Bangkok--23 Jul--TRIS Rating TRIS Rating Co., Ltd. has upgraded the company rating of Quality Houses PLC (QH) and the ratings of its existing debentures to “A-” from “BBB+”. At the same time, TRIS Rating has assigned a “A-” rating to QH’s proposed issue of up to Bt2,500 million in senior debentures. The outlook remains “stable”. The upgrades are based on QH’s stronger position in middle-income residential property market, improving profitability, and ability to take advantage of the recent government tax incentives from its sizable prebuilt housing units. The ratings also take into consideration the company’s long track record in the property development market, strong brand name in the high-end residential property, and recurring income from commercial properties. The strengths are partially offset by the cyclicality of the property development industry and inflationary pressure that may impact developers’ profitability.ฃ The “stable” outlook reflects the expectation that QH will be able to maintain its strong market positions in both the middle-income and high-end markets as demand for property slows. The company is also expected to sustain its favorable sale growth rate and have better profitability while the government tax incentives are in effect. QH’s housing project portfolio investments are expected to be less aggressive after the tax incentives expire in 2009. Leverage is expected to drop after QH releases large residential inventories to the market while preserving substantial cash for debt repayment and expansion.TRIS Rating reported that QH is one of the leading property developers in Thailand. It was established in 1983 by Land & Houses PLC (LH). As of April 2008, its major shareholders were LH Group (25%) and the Government of Singapore Investment Corporation Pte. Ltd. (13%). QH’s competitive edges stem from its strong position in the high-end residential property market, high quality of its portfolio of rental properties that generates recurring income including Q-House office buildings and Centrepoint serviced apartments, and the growing presence of mid-priced residential project brand, Casa Ville. The average unit price across QH’s residential project portfolio fell to Bt7.4 million, reflecting a strategic shift towards the more medium-priced segment. As of March 2008, the company had 22 residential projects on hand worth approximately Bt16,144 million in the remaining units. Residential sales accounted for around 85% of total revenue, while rental income from office and serviced apartments accounted for 3%-4% and 10%-12%, respectively over the past few years. In 2009, QH plans to launch three condominium projects, which are expected to contribute significant portion of revenue in 2010. TRIS Rating said, QH’s operating performance was satisfactory in recent years. As residential property demand slowed in 2006-2007, QH’s revenue continued to increase, rising from Bt7,904 million in 2005 to Bt10,246 million in 2007. In the first quarter of 2008, revenue slowed to Bt2,355 million, from Bt2,455 million in the same period of 2007, because QH suspended housing unit transfers for three weeks prior to the date (29 March 2008) that tax incentives took effective. It is expected that revenue for the second quarter of 2008 will increase from the same period in 2007 due to the pending transfers. Driven by the recent success of the mid-priced residential projects, QH invested heavily in the past years, driving total assets Bt25,706 million at the end of March 2008 from Bt20,305 million at the end of 2006 to. As a result, debt to capitalization ratio increased from 52% at the end of 2006 to 60% in March 2008. QH’s operating margins improved significantly to around 18% in 2007 and during the first quarter of 2008 from 12% in 2006, reflecting the end of cutting prices to liquidate QH’s long lasting stocks. It is expected that the company’s profitability will benefit from the recent government’s tax incentives, since QH carried a sizable residential project portfolio much of the portfolio will be ready for transfer within a year. TRIS Rating also said that demand for residential property depends on the country’s overall economic prospects. The Thai economy is expected to record modest growth in 2008, with gross domestic product (GDP) forecast to grow by 4.5%-5.5%. However, the residential property market is challenged by inflationary pressures, political instability and potential interest rate rise. A government stimulus package which was effective in March 2008 reduces both the special business tax for residential developers and the transfer fee for home buyers and property developers. These incentives may provide a short-term boost in demand for residential property. However, consumer confidence remains low since consumers are uncertain about the overall economy. In addition, high inflation with rising interest rates should lower the ability of potential homebuyers to afford new housing.