Thailand Residential Property Sector

Thailand Residential Property Sector: Noticeable potential negative impact from floods

● We believe current floods will have a negative impact on the property developers, with the biggest impact expected to be on property sales in 4Q11 and potentially throughout 2012.
● We have done an analysis on 2011E and 2012E net profits assuming (1) no sales in 4Q11 and (2) weaker-than-normal sales activity through full-year 2012.
● The results are that PS will be the biggest loser, followed by QH and then LH, the three big land-house developers. The least impacted under this scenario is LPN, which is a pure condo developer. AP could see a big impact this year but should fare better than peers in 2012.
● The impact could be quite noticeable on property stocks and hence we believe it could remain an overhang on the sector in the near term. Based on the current situation, the stocks we would avoid are PS and QH and the name we would favour is LPN.

Thailand Residential Property Sector Valuation metrics

Floods are negative to property sales What happens to property sales when there are floods, especially a major one like Thailand is facing currently? Firstly, buyers will not be able to access housing projects in the water-logging areas. In this case, it pretty much means no sales throughout 4Q11 as flood water is unlikely to recede until end-November to early-December. Second, even if water recedes, developers will need time to clean, clear and refurbish their housing projects before these can be reopened for customer visits. This, in our opinion, could take another one to three months, or basically 1Q12. Finally, floods could add financial burden to the customers, virtually making the inclination for home buying not
as strong as it would otherwise be; in other words, a slower-thannormal sales activity in 2012E.

Framework for our scenario analysis
Our scenario analysis here takes a look at what would happen to developers’ net profits should there be negative consequences on sales as a result of these floods. We, however, do not touch costs in this analysis as it is difficult to quantify the impact at this time while it is also likely less important than sales, in our view.

Our three mainassumptions are:

1. A bear case scenario for 4Q11 which is no new sales during the entire quarter.
2. A slowdown in property sales activity throughout 2012, under which we assume property sales would only half of the normal.
3. Some delays in condo transfers in 4Q11 as a result of pent-up volumes from the two-month flood period.

The results—PS is the most at risk followed by QH while LPN should be the least impacted PS: By our estimate, 80-85% of PS’s revenue this year and next should come from single-detached houses (SDH) and town houses (TH). Hence, under our scenario, PS could see a 37% drop in forecast reported net profit in 2011 and an even bigger 46% drop in 2012. QH: QH is expected to be the second worst hit after PS.

Approximately 80% of its revenue comes from SDH and TH. But about 30% of bottom-line contribution is associate income. Hence, the final impact on net profit is lower at around 30% drop each year.
LH: LH is similar to QH in a sense that the majority of its revenue comes from SDH and TH (approximately 80%) and it also has huge associate income to shore up its bottom-line (also around 30% of reported net profit). But given LH’s stronger-than-QH profit margin, the potential impact on its bottom-line is expected to be less, at a 23-24% drop each year.

AP: AP could be hard hit in 2011 if we assume no SDH and TH sales in 4Q11 as these two products are expected to be big contributors to its earnings this year. However, many of its condo projects will be completed in 2012 due to which revenue booking should not be impacted. Hence, the negative impact on 2012E net profit (a 20% potential drop) is expected to be less than that for PS, QH and LH.
LPN: This should be the least impacted out of the big five developers as it is a pure condo developer. Revenue booking is not expected to change either this year or in 2012. Hence, we do not see any impact on our forecast numbers either in 2011 or 2012.

Potential impact on reported net profits in 2011E and 2012E