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EXECUTIVE Q&A
SHARE INVESTOR
Nardone: Reducing risk, increasing value |
Hemaraj Land and Development Plc, currently celebrating its 20th anniversary, is Thailand's largest developer of industrial estates and related utilities, property and customer services.
Its portfolio includes six industrial estates covering 31,000 rai, with 382 customers including 126 automotive companies that represent investments totalling US$14 billion and employ some 65,000 people directly. David R. Nardone, the company's president and CEO, discusses the business and economic outlook in today's Executive Q&A.
Business
1. Please explain Hemaraj's business model.
We are developers, we started out with the core business of industrial estate development. As we've added more customers, this creates a utility business as our customer base is capital intensive. They consume a lot of water thus we provide water and waste water treatment on the estates. Over time we try to leverage with property such as SME factories that we rent or sell and other property development/acquisitions such as an office building we bought and condominiums for sale. Thus we view our business in three product lines industrial estates, utilities and property.
2. Industrial estate is Hemaraj's core business, are land sales still on target for 1,500 rai?
Initially we had a budget of 1,300 rai, and when we announced first-quarter earnings, so that the retail investor has the same advantage as the institutional investor, we provided new guidance and increased our forecast to 1,500 rai. As of the first half of 2008 we had achieved sales of 934 rai and a number of contracts already signed including the Danelli recently thus reaching 1,100 rai. When second-quarter results are announced, we will likely increase our guidance target for the year. Our business is strong as BoI application approvals last year were at record levels.
3. Can you provide information of Hemaraj's land bank today, total size, and remaining land available?
We have 10,000 rai on a sellable basis, but it is not all developed. Depending on location and phase, some is developed, some is raw land. We have land on three of our own estates plus a land bank in two industrial parks with Siam Cement Group. Also a very minimal land bank at our petrochemical estate. But we've bought land there every year recently and we are expanding our land bank there again.
Automotive and petrochemical companies represent around 50% of Hemaraj's clientele base, according to the Bank of Thailand both industries are operating at high capacity utilisations, and automotives have the Eco-Car projects thus:
a. Is Hemaraj experiencing more interest from those industries?
We have a lot of continuing business from the PTT Group. If you follow their capital plans of billions of baht investment we normally benefit from the downstream of their business. Normally when we expand we do it back-to-back with our customers in mind. Auto business was historically one third of revenue, today its 50% of current business both in number of customers and number of rai. In the first quarter of 2008 we won the expansion for the Suzuki eco-car programme. If you look at other programmes GM is planning a new pickup model. We also see new supplier expansion for Ford/Mazda for Mazda 2 series passenger car. There is still the eco-car programme and one ton pickup expansion. So we project over the next three to five years, we will see significant auto investment continuing.
b. Hemaraj's has two industrial estates at the Eastern Seaboard area, where the majority of customers are automotive companies, how much land does Hemaraj have available for sale there?
That is developed or in a sellable condition, probably about 1,200 rai. Normally we develop in phases ahead of customer demand. Hemaraj Eastern Seaboard, we've been developing for three years already.
4. Utilities revenue has been a steady revenue earner for Hemaraj, how much additional growth is there for utilities?
We provide raw water in the case of some power and chemical companies, potable water, clarified water and waste water treatment. We are quite a good environmental company as we have the technology for waste water. We also maintain well the industrial estates. In 2007 utilities revenue was 660 million baht and in 2008 it should increase by 15% and this will double by 2011. Mainly large petrochemical companies coming online consume a lot of our utilities.
5. With the SME factories, currently Hemaraj owns a total of 99 SME factories, what are Hemaraj's plan with these factories going forward?
We actually have 54 factories under rental as of the second quarter of 2008 and we have sold 39 factories to date, a total of 114 built to date, leaving 14 available. SME factories are complementary to our normal business as we look to provide a quality service for our customers. Thus we are looking at a 30% increase in revenue this year and going forward we forecast 20% growth. We feel that the SME factories will provide us with a steady income as part of our property strategy.
6. Is The Park Chidlom a signal of intent by Hemaraj to enter into property development or an opportunistic play?
It was by intent, we were targeting a niche industry. At the time we thought the high-end condominium market was underserved with very little development since the crisis. And our first condominium just won the CNBC Best High-Rise development which is nice. The benefit for us is that we have a broad development strategy of industrial estates, utilities and property thus we can invest where we see attractive returns. We aren't a property developer machine chasing diminishing margin projects, so we will look for opportunities to invest that are competing for capital.
7. Recently Hemaraj and Glow announced a JV, Gheco-One, why has Hemaraj decided to enter into the power producer?
We've been in the power market for 13 years. We developed with Tractebel, the predecessors of Suez Energy and the same people amazingly since about 1996 where we won the Bowin IPP project. We still have 5% remaining with Glow IPP but zero in two other SPP projects. Unfortunately we had to sell most of our equity stakes down in the past from the crisis. But power has been part of our utility strategy and we are just continuing that with Gheco-One. We have a 35% shareholding of 660 MW and 40 billion baht in investment. We will look at other small power opportunities.
Industry
1. How does Hemaraj differentiate itself among its competitors (Amata, Rojana, MTS, Navanakorn)?
We've had the number one market share for the last three years and for the first six months of this year. Normally we have 25-35% of market share. We're averaging 50 contracts a year, and 40-50% of the business is from the existing customer base.
We can differentiate with a higher level of infrastructure development as our clients are capital-intensive. With a chemical company their land investment is only 5-10% of cost so they will differentiate on the reliability and the level of utilities. The fact that we have a third raw water pipeline and multiple water treatment plants, basically we can back them up. We have a good product and our customers are happy.Our customer base is 126 auto companies, 383 distinct customers, 556 contracts with US$14 billion customer investment. Also 60% of our customers have expanded their initial land area since they've joined us.
Financial Performance
1. With the government stimulus package for property tax savings, Hemaraj can save 5.18% and 4.18% on the value of its Industrial Estate and Condominium sales, will Hemaraj be looking to transfer more sales within the next 12 months?
For the condominium most units should be transferred by March 2009. With industrial estate sales, it's a bit more difficult as we have to follow the customers' timing.
Miscellaneous
1. What do you feel are the biggest risks facing your business today?
Higher risks are more the global ones especially commodity pricing as it affects our costs, albeit more for commercial property development instead of industrial estates. Energy costs are a concern everywhere and not just Thailand-specific. And of course overall economic growth drives industrial activity. Less concern, but still a concern, is local politics and also for Thailand to demonstrate consistent policies that the BoI have been doing.
2. Where do you see Hemaraj in five years from now?
In five years our goal is to double revenue and have a more measured revenue structure between industrial estates, utilities and property. We expect each business to provide roughly a third of revenues. The industrial estate will become less of a revenue flow because frankly I think that it's the hardest one to grow. Utilities will provide a more recurring stable revenue flow. Properties include the SME factories, condominiums and rental revenue.
By reaching this goal with a broader revenue base and half of the revenue being recurring, we reduce the risk of the company. It also helps Hemaraj to focus on where the best shareholder value is.
The Executive Q&A Series is presented by ShareInvestor, Asia's leading financial internet media and technology company, and the largest investor relations network in the region with more than 400 listed clients. The interview was conducted by Pon Van Compernolle, managing partner of GVC Capital, an investment advisory firm focused on small- and mid-caps in Thailand. For more information, e-mail pon@gvc-capital.com or howard@shareinvestor.com or visit http://www.ThaiListedCompany.com
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