Corporates. Asian Property Development Public Company Limited. Property/Real Estate Thailand Full Rating Report. Rating Rationale

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1 Property/Real Estate Thailand Full Rating Report Ratings National Long Term Rating Short Term Rating Outlook National Long Term Rating Financial Data Asian Property Development Public Company Limited 30 Jun 10 BBB+(tha) F2(tha) Stable 31 Dec 09 Revenue 8,266 12,424 Operating EBITDAR 2,131 2,869 Op. EBITDAR/ revenues (%) Op. EBITDAR/ net fixed charges (x) Cash flow from 1, operations Free cash flow FFO/interest expense net of interest income (x) Total debt 9,119 7,942 Closing net debt 5,739 6,234 Total adjusted debt Net of cash/op. EBITDAR (x) Adjusted net leverage/ FFO (x) Analysts Pimrumpai Panyarachun Somruedee Chaiworarat Related Research Applicable Criteria Corporate Rating Methodology (August 2010) National Rating Methodology Update December 2006) Asian Property Development Public Company Limited Rating Rationale Fitch Ratings upgraded (APD) on 4 from BBB(tha) / F3(tha) to BBB+(tha) / F2(tha). The move was the result of the strong operating performance in 2009, healthy credit metrics at end H110, and robust pre sales. APD s revenue increased 26% to THB12.4bn while EBITDAR rose to THB2.9bn in the financial year ending in December 2009 (FY09). Financial leverage measured by net adjusted debt to EBITDAR declined to 2.2x at the end of the 2009 financial year (FYE09) from 2.5x at FYE08 driven by strong cash flow from the ownership transfer of completed condominium units in H209. Strong cash flow from operations further brought the leverage down to 1.5x at end H110. Although APD s financial leverage is likely to increase during H210 FY11 due to a higher working capital requirement to fund the construction of condominiums, it should remain relatively low compared with its leverage during the expansion phase in The ratings also reflect APD s solid brands in townhouses and condominiums in the mid to upper mid tier sectors, sound financial management policy, and record in property development in Bangkok and its surrounding area. The ratings of APD are constrained by the cyclical nature of property development, which could lead to volatile working capital and cash flow. Moreover, almost all of APD s cash flow generated from operations is projectbased cash flow. This makes its credit profile riskier compared to companies (with comparable credit metrics) in other businesses with more stable cash flows, which would prove to be more resilient to an economic downturn. The Stable Outlook reflects Fitch s expectation that APD should be able to maintain its business profile as well as its credit metrics concurrent with the current rating in the next 24 months. What Could Trigger a Rating Action? Negative rating pressure could come from aggressive expansion which includes significantly higher than expected land acquisitions, much lower than expected pre sales, and high cancellation rates. Further upward movement on the ratings may be limited by the increasing working capital needs for the construction of the pre sold condominiums as well as land acquisitions in the next two years. Liquidity and Debt Structure APD s liquidity is relatively strong with short term debt, which will mature within 12 months of THB1.5bn, against its carrying cash of THB3.4bn at end H110. Continued access to the debt capital markets, and project loans from banks support its financial flexibility. At end H110, capital market debt accounted for 88% of total debt. APD redeemed THB1.5bn of bonds maturing in July 2010 using internal cash and the proceeds from new bonds issued worth THB1.0bn. The portion of capital market debt is expected to decline slightly as project loans are drawn to fund construction in

2 Company Profile Incorporated in 1984, APD is one of Thailand s top residential property developers in terms of revenue (ranked fourth among listed developers), property development track record, and brand awareness. APD s initial focus was townhouses, while its current property project portfolio comprises single detached houses (SDHs), townhouses, and condominiums, located within Bangkok and its suburbs. APD has firmly established its position in the townhouse and condominium segments and has continued to strengthen its position in SDH. Its CEO, Anuphong Assavabhokin, and MD, Pichet Vipavasuphakorn, together hold a 33% stake. APD s Product Portfolio Property type Brand Segment Unit price (THBm) Condominium The address Mid tier to luxury >5.0 Rhythm Mid tier to upper mid tier Life Mid tier Aspire Lower mid tier Townhouse Baan Klang Krung Mid tier to upper mid tier >5.0 Baan Klang Muang Mid tier Biztown Mid tier to upper mid tier Single detached house Palazzo Luxury >10.0 The City Mid tier to upper mid tier The Centro Mid tier Source: Company and Fitch estimates Business Analysis Solid Pre Sales APD s continued solid backlog is expected to help secure revenue in The backlog at end H110 stood at THB14.2bn, made up of THB12.6bn of condominiums, and THB1.7bn of SDHs and townhouses. While the backlog of SDHs and townhouses will mainly convert into revenue in 2010, most of the backlog of the condominium projects will largely convert into revenue in APD s average monthly pre sale of SDHs and townhouses increased to THB525m in H110 from THB478m in 2009, helped by the improving economy and the higher number of new project launches. Although average pre sales of condominiums in H110 was lower than in 2009, Fitch expects the average monthly condominium presales in 2010 to be close to the figure in 2009, supported by a chunk of new condominium launches in H210. This should help to increase APD s pre sales backlog to about THB20.0bn at end Strong Take Up Rate APD s take up rate for its pre sale condominiums has been strong at above 80% before the project is completed and ready for ownership transfer. Speculative investment has accounted in part for the recent high take up rates at some new condominium projects launched by established developers including APD. However, non speculative demand, which includes demand for long term investments and demand for new residences has been relatively strong, as illustrated by the reasonable take up rate at the less speculative locations and the company s relatively low cancellation rates. APD has also been able to maintain reasonable take up rate of its low rise housing, particularly its townhouse projects, due to their quality, design, and its strong brand. The support from banks which provide attractive home loan packages to APD s customers including high LTVs and competitive interest rates, has also helped stimulate orders. Strengthening Position APD became the fourth largest listed property developer by revenue in 2009, 2

3 moving up from the fifth in 2008, driven by its strengthening position in the condominium segment. The company has also managed to maintain reasonable profit margins compared to other established developers, mainly due to the high proportion of its earnings coming from condominiums. APD s revenue and project portfolio are still smaller than Pruksa Real Estate Public Company Limited (PS), Land and Houses Public Company Limited (LH, BBB+(tha) /Stable) and Sansiri Public Company Limited (SIRI). However its financial profile is one of the strongest. Peer Comparison 2009 (THBm) PS LH SIRI APD QH Net sale 18,966 17,656 17,306 12,424 11,355 Growth (%) Gross margin (%) EBITDA 4,994 4,519 3,018 2,869 2,258 EBITDA margin (%) Operating cash flow 3,988 4,248 1, ,765 Asset 18,871 46,920 25,375 19,007 28,258 Equity 13,023 27,343 10,124 8,187 12,504 Net debt 1,254 14,617 6,266 6,234 11,749 Net debt/ebitda (x) Net debt/equity (%) EBITDA/interest paid (x) H110 Net sale growth (%) EBITDA margin (%) Source: Companies financial statement and Fitch s calculation Low Rise to Help Growth in Condominiums accounted for about 53% of APD s total revenue in However, this is likely to decrease to the range of 35% 45% in due to relatively fewer condominiums being completed for ownership transfer in The rise in revenue from SDHs and townhouses resulting from a sharp increase in number of new SDH and townhouse projects launched in 2010, is expected to help maintain moderate revenue growth in 2010 and APD has announced a plan to launch a total of five SDH and eight townhouse projects in 2010 worth THB16.2bn in combined project value compared with THB2.3bn in Out of the THB10.2bn combined value of available projects for sale at end H110, 44.6% was SDHs, 22.2% was townhouses and 33.2% was condominiums. APD is likely to continue launching a number of new low rise projects in 2011 to further support its revenue growth. Improving Economy and Urbanisation to Support Demand The Bangkok property market in is likely to be driven by the economic recovery and by the greater number of new project launches. The condominium segment should continue to be the main driver. In H110 the number of transferred condominium units increased by 86% yoy to 44,828 units, driving the total number of transferred housing units to 61,200. The demand for low rise residential property in H110 was also strong, with the number of transferred SDHs increasing by 26% yoy, and transferred townhouses by 42%. However, Fitch noted that the sharp rise in the number of transferred housing units was partly helped by the government s tax incentive programme which expired in H110. Moreover, the progress of the construction of new mass transit rail routes (Red Line and Purple line) should continue to increase the number of both low and high rise residential projects adjacent to these routes in the suburbs. The market should be supported by rising consumer confidence. Although the Consumer Confidence Index (CCI) declined in April and May 2010, due to the concerns over civil unrest, it rebounded to the same level as in the beginning of January 2010, on the back of the economic recovery and a healthier political environment. 3

4 Consumer Confidence Index (Index) Jan 01 May 03 Oct 05 Mar 08 Aug 10 Source: University of the Thai Chamber of Commerce Political Instability and Intense Competition The key risk to the housing market in is political instability, which could lead to weaker than expected housing demand. Meanwhile, competition is expected to remain high in the condominium sector, as the high profit margins have brought in new developers. Competition is also likely to be more intense in the lower tier segment, as all of the large developers have entered into this sector. Nevertheless, established developers still have advantages over the new ones due to their strong brands, record in property development, and access to project loans from banks. Interest rates are expected to rise. However, Fitch expects the impact on housing demand to be limited in , as evident from the strong pre sales at new launches of the major developers both in low and high rise projects. Financial Analysis Accounting Issue In Q110 APD changed its accounting policy for revenue recognition from a percentage of completion method, to recognising revenue in full when property ownership is transferred. The move was made in order to comply with an upcoming change in the Thai GAAP. Fitch views that this will make APD s financial statements better reflect the company s operating performance. However, Fitch notes that this might result in more volatile reported earnings due to the pattern of revenue recognition of the condominium projects. Solid Growth and Profitability APD s revenue and earnings growth in the past few years have been strong with a four year CAGR of 24% and 29% for revenue and EBITDAR, respectively. Revenue and EBITDAR continued to increase significantly in H110 which was partly attributable to the help from the government s stimulus package. Moreover, APD has been able to maintain relatively strong profit margins as it expands. Its EBITDAR margin was 23% in 2009, and increased to 26% in H110 thanks to its efforts in strengthening its brands and position in the townhouse and condominium segments, ability to find good locations, and effective cost management. Fitch expects APD s revenue and EBITDAR to grow moderately during driven by an improving economy, while it anticipates relatively stable profit margins in APD s EBITDAR margin in 2011 is likely to decline slightly given the higher special business tax and transfer fee starting in H210. P/L Summary H Revenue 8,266 12,424 9,832 7,825 6,344 5,257 Revenue growth (%) Gross margin (%) EBITDA 2,131 2,869 2,474 1,468 1,091 1,033 EBITDA margin (%) Source: Company, Fitch Volatile Cash Flow Despite APD s increasing land acquisition to support its future project expansion, its cash flow from operation turned to positive THB599m in 2009 from negative THB1.1bn in There were ten condominium projects completed and ready for ownership transfer in 2009 compared with about six projects in The government s tax incentive program for homebuyers which ended in December 2009 was also partly accountable for the faster than expected property ownership transfer in 2009 and H110. As strong condominium ownership transfer continued in H110, cash flow from operation reached THB1.0bn, an 8% increase compared with H109. Fitch expects positive cash flow from operation for 2010, given the expected 4

5 moderate low rise sale, the ownership transfer of the Rhythm Ratchada project, as well as moderate land acquisition in H210. Improved Credit Metrics APD s financial leverage has continued to decline since 2007, despite the company s expansion. Financial leverage, measured by net adjusted debt to EBITDAR came down to 2.2x at FYE09. Strong cash inflow from condominium ownership transfers in the beginning of 2010 further reduced its leverage. Its net adjusted debt to last 12 month EBITDAR was down to 1.5x at end H110. APD s coverage ratios have been strong with EBITDAR to gross interest and funds from operations to gross interest expenses of 8.8x and 6.1x in 2009 respectively. The construction of condominiums launched in late 2009 and 2010, the increased land acquisition and higher dividend payments are expected to result in negative free cash flow in 2010 and As a result, Fitch expects leverage to increase in H210 and FY11. However, APD s financial leverage is likely to remain lower than during the expansion in Interest coverage ratios are likely to remain solid for Moreover, the flexible land acquisition policy should, to some extent, help maintain appropriate leverage if the property market is weaker than expected in Good Access to Local Debt Market APD is one of the few property developers whose funding is not limited to secured project loans and funds from shareholders. The portion of capital market debt has increased over the past five years with capital market debt accounting for about 82% and 88% in 2009 and H110, respectively. As this capital market debt is mainly unsecured long term bonds, the proportion of unsecured debt has also been increasing over time. This continued good access to the debt capital market will provide APD with financial flexibility. Issuer Participation The issuer did not participate in the rating process other than through the medium of its public disclosure. 5

6 Summary Balance Sheet 31 Dec Dec Dec Dec Dec 2005 THBm THBm THBm THBm THBm Original Original Original Original Original ASSETS Cash and Marketable Securities 1,708 1, Accounts Receivable/Trade Debtors Inventory 16,567 14,951 11,488 8,712 8,954 Other Current Assets Property, Plant & Equipment Intangible Assets Other Non current Assets TOTAL ASSETS 19,007 17,378 13,145 10,418 10,276 LIABILITIES Short term Debt (inc. CPLTD) 1,515 1,061 1,520 1,751 1,069 Accounts Payable/Trade Creditors Provisions Other Short term Liabilities 2,160 2,000 1, Other Long term Liabilities Long term Secured Debt 1,427 3, ,635 Long term Unsecured Debt 5,000 3,500 3,250 1,350 2,600 TOTAL LIABILITIES 10,820 10,590 7,629 5,367 6,281 EQUITY Minority Interest/Minorities Equity Capital & Reserves 8,182 6,787 5,513 5,048 3,983 TOTAL LIABILITIES & EQUITY 19,007 17,378 13,145 10,418 10,276 Adjusted Gross Debt 7,942 7,986 5,509 4,031 5,303 Debt Schedule DEBT PRIORITY Lease Liabilities Secured 1,442 3,736 1,659 1,431 2,703 Unsecured 6,500 4,250 3,850 2,600 2,600 Convertible Subordinated Total Debt 7,942 7,986 5,509 4,031 5,303 Off Balance Sheet Debt Total Adjusted Debt 7,942 7,986 5,509 4,031 5,303 Non recourse + Equity Hybrid Component Total Adjusted Debt with Equity Credit 7,942 7,986 5,509 4,031 5,303 Adjusted Liabilities~~ 7,942 7,986 5,509 4,031 5,303 DEBT SOURCE Bank 1,442 3,736 1,659 1,431 2,703 Capital Markets 6,500 4,250 3,850 2,600 2,600 Other TOTAL DEBT 7,942 7,986 5,509 4,031 5,303 DEBT MATURITY Less than 1 Year 1,515 1,061 1,475 1,722 1,069 1 To 2 Years 2,000 1, ,350 2,100 2 To 5 Years 4,427 5,266 3, ,135 More than 5 Years TOTAL DEBT 7,942 7,986 5,509 4,031 5,303 Unrestricted Cash & Deposits 1,708 1, CURRENT DEBT NET OF CASH (193) (697) TOTAL DEBT NET OF CASH 6,234 6,227 4,787 3,272 4,787 TOTAL ADJUSTED DEBT NET OF CASH 6,234 6,227 4,787 3,272 4,787 Adjusted Liabilities Net of Cash 6,234 6,227 4,787 3,272 4,787 Restricted Cash & Deposits ~ includes Restricted Cash ~~ Total Adjusted Debt with Equity Credit plus Debt like Pref. Stock 6

7 Summary Income Statement 31 Dec Dec Dec Dec Dec 2005 THBm THBm THBm THBm THBm Original Original Original Original Original SUMMARY INCOME STATEMENT Revenue* 12,424 9,832 7,825 6,344 5,258 Cost of Goods Sold 8,258 6,349 5,248 4,348 3,574 GROSS PROFIT 4,166 3,484 2,577 1,996 1,683 Selling, Distribution & Administrative Expenses 1, , Other Operating Expenditure** (62) 11 0 (25) (16) Presentational only: L T Rentals (incl. in SG&A above) Operating EBITDAR 2,869 2,474 1,468 1,091 1,033 Depreciation & Amortisation Non recurring, non operational and non recourse income*** Associate Income/Loss 3 10 (5) (1) 4 Other Income/Expense EBIT 2,846 2,467 1,434 1,818 1,126 Interest Income Interest Expense Non interest Financial Income/Charges PBT 2,685 2,375 1,315 1,723 1,068 Taxation Minorities (3) (0) (0) (1) (26) NET INCOME 1,866 1, , Extraordinary Items/Accounting Changes NET INCOME AFTER EXTRAORDINARY ITEMS (before dividends) 1,866 1, , Summary Cash Flow 31 Dec Dec Dec Dec Dec 2005 THBm THBm THBm THBm THBm Original Original Original Original Original SUMMARY CASH FLOW Operating EBITDAR 2,869 2,474 1,468 1,091 1,033 Cash Interest Paid, Net of Interest Income Cash Tax Paid Associate Dividends Other Changes before Funds From Operations**** (16) FUNDS FROM OPERATIONS 1,704 1, Working Capital (1,105) (2,681) (2,181) (100) (2,015) CASH FLOW FROM OPERATIONS 599 (1,103) (1,245) 547 (1,292) Non Operational Cash Flow*** (148) 115 Capital Expenditure Dividends Paid FREE CASH FLOW 64 (1,530) (1,646) 62 (1,684) Receipts from Asset Disposals Business Acquisitions Business Divestments , Exceptional & Other Cash Flow Items 11 (16) NET CASH IN/OUTFLOW 75 (1,546) (1,632) 1,486 (1,533) Equity Issuance/(Buyback) FX movement Other Items Affecting Cash Flow**** (81) 76 5 (47) 61 NET CASH FLOW AVAILABLE FOR FINANCING (6) (1,440) (1,515) 1,515 (1,465) OPENING TOTAL DEBT NET OF CASH 6,227 4,787 3,272 4,787 3,322 Net Debt Increase/(Decrease) 6 1,440 1,515 (1,515) 1,465 CLOSING TOTAL DEBT NET OF CASH 6,234 6,227 4,787 3,272 4,787 * Net of Sales, Royalty & Other Operational Taxes ** Excludes Depreciation & Amortisation *** Analyst Estimate **** Balancing Item 7

8 Ratio Analysis 31 Dec Dec Dec Dec Dec 2005 THBm THBm THBm THBm THBm Original Original Original Original Original EARNINGS/PROFITABILITY Revenue Growth (%) n.a. Gross Profit/Revenues (%) Op. EBITDAR/Revenues (%) EBIT/Revenues (%) Pre Tax Profit/Revenues (%) Profit after tax/revenues (%) Effective Tax Rate (%) Profit after tax/average Equity (%) Return on Average Assets (%) FFO Return on Adjusted Capital (%) Free Cash Flow Margin (%) 0.52 (15.56) (21.04) 0.98 (32.02) COVERAGES FFO/Gross Interest Expense and Preferred Dividends (x) FFO Fixed Charge Cover (x) (Op. EBITDAR Capex)/Gross Fixed Charges(x) Op. EBITDAR/Net Fixed Charges (x) FFO/Interest Expense Net of Interest Income (x) Free Cash Flow Debt Service Coverage (x) 0.22 (0.82) (0.92) 0.09 (1.44) Net Fixed Charges Cover (x) LEVERAGE Total Adjusted Debt/Op. EBITDAR (x) Total Adjusted Debt Net of Cash/Op. EBITDAR(x) Adjusted Liabilities Net of Cash/Op. EBITDAR (x) Adjusted Net Leverage/FFO (x) Adjusted Leverage/FFO (x) Free Cash Flow/ Adjusted Liabilities (%) 0.81 (19.16) (29.89) 1.54 (31.75) CFO/Total Debt Net of Cash (%) 9.61 (17.71) (26.00) (26.99) CFO/Adjusted Liabilities Net of Cash (%) 9.61 (17.71) (26.00) (26.99) Total Adjusted Debt/Total Adjusted Capitalisation (%) FINANCIAL STRUCTURE Secured and Lease Debt/Total Debt (%) Current Debt/Total Debt (%) Off Balance Sheet Debt/Total Adjusted Debt (%) Total Debt Net of Cash/Tangible Equity (%) PENSION ADJUSTED RATIOS Mixed Scheme Pension Liability Pension Adjusted Net Leverage Pension Adjusted Net Coverage Pension Adjusted Net Coverage (Implied) Implied Interest Cost Pension Adjusted Gross Coverage Pension Adjusted Gross Coverage (Implied) WORKING CAPITAL CYCLE Average Inventory Processing Period (days) Average Receivables Collection Period (days) Gross Cash Cycle (days) Average Payables Payment Period (days) Cash Conversion Cycle (days) ADDITIONAL INFORMATION Depreciation Amortisation Capital Expenditure/Depreciation (x) CFO/Capital Expenditure (x) (14.39) (58.35) (33.04) Interest Capitalised Hire/Lease/Rent Costs for Current Assets Hire/Lease/Rent Costs for Long term Assets Contingent Liabilities Operating Exceptionals in Operating Costs Staff cost/revenues (%) R&D (net)/revenues (%)

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