With contractors large and small knowing they must make money by being efficient rather than counting on high-margin projects, the construction sector in Thailand is highly competitive. Large builders tend to stick to government contracts and are selective in working for the private sector, which is in part a legacy from the 1997-98 Asian financial crisis. For 2012 the sector outlook is positive based on the likelihood of post-flood rebuilding, and a resumption of projects that had been delayed by the incident.
For the long term, however, the continuation of a trend of strong public sector spending on infrastructure makes continued growth widely expected. The direct impacts will be felt by the bigger builders, with benefits trickling down to smaller ones as new roads or mass-transit stops generate increased demand for developed real estate and open up new areas of the country to economic development.
SLOWDOWN: Spending on construction contracted by 5.4% in the third quarter of 2011 and 5.9% in the fourth quarter, according to the National Economic and Social Development Board, as flooding disrupted activity. However, expenditure is seen rising again in 2012. Most of the slowdown came from the halting of public sector projects, as growth rates of 6.1% and 2.6% in the third and fourth quarters, respectively, were recorded in the private sector. Private sector spending typically lags public expenditure by a small amount. It has been smaller in total in every year but one (2004) since the Asian financial crisis, according to research from Sino-Thai Engineering and Construction, one of the country’s three largest building firms. Public sector spending on construction has been hovering at about BT400bn ($12.8bn) since 2007, when the global financial crisis halted growth.
BIG THREE: The construction sector in Thailand is dominated by three companies: CH. Karnchang, Italian-Thai Development (known as ItalThai) and SinoThai. These three are diversified builders with the expertise and technology to compete on a global scale, and are among the contractors building and bidding in countries including Laos, Cambodia, Myanmar, Bangladesh, India and elsewhere in Asia. Overall, there are 590 members of the Thai Contractors Association, which includes foreign and local players, but likely around 10,000 builders actually participate in the market, from constructing new mass transit lines in Bangkok to single-family dwellings in the provinces.
There are 13 contractors listed and tradable on the Stock Exchange of Thailand, and they reported a combined revenue of BT111.04bn ($3.5bn), according to a 2011 report by ItalThai. The three largest were the only ones to report revenue of at least BT10bn ($319m) and also capture more than 10% of market share among listed companies. ItalThai led the market with BT44.95bn ($1.4bn), giving it 40.5% of the overall take. Sino-Thai, at BT15.02bn ($479.1m), has a similar market share of about 13.5%. CH. Karnchang’s BT13.84bn ($441.5m) translated into a 12.5% share.
ItalThai’s parent company, Ital-Thai Group, is majority-owned by the Karnasuta family. The parent company suffered a loss of BT1.69bn ($53.9m) in 2011, but President Premchai Karnasuta pledged a return to profitability in 2012. Like many others, ItalThai has emerged from the flooding of late 2011 with a large orders backlog: Karnasuta said in April 2012 that the company has BT200bn ($6.4bn) in orders in its pipeline, compared with BT20bn in 2010 ($638m). He projected a third of the backlog would become revenue-generating projects within three years.
BUILDING BACKLOGS: Sino-Thai had an order pipeline of BT48.94bn ($1.6bn) at the end of 2011. This is a record high for the company, and more than double the year-end total in 2010. The previous high was in 2005, at BT28.6bn ($912.3m).
Meanwhile, CH. Karnchang, in which the Plew family owns a 51.43% share, had a BT106bn ($3.4bn) backlog at the end of 2011. It reported a client mix of 86.1% public sector and 14.9% private, and 70% of projects consisted of roads, bridges or mass transportation.
The market is partially open to foreign companies, excluding government projects because Thai laws mandate bidders must be Thai or companies with a Thai majority in ownership. Domestic financing is also more of a challenge for foreign builders than Thai ones, which creates an additional obstacle for outsiders. Foreign companies on a regular basis form joint ventures with local partners in order to gain greater access to projects and project finance.
PRODUCTIVITY: Materials prices are generally expected to account for 40% of costs and labour another 40%. Oversupply in the domestic cement market will not be brought into balance any time soon, and that makes cement a relatively safe variable in comparison with other materials prices. Managing labour costs means time spent juggling workers; Thailand claims virtually no unemployment, and does so using a system in which temporary workers flow from agricultural work during harvest times to other jobs, such as construction, at others. Productivity measures like deploying technology to monitor projects or using precast concrete are an increasingly important part of profitability given the competition in the sector.
“Developers are increasingly putting pressure on construction companies to shorten the timeframe for project completion, which is also a factor driving the need for improvements in productivity in the construction business,” said Jean-Marie Verbrugghe, the managing director of Bouygues Thai, the country’s largest foreign-owned contractor.
BUILDING STRATEGIES: Overall, successful building in Thailand requires a heavy focus on efficiency. The biggest builders are shooting for profit margins of 10-15%, and tend to be picky about projects. CH. Karnchang seeks to work only on those worth BT100m ($3.2m) or more, for example. ItalThai in its 2011 annual report acknowledges that its strategy of bidding on large public sector projects carries some risk. “We generally target large, high-profile contracts from public sector entities,’’ according to the report. “As a result, at any point in time a small number of clients may account for a major portion of our revenues and backlog.’’ As of the end of 2011 five clients accounted for 22% of 2011 revenue and 16.8% of the company’s backlog: Mahidol University, Chulalongkorn Hospital, the Bangkok Metropolitan Administration, the Electricity Generating Authority of Thailand (EGAT) and the Airport Authority of India.
For these sector leaders, preferring a non-diverse client mix that eschews private sector projects is in part a legacy from the 1997-98 crisis. “During the Asian financial crisis we experienced significant nonpayment of amounts owed to us from our private-sector property developer clients,’’ ItalThai explained in its report. “As a result, and because the public sector has generally been more active than the private sector in the construction industry since the Asian financial crisis, we have focused on obtaining public sector work.’’ ItalThai disclosed its revenue mix at the end of 2011 as 64.6% from public sector projects, and its backlog as 84.4% derived from same. Similarly, CH. Karnchang’s mix, split by project value, is 86.1% public projects and 13.9% private.
GEOGRAPHICAL DIVERSITY: For the construction firms that can be choosy, one way to reduce the risks stemming from an overreliance on a few large customers is to work in other countries, and that is a trend likely to be reinforced in 2012. Thai builders are often a good choice in the region for large infrastructure projects because of their relative experience and capacities compared with builders in less developed countries such as Vietnam, Laos, Cambodia or Myanmar. In Laos leveraging the Mekong River for hydroelectric power is a source of work. CH. Karnchang has power station projects under way, for example. According to ItalThai’s 2011 annual report, jobs outside the country accounted for 40.6% of revenue for the year, and 53.7% of the backlog at its end.
Myanmar in particular is expected to take on greater significance thanks to its political and economic liberalisation; the partial suspension of some EU economic sanctions against the country, as well as the potential for US and other boycotts to end soon, adds to its emergence. Thai companies across all sectors are strong candidates to benefit, as Thailand is the second-largest investor in Myanmar, behind China. This gives Thailand existing relationships to build on. Anon Sirisaengtaksin, the CEO of PTT Exploration & Production, the exploration and production arm of the Thai state-owned energy company, advocated building better infrastructural links between the two countries in order to facilitate trade.
REGIONAL PROJECTS: The biggest ongoing Thai project in Myanmar is a deep-water port and industrial park at Dawei, in the southern arm of the country on the Andaman Sea, currently valued at $8bn. The construction plans call for the port and a road to Thailand, which would end at Laem Chabang, the largest port in Thailand, in the eastern seaboard area southeast of Bangkok. Next would come the park construction, which will operate as a special economic zone, with the tax breaks and incentives common to such developments. Support services, also to be built by ItalThai, include a power plant and other facilities.
The build-operate-transfer agreement is for a term of 60 years, and entitles ItalThai to operate the port but to share a 20% stake in it with the Myanmar government. Tenants in the industrial park will sign onto a 30-year lease with non-automatic renewal. Several glitches in the process thus far highlight the risks to the project, such as the Myanmar government’s decision in early January not to supply coal to the on-site power plant, or a local ethnic group’s opposition.
Beyond the ASEAN region, India and Bangladesh are key targets. ItalThai is in the early stages of a public-private partnership venture to build an elevated expressway in Dhaka, and has several projects underway in India including a new passenger terminal at the Kolkata airport. ItalThai expects a steady flow of large public sector projects to be tendered soon in India, according to its annual report. Thai firms are also expanding into resource-based ventures in other countries, in part to help materials procurement. ItalThai has a bauxite mine in Laos, for example. Siam Cement Group, Thailand’s largest cement producer, recently announced an expansion in Indonesia.
DOMESTIC DRIVERS: In 2012 flood-based reconstruction and response, in the form of building dykes and other water management structures, will serve as a main growth catalyst. In addition to rebuilding damaged facilities, strengthening existing dykes and other fortifications, and creating new ones, the government looks set to keep major builders occupied for much of 2012. About 240 water management projects were approved in the first quarter, costing about $800m and furthering the government’s water-management master plan. Other aspects of the plan are less construction-centric, such as a plan to convert agricultural lands around the Chao Phraya River to reservoirs. Indirect benefits will come to the construction sector, however, such as from a catastrophe insurance fund that has been established and the provision of soft loans by government-owned banks for flood mitigation and prevention projects.
Beyond water control, infrastructure remains one of the main elements of the long-term growth narrative in the construction sector. Likely the most visible example to a visitor to Bangkok is mass transit. Both underground and above-ground systems are in expansion mode, but it is the above-ground system, the BTS Skytrain, that will get the lion’s share of attention. The city’s master plan calls for 12 routes and 509 km of rail, with at least 391 km of the total to be completed by 2019. As of the fourth quarter of 2011 there were 79 km in operation, the same amount under construction and a bidding round announced for another 30.1 km, according to documents from SinoThai. The big three firms, as well as a few others, have won contracts to build the rail lines and stations. For smaller firms, the idea is to win subcontracting assignments and then capitalise on the new opportunities created by the stations – for example, plots of land around them will become candidates for condominiums, office towers or retail space.
Power plants are another important source of new business for large-scale contractors, as the Thai government’s power development plan for the period between 2010 and 2030 calls for adding 54 MW of additional capacity, both from EGAT and from independent producers. A bidding round is expected in 2012 to expand Bangkok’s Suvarnabhumi Airport. Other large-scale public-sector spending campaigns in place for the next several years include a five-year plan by the State Railway of Thailand. A few different versions of a long-term infrastructure plan had been floated in early 2012, including a reported BT400bn ($12.8bn) package in January, and a $72bn strategy announced in March. Both included as a centrepiece project a 750-km railway line between Bangkok and the northern city Chiang Mai.
COST CONTROL: As mentioned, construction firms generally aim to keep their labour and materials expenses at no more than 40% each in the overall cost structure of a project, and ideally below 30%. For 2012, cost overruns look more likely on the labour side of the equation than for materials.
The minimum wage in Thailand will see a major increase in 2012 and 2013. The rate was boosted 35% in Bangkok and six other provinces as of April 1, 2012 to BT300 ($9.60) per day. In other provinces, where the rate is at either about BT220 ($7) or BT160 ($5.10), the plan is to boost workers’ wage to BT300 by 2013. For contractors, the challenge is to absorb the extra demand created by the jump in purchasing power while also paying workers more. In some cases since the flooding, the government has approved requests from contractors to use lower-paid foreign workers, often from neighbouring countries, in part on expectations of a labour shortage due to the extra work available in flood reconstruction. Bouygues Thai, for example, had hired 8% of its workers from Cambodia as of January 2012. However, domestic labourers will remain the overwhelming majority, and the degree to which the workforce has become more expensive for contractors will not be known until well into the year. Estimates have ranged from 8% to 20%.
A catalyst that could help to lower costs is a reduction in corporate income taxes. Thailand’s cabinet in October 2011 dropped rates in order to create more parity between domestic corporations and foreign ones operating in export-oriented zones, many of which had been attracted to Thailand by incentive packages such as lower tax rates. “The expected reduction in corporate tax from 30% to 23% will also be a positive for big companies to contain costs,’’ said Plew Trivisvavet, CH. Karnchang’s CEO. “This will increase the amount of projects companies can take on and for listed companies in particular it will increase the dividends to their shareholders.’’ MATERIALS COSTS: The Ministry of Commerce publishes an index of materials prices on its website. As of March 2012, the index indicated a 4.5% increase in materials prices from March 2011, and up 0.6% from the previous month. Concrete, tiles and paint were among the materials contributing the most to the increase. Materials prices may rise with demand in 2012, Plew said, envisioning a scenario in which post-flood reconstruction added to the normal pace of building pushes up prices. However, regional demand for materials is expected to slow, and that could dampen price increases. Expectations for a cooling Chinese economy will crimp demand for steel and cement there, for example.
In the cement segment, however, external factors are less likely to play a role because of existing oversupply. Capacity is 56.4m tonnes, and demand about half of that – 27m tonnes, according to Siam Cement Group, the country’s largest producer. Most of that capacity came available before the 1997-98 crisis shrank private sector demand, and only some of it can be exported, leaving plants producing less than they optimally could. The 3% increase in demand in 2011 was less than the double-digit growth that had been expected before the flooding.
For the long term, exports can be an answer, in particular if the plan to establish an economic union called the ASEAN Economic Community (AEC) by 2015 reduces trade barriers in the region. Still, a subdued economic outlook for 2012 means another year producing below capacity and at steady prices is likely. Siam Cement in 2011 announced a $219m plan to develop production capacity in ceramics and other construction materials in Indonesia, where, like in Thailand, an infrastructure drive triggered by public spending is forecast to take place.
OUTLOOK: With domestic competition strong and cost control an issue, Thailand’s largest builders seem likely to continue along their current path, which means a focus on large public sector contracts and an international emphasis. Though Thai firms are likely to see competition in countries such as Myanmar and others, the hope in Thailand is for its membership in the eventual AEC to provide its firms a competitive advantage over rivals from China or from more-developed countries such as Japan and Korea.
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