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Consolidated Financial Results: 2018

Executive Summary

In 2018, the Thai economy has grown at a continuously solid level with a GDP expansion of approximately 4.1% YoY. The growth is attributed to a number of factors, namely 1.) strong export growth despite a slowdown in the last few months of 2018; 2.) growth in private consumption supported by higher household income in both agriculture and non-agriculture sectors along with recovering consumer confidence; 3.) strong tourism growth mainly from higher international tourist arrivals, especially from the ASEAN region, despite a slight decline in Chinese tourist arrivals during the second half of 2018 and 4.) other supporting factors, namely government spending to support the low-income citizens and other short-term stimulus packages, as well as private investments to support the increase in manufacturing capacities of various industries. Heading into 2019, the Thai economy is expected to grow at a similarly solid pace with key supporting factors, such as continued public and private investment schemes, growing domestic consumption and tourism. Factors that may affect the Thai economy in 2019, to name
a few, are the slowing global economic growth, the inconclusive trade war between the US and China, and the strengthening Thai Baht currency as inflation remains low, which altogether may cause export growth to slow down compared to the prior year. Having considered the above-mentioned circumstances, the Bank of Thailand increased the policy rate from 1.50% to 1.75% in December 2018 to balance the economic growth momentum and the stability of the financial system.

The performance of Central Pattana Public Company Limited (“The Company” or “CPN”) in 2018 shows total revenue of THB 36,458 mn, a decrease of 5.4% from the same period in the previous year (YoY), and net profit of THB 11,216 mn, a decrease of 17.3% YoY, mainly due to the recognition of non-recurring income from the insurance claim under terrorism coverage of THB 3,500 mn in the prior year.

Excluding the non-recurring items CPN reported total revenue of THB 36,065 mn, a 16.8% increase YoY, and net profit of THB 10,823 mn, a 9.4% increase YoY. The result demonstrates the growth resiliency of CPN’s operating results despite the ongoing major renovation at CentralWorld and the transfer of CentralFestival Pattaya Beach to CPN Retail Growth Leasehold REIT (“CPNREIT”) in December 2017.

CPN continues to emphasize on effective revenue generation through new shopping malls, enhancement of existing malls, new mixed-use development projects, such as residential development, as well as efficient cost management. CPN currently manages 32 shopping malls with the net leasable area (NLA) of approximately 1.7 mn sqm. At the end of 2018, the average occupancy rate for CPN’s retail properties stood at 93%.

Major Events in 2018

The acquisition of shares in Grand Canal Land Public Company Limited or “GLAND”with details to the transactions as follow

For the consolidated financial statements at the end of 2018, CPN recorded an increase in total assets at THB 36,938 mn, mostly from investment properties at THB 23,254 mn, and an increase in total liabilities at THB 17,796 mn, mainly from interest-bearing debt of THB 7,695 mn based on the events above. CPN is currently in the process of reviewing the investment plan to develop the assets of GLAND.

CPN constantly looks for new investment opportunities, including mergers and acquisitions (M&A), to reinforce its business plan and long-term growth strategy. The acquisition of GLAND marks an important step for CPN towards becoming the leader in mixed-use development projects, as many of GLAND’s assets are located in high-potential locations capable of large-scale project development, thus increases the competitiveness in the industry and create sustainable return to shareholders in the long-term.

The opening of Central Phuket, the largest shopping complex in the southern part of Thailand. Covering over 111 rai of land, the complex reigns as the first luxury flagship of CPN, seamlessly blending the lifestyle and relaxation experience. Positioned as the Magnitude of Luxury & Leisure Resort Shopping Destination not only for local communities but also foreign tourists. The new section, Central Phuket Floresta Building, was opened on September 10, 2018, as the luxury and lifestyle destination that features famous global brands, as well as a variety of shops and restaurants. It also features the world’s first and only global attractions, namely 1.) Tribhum, the virtual 3D interactive walkthrough experience to open in 1Q19 ; 2.) Aquaria, which features over 25,000 marine species to open in 2Q19 and 3.) Tales of Thailand, the center of cultural heritage, from past to contemporary, from all parts of Thailand.

Asset Enhancement Initiatives to increase the value of existing shopping malls, customers, tenants and societies, and create long-term returns. In 2018, CPN progressed with the following asset enhancement initiatives.

Diversification into Mixed-use Development Projects

CPN sees the potential in mixed-use development projects, which consist of residential projects, office buildings and hotels, in the same complex as the shopping malls to support and maximize the benefits of the latter’s business. In 2018, CPN have made notable progresses in the following mixed-use development projects.

Sustainable Growth as a Core Principle in Business CPN is selected to be the member of the Dow Jones Sustainability Indices (DJSI) in 2018. The inauguration into the DJSI World index, in which CPN is the only real estate company and one of eight Thai companies to achieve the feat, and the DJSI Emerging Markets for the fifth consecutive year (2014-2018). This is a testimony to CPN’s philosophy on sustainable business operations by taking into consideration the interests of the whole, the environment, the related parties and continuously partake in driving the well-being of society and communities forward.

Other Events

Asset Enhancement Initiatives to increase the value of existing shopping malls, customers, tenants and societies, and create long-term returns. In 2018, CPN progressed with the following asset enhancement initiatives.

Diversification into Mixed-use Development Projects CPN sees the potential in mixed-use development projects, which consist of residential projects, office buildings and hotels, in the same complex as the shopping malls to support and maximize the benefits of the latter’s business. In 3Q18, CPN have made notable progresses in the following mixed-use development projects.

Financial and Operating Performance in 2018

Table 1: Summary of Net Leasable Area and Occupancy Rate


(1) Assets under CPNREIT and CPN comprises 5 shopping malls, namely CentralPlaza Rama 2, CentralPlaza Rama 3, CentralPlaza Pinklao, CentralPlaza Chiangmai Airport and CentralFestival Pattaya Beach
(2) Assets under CPNCG and CPN comprises 1 office building, namely The Offices at CentralWorld
(3) Occupancy rate of Hotel Business was an average of occupancy rate in each quarter
(4)Central Phuket, which consists of the Floresta and Festival buildings, is counted as a single project

Overview

As of December 31, 2018, CPN managed 32 shopping centers (14 projects in Bangkok Metropolitan Area (BMA) and 18 projects in the provinces), 30 food courts, 7 office towers, 2 hotel properties, 1 residential property (totaling 11 units), and 3 real estate properties for sale (totaling 1,227 units), which includes the properties transferred to CPN Retail Growth Leasehold REIT (“CPNREIT”) and CPN Commercial Growth Leasehold Property Fund (“CPNCG”).

At the end of 2018, the average occupancy rate of CPN’s shopping malls stood at 93%, a slight increase over that of the previous year at 92%. This was largely attributed to the increase in occupancies at the recently renovated shopping malls, namely CentralWorld and CentralPlaza Rama 3.

In 3Q18, the average rental rate of all shopping malls stood at THB 1,682 per sqm/month. Same store rental rate growth is at 3.9% from THB 1,600 per sqm/month in the previous year to THB 1,662 per sqm/month as a result of rate escalations, contract renewals and lower discounts given to tenants at most shopping malls.

In 2018, same store rental revenue growth stood at 3.1% YoY. The same store rental revenue excludes that of 1.) the new malls in 2017, namely CentralPlaza Nakhon Ratchasima and CentralPlaza Mahachai; 2.) the new mall in 2018, namely Central Phuket Floresta 3.) malls under renovation during 2017 and 2018, namely CentralWorld, CentralPlaza Rama 3, CentralPlaza Chonburi and CentralPlaza Chiangrai, and 4.) CentralFestival Pattaya Beach, part of which was transferred to CPNREIT in 2017.

In 2018, the average rental rate of all shopping malls stood at THB 1,669 per sqm/month. Same store rental rate growth is at 2.5% from THB 1,634 per sqm/month in the previous year to THB 1,674 per sqm/month, which was slightly below the level in the prior year due to lower-than-expected rental rate increases at some shopping malls, as well as additional discounts given towards the end of the year. Despite the minor setback, the rental rate growth in CPN’s total portfolio continues at a healthy trajectory as rate escalations from contract renewals and lower discounts given to tenants at most shopping malls were solid.

Non-recurring items

The following non-recurring items are excluded from the analysis of the financial results in 2018 compared to the same period in the previous year.

Total Revenue

In 2018, CPN reported total revenue of THB 36,065 mn, an increase of 16.8% YoY (for 4Q18, total revenue stood at THB 9,247 mn, an increase of 18.0% YoY). Excluding other income, total revenue derived from operations increased approximately 18.0% YoY, which went according to plan. Main components of revenue are as follows.

Revenue from rent and services

In 2018, the in-mall food court business recorded revenue of THB 1,849 mn, an increase of 13.4% YoY (for 4Q18, the figure stood at THB 515 mn, an increase of 19.0% YoY) due to the following factors.

Revenue from food and beverages

In 2018, the in-mall food court business recorded revenue of THB 1,849 mn, an increase of 13.4% YoY (for 4Q18, the figure stood at THB 515 mn, an increase of 19.0% YoY) due to the following factors

Revenue from hotel operations

Hotel operations are considered CPN’s non-core businesses. In 2018, revenue from hotel operations was THB 1,208 mn, an increase of 10.1% YoY (for 4Q18, the figure stood at THB 370 mn, an increase of 27.6% YoY). The increase is largely attributed to the change in service charge recognition for the entire year of 2018, previously recorded as net revenue, to report gross revenue and costs. Meanwhile, revenue from hotel operations increased slightly despite a drop in average occupancy rate at Hilton Pattaya stood, from 94% in the previous year to 93%, and at Centara Hotel and Convention Center Udonthani, from 80% in the previous year to 75%. Although occupancy rates at both hotels were impacted by the lower number of tourist bookings, average room rates at both hotels increased YoY.

<Revenue from sales

Revenue from sales of real estate comprises the transfer of ownership in residential units to customers, which CPN began to record the sales from 2018 onwards. In 2018, revenue from sales stood at THB 2,762 mn (for 4Q18, the figure stood at THB 377 mn), which primarily represents 97% of total units transferred to customers at 3 condominium projects, namely ESCENT Rayong, ESCENT Chiangmai and ESCENT Khonkaen.

Other revenue

In 2018, CPN reported other revenue of THB 2,178 mn (for 4Q18, the figure stood at THB 614 mn). The majority of the amount relates to the management fee received from CPNREIT and CPNCG, which stood at THB 767 mn, an increase of 56.0% YoY (for 4Q18, the figure stood at THB 223 mn, an increase of 90.5% YoY) and in line with the increase in total asset value of CPNREIT following the asset transfer in late 2017.

Total Costs

In 2018, CPN reported total costs of THB 17,579 mn, an increase of 21.1% YoY (for 4Q18, the figure stood at THB 4,570 mn, an increase of 19.7% YoY). Main components of the costs are as follows.

Cost of rent and services

Costs of rent and services constituted utilities, security & cleaning services, on-site personnel, land rental, depreciation & amortization, repair & maintenance costs and insurance premium and property tax of properties owned for rental.

In 2018, CPN reported cost of rent and services at THB 14,142 mn, an increase of 9.7% YoY (for 4Q18, the figure stood at THB 3,797 mn, an increase of 12.1% YoY). The rise in cost is higher than the increase in revenue and comes from the following factors.

Cost of food and beverages

Costs of food and beverage constituted costs of operating in-mall food centers, as well as depreciation and repair & maintenance costs of food center equipment and furniture, and decoration costs.

In 2018, CPN reported costs of food and beverages at THB 1,448 mn, an increase of 13.0% YoY (for 4Q18, the figure stood at THB 409 mn, an increase of 19.9% YoY). The rise in cost is in-line with the growth in food and beverages revenue from the higher cost base from the new food courts opened at new malls in 2017 and 2018, namely CentralPlaza Nakhon Ratchasima, CentralPlaza Mahachai and Central Phuket Floresta. Due to better cost management of the existing food courts in the Food Destination zones, CPN can attain an optimum level of operating cost for its food and beverages business..

Cost of hotel operations

In 2018, CPN reported costs of hotel operations at THB 423 mn, an increase of 23.1% YoY (for 4Q18, the figure stood at THB 173 mn, an increase of 90.9% YoY). The increase is largely attributed to the change in service charge recognition for the entire year of 2018, previously recorded as net revenue, to report gross revenue and costs. That aside, the cost of hotel operation is generally in-line with the increase in revenue with both hotels showed effective cost control in both room and food and beverage management.

Cost of sales

In 2018, CPN reported cost of sales at THB 1,565 mn (for 4Q18 the figure stood at THB 191 mn), in-line with the growth in sales of real estate due to the transfers at ESCENT Rayong, ESCENT Chiangmai and ESCENT Khonkaen condominium projects.

Administrative Expenses

Total administrative expenses constituted expenses on personnel, marketing & promotion, office supplies, professional fees, and depreciation and amortization of office equipment and hotel properties.

In 2018, CPN reported total administrative expenses at THB 6,114 mn, an increase of 20.7% YoY (for 4Q18, the figure stood at THB 1,875 mn, an increase of 13.3% YoY). The increase is mainly attributed to higher personnel expenses to support business expansion and higher marketing expenses from more frequent events and activities at malls. Additional administrative expenses in 2018 include costs associated with transfers of condominium units, rental expense of Hilton Pattaya Hotel based on the sublet agreement with CPNREIT, and expenditures associated with shares acquisition in GLAND. Hence, the administrative expenses to total revenue ratio stood at 17.0%, which is higher than the previous year’s at 16.4% (for 4Q18, the ratio stood at 20.3% compared to the previous year at 21.1%).

Gross Profit Ratio & Operating Profit Ratio

In 2018, CPN’s gross profit ratio, excluding other income, dropped to 48.1% from 49.6% in the previous year (for 4Q18, the figure stood at 47.1% compared to the previous year at 47.7%), whilst operating profit ratio dropped proportionately to 34.5% from 36.6% in the previous year (for 4Q18, the figure at 30.8% compared to the previous year at 30.2%).

Excluding the sales of real estate, gross profit ratio in 2018 would be 49.8% as CPN achieved a gross profit ratio for the sale of residential projects at 43.3%. The gross profit and operating profit margins remain at levels similar to the previous year despite incurring higher cost of rental and services at CentralPlaza Rama 2 following the land lease extension. Hence, CPN is determined to exercise effective cost management and prudent cost control measures to maintain its profitability.

Net Profit

In 2018, CPN reported a net profit of THB 10,823 mn, an increase of 9.4% YoY (for 4Q18, the figure stood at THB 2,445 mn, an increase of 13.7% YoY) due the growth in revenues of all businesses, effective cost management and accordingly with the business environment, increases in management fees and share of profit from investment in CPNREIT. Meanwhile, CPN incurred higher financing cost from additional interest-bearing debt following the acquisition of GLAND.

Table 2: Summary of Profit & Loss Statement

Capital Structure

As of December 31, 2018, CPN reported total interest-bearing debt of THB 30,398 mn, an increase from the balance as of December 31, 2017 of THB 9,529 mn, mainly due to the increase in short-term borrowings to fund the shares acquisition of GLAND and the consolidation of GLAND’s interest-bearing debt, which has a higher average cost of debt than CPN’s interest-bearing debt. As a result, the weighted average financing cost at the end of 2018 rose to 3.31% compared to the level at the end of the previous year at 3.17%. Fixed interest rates debt comprises 46% of total interest-bearing debt whilst floating interest rates make up the remaining 54%.

Net interest-bearing debt to equity ratio stood at 0.37 times, an increase from 0.07 times from the end of last year, on higher net debt as mentioned above and on lower cash and short-term investments.

CPN emphasizes on the importance of effective management of its capital structure to be resilient towards the volatile money market and capital market, as well as maintain its financing cost at an optimum level for its businesses going forward.

Dividend

CPN has a dividend policy of no less than 40% of annual net profit. On February 21, 2019, the Board of Directors passed a resolution to propose to the Annual General Meeting of Shareholders, to be held on April 26, 2019, to approve the dividend payment of THB 1.10 per share paid from the 2018 net profit. Hence, the proposed dividend payout ratio from the 2018 consolidated net profit is at 44.0%.

Table 3: Summary of Financial Position


(1)(1) Investment Properties are booked at cost and depreciated with the straight-line basis over the life of the assets. The estimated fair value is THB 219,161 mn (THB 180,409 mn as of December 31, 2017), stated in the disclosure notes to the main financial statements no. 14 under “Investment Properties”.

Table 4: Key Financial Ratios


(1) (1) Return on assets and return on equity are calculated based on net profit in the last twelve months
(2) (2) Interest bearing debt to equity net of cash and cash equivalent and short-term investments

Business Plan

CPN has set a 5-year (2019-2023) growth strategy that aims to achieve a compounded annual growth rate (CAGR) in revenue of at least 13% per year. The strategic direction to expand the business through mixed-use development, such as new shopping malls, enhancement of existing shopping malls, rental rate escalations, incremental gains from operations management, and residential project development, are key drivers to realize the target.

As the economy begin to flourish across various areas around Bangkok and provinces, CPN have studied the prospects of new retail formats and innovative concepts and designs of shopping malls to elevate the standard of its shopping malls that offer dynamic experiences towards customers with different lifestyles, both local and foreign tourists

Furthermore, CPN studied the opportunities to expand its business into the Southeast Asian countries, especially those with high growth potential, such as Malaysia, Vietnam and Indonesia, to accommodate its sustainable growth aspiration.

Domestic Expansion

CPN have announced the plan to launch 2 new malls to open in 2019 and early 2020, namely 1.) Central Village, the first international luxury outlet in Thailand, in 3Q19 and 2.) CentralPlaza Ayutthaya by early 2020.

CPN also made continuous progress with the asset enhancement initiatives, particularly with CentralWorld, which is on track for completion in 1Q19. Furthermore, major renovations at CentralPlaza Chiangrai and CentralPlaza Chonburi, as well as minor renovations at CentralFestival Pattaya Beach, Central Phuket Festival and CentralPlaza Lardprao, have already commenced and will gradually be completed in 2019.

Furthermore, CPN sees the opportunity to develop mixed-use projects as an integral part of long-term growth. In 2017, CPN announced the plan to undergo a joint venture investment project with Dusit Thani PCL (“DTC”) to develop a mixed-use project comprising a hotel, a residential project, a retail space and an office building at the corner of Silom Road and Rama 4 Road.

Projects under GLAND CPN continues to study and review the development plan of undeveloped land under GLAND, which are in high potential areas of Bangkok, and expects to finalize the plan within 2019. At the same time, CPN plans to enhance the performances of GLAND’s existing assets to maximize the benefits and growth potential of GLAND going forward

International Expansion

CPN currently engages in joint development of Central i-City in Malaysia on the grounds of the country’s growth potential and diversification of investment risk. Central i-City, with its strategic location and promising potential in area, is a joint venture investment between CPN, with 60% ownership, and I-R&D Sdn. Bhd (“IRD”), a subsidiary of I-Berhad, the other 40% ownership. The project is currently undergoing exterior and interior furnishing processes and on course for opening in March 2019. Moreover, CPN is currently preparing an investment plan in Vietnam, a market with exceptional growth potential in the region that will be an important driving force in the company’s long-term growth.

Mixed-Use Project Development

CPN recognizes the potential to develop mixed-use projects in the shopping mall area by utilizing the existing vacant plots of land adjacent to the shopping malls, thus enhancing the value of investments in the form of residential development, office buildings and hotels, to name a few. Residential development To-date, CPN has launched a total of 7 condominium projects in Bangkok and in the provinces, as well as 1 single-detached housing in Bangkok. Moreover, CPN continues to study new areas for possible development as a pipeline for future project announcements.

Table 5: Progress of Future Projects