentures for working capitals and business expansion. TRIS Rating does not anticipate any substantial impact on CK’s leverage from this new debentures given that Bt1,700 million worth of debentures will be due in October 2008. CK’s concessions cover several infrastructure assets, including expressway, underground mass transit, tap water, and electricity. As of year end 2007, CK’s major investments included a 14.71% stake in Bangkok Expressway PLC (BECL), a 24.61% stake in Bangkok Metro PLC (BMCL), a 46.15% stake in Thai Tap Water Supply PLC (TTW), and a 28.50% stake in South East Asia Energy Co., Ltd. (SEAN). Most of CK’s concession investments were funded by debts, which resulted in its high leverage level over the past few years. BECL and TTW have already contributed dividends and equity income to CK, while BMCL still experiences losses. Management plans to list TTW on the Stock Exchange of Thailand (SET) in the near future. SEAN’s major project is under construction and is expected to generate income no later than 2011. With regard to the dispute between BBCD and EXAT, BBCD filed a new claim with the court under the notion that it still has a legal right to claim the additional construction costs from the EXAT despite the negative ruling of the Supreme Court. The company expects the legal process to take up to three years. TRIS Rating said, CK’s revenue in 2007 dropped by 29% from a year ago to Bt13,565 million, impacted by unfavorable construction industry. Operating margin weakened slightly in 2007 to 4.2%, down from 5.1% a year earlier due to competitive environment. However, debt to capitalization ratio improved from 79.6% in 2006 to 67.7% in 2007 as a result of the completion of the South Outer Ring Road project and equity injection from warrants exercised.