TRIS Rating Assigns “A-/Stable” Rating to Senior Debt Worth Up to Bt2,000 Million of “QH”

TRIS Rating has assigned a rating of “A-” to the proposed issue of up to Bt2,000 million in senior debentures of Quality Houses PLC (QH). At the same time, TRIS Rating has affirmed the company and current senior debenture ratings of QH at “A-”. The outlook remains “stable”. The company will use the proceeds from the new debentures for general business expansion. QH’s ratings reflect the company’s established track record in the property development industry, strong position in the middle- to high-income housing market, and financial flexibility from investments in marketable securities. The strengths are partially offset by the cyclical nature of the property development industry, pressures from construction costs and labor shortage, and a high financial leverage in the medium term. The “stable” outlook reflects an expectation that the company’s business profile will remain strong in the medium term. The company’s debt to capitalization ratio is not expected to stay above 60%, or interest-bearing debt to equity above 1.5 times, for extended periods.

QH was founded in 1983 and is one of the leading property developers in Thailand. As of October 2013, QH’s major shareholders were Land and Houses PLC (LH, 25%) and the Government of Singapore Investment Corporation Pte. Ltd. (11%). QH’s business profile is strong. The company’s revenue in 2012 stood at Bt13.1 billion, ranked sixth among the property developers listed on the Stock Exchange of Thailand (SET-listed). QH has a strong market position, particularly in single-detached house (SDH) segment pricing over Bt5 million per unit. Over the past few years, the company has also delivered an acceptable performance in the lower-priced segments, between Bt1-Bt3 million per unit. The company’s housing brands are highly recognized and well accepted by buyers.

QH’s financial profile during 2012 to the first half of 2013 improved satisfactorily, driven by growth in the segment with unit price of Bt1-Bt3 million and higher condominium transfers. Presales in the first half of 2013 stood at Bt12.1 billion, up 45% from the same period a year ago. During the same period, revenue stood at Bt9.4 billion, up 87%. Operating margin (operating income before depreciation and amortization as a percentage of revenue) in the first half of 2013 was 16.5%, compared with 12.5% in 2012 and 7.8% in 2011. The debt to capitalization ratio at the end of June 2013 was 56.6%, improving consecutively from 63.0% in 2011 after the Bangkok’s flooding. Lower leverage is partly due to the net cash receive of Bt2 billion in 2012 from the set up of a property fund.

For the next three years, TRIS Rating expects QH to generate base-case revenues in a range of Bt16-Bt19 billion per annum. Revenues from low-rise projects should be around Bt10 billion per annum, while the rest will be from condominium projects. At the end of June 2013, QH’s condominium backlog was Bt9.6 billion. About Bt3 billion of the backlog is expected to be transferred in the second half of 2013, while the rest will be transferred during 2014-2015 at Bt3-Bt3.5 billion per annum. For the next three years, QH’s operating margin is expected to remain quite stable. The debt to capitalization ratio is expected to stay around 55%, taking into account the company’s plan to launch projects worth approximately Bt20 billion per annum.

QH’s liquidity profile remains acceptable. At the end of June 2013, QH’s long-term debts, mostly debentures, maturing within the next 12 months were Bt4.1 billion. Most of the debts are expected to be refinanced with new debentures. QH’s liquidity sources include Bt5.1 billion in undrawn long-term facilities at the end of June 2013 and expected funds from operations (FFO) of Bt1.5-Bt1.9 billion per annum. The company’s liquidity was enhanced by a portfolio of marketable securities with a fair value of Bt25.3 billion at the end of June 2013.

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