Hemaraj Land and Development

Hemaraj Land and Development Plc (HEMRAJ)

Investment thesis: While AMATA is our top short-term BUY in the Industrial Estate (IE) sector (catalyzed by land sales upgrade flows, as the street assumption is currently too low, in our view), HEMRAJ looks to be the best long-term play in the sector, thanks to its strategic focus on building recurring income through rental assets and utilities. Although we dislike its plan to build a resort on Koh Lan, it would be premature to discount the stock over this issue, as ground-breaking will be years in the future and we want to see its JV partners first. The short- to mid-term outlook for its existing businesses remains awesome. Our BUY rating stands.
Promising IE prospects: HEMRAJ’s FY12 land sales target of 2,000 rai looks easily achievable. After record land sales of 928 rai in 1Q12, management claims that land sales remain strong. Land margin should be sustained—a 15% increase in sales price offsetting the effect of higher raw land and development costs. Other industrial-related businesses should also perform well. HEMRAJ anticipates that utility sales will rise by 18% and the rental factory portfolio will expand by 50% (up 80,000sq.m) this year. The firm also targets renting out 80,000sq.m of warehouse space at Logistics Park (a new business) per year, starting 2H12.
Series of power income line up: GHECO-One (a 660MW coal-fired power plant) is expected to start operating very soon, followed by eight SPPs (120MW each) to go on-stream in FY13-16. Equity income from GHECO-One (35% holding) is expected at Bt1.4bn per year through FY19 (then decline) and from SPPs (25% stakes in each) at around Bt50m per plant per year.
We are concerned about new project: HEMRAJ announced plans to build an integrated resort, entertainment and leisure complex (called Million Island Pattaya) on a recently acquired 228-rai plot on Koh Lan (an island 10km offshore from Pattaya Beach), management said the land is beautiful with a 300-meter private beachfront. The company is putting together a master plan for the project and looking for JV partners to develop and operate each component. We think the project is risky—its success would depend on the competence and honesty of HEMRAJ’s partners, as it has no industry experience or know-how in either hospitality or entertainment.