For the next three years, the engineering and construction (E&C) industry is expected to grow at about 5-7 per cent in real terms per year, or 8-10 per cent in terms of market prices, according to Tris Rating.
The key upside catalyst, which should drive the industry’s growth rate to 10-12 per cent in real terms per year, is the government’s plan to spend Bt2 trillion over the course of seven to eight years, mainly for railway infrastructure development.
Construction spending in the private sector is exposed to a greater downside risk from potential decelerations in new residential high-rise projects. Market competition for the next three years should remain intense, but is expected to be lower than the previous few years.
Strong market growth is expected to sustain most of the rated E&C contractors’ operating margins. Rated contractors’ leverages are also expected to rise as a result of larger project undertakings, and for some contractors, to support long-term investment projects. However, expected stronger cashflow generations should alleviate the risks from higher levered capital structures.
The operating environment of the E&C industry has improved since last year. Several infrastructure projects were launched after the flooding crisis in late 2011. Major public infrastructure projects, mainly the Bt2 trillion logistical development projects and Bt350 billion water management projects, are expected to boost E&C spending from the middle of next year.
The industry continues to face an increasing challenge from labour scarcity. Several contractors continue to be affected by the minimum wage hike policy, especially contractors that haven’t completed projects secured before last year. In general, labour accounts for about a third of construction costs.
Last year, 17 operators in the E&C industry were listed on the Stock Exchange of Thailand. Assets of all the listed contractors were Bt194 billion, with 74 per cent shared by the three biggest contractors – ITD, CK and STEC. The three biggest contractors shared about 58 per cent of total revenues. The remaining market is shared by several fragmented players.
The E&C industry has been one of the most dynamic and volatile during the past decade. Construction spending has been linked to economic conditions and business sentiment. Despite government policies to increase public spending during economic downturns to stabilise investment activities, disbursements of public budgets have largely been influenced by political factors and fiscal constraints.
There is a vast number of small and medium-sized contractors, which focus on civil work in the private sector, largely residential and commercial buildings. The industry also comprises a few large-scale contractors that generally focus on big and sophisticated construction projects.
The E&C industry has been under great focus for the past several months, following the government’s campaigns on passing the law allowing the government to borrow and invest in infrastructure projects worth Bt2 trillion. The law is expected to be approved by Parliament this year.
There is a possibility of further delay, depending on the degree of political challenges. The law has been submitted to the Senate and may have to be approved by the Constitutional Court.
If the law becomes effective, it will allow the government to spend about Bt700 billion-Bt800 billion per year on the infrastructure projects over the next seven to eight years, compared with Bt300 billion-Bt400 billion per year under normal budgetary allowances. About 80 per cent of total spending will be allocated for railway network development projects.
The construction work of listed contractors is a trivial portion of construction activities. The National Economic and Social Development Board has reported that investment in construction activities last year was Bt928 billion. The revenue of listed contractors was only 16 per cent of the national construction market.
Most of the rated contractors suffered from the economic slowdowns and delays in public projects from 2008-10. However, several infrastructure projects were launched after the flooding crisis in late 2011. The growth in construction investment is expected to continue for three years.
The debt-to-capitalisation ratio of rated issuers has been quite stable for three years. The levels of leverages vary widely among the rated issuers given differences in business models. Leverages are particularly high for contractors focusing on long-term investment projects, namely ITD and CK.
Contractors have been affected by the government policy to raise minimum wages countrywide. In general, labour accounts for about a third of construction costs. Contractors in rural areas could be greatly impacted, as minimum wages rose as much as 40 per cent in some provinces.
Minimum wages in rural areas were typically much lower than urban areas. The relatively low unemployment rate, below 1 per cent seasonally adjusted, since 2010 reflects the shortage of domestic labour. Last November, the seasonal inactive labour force, according to the central bank, was 0.3 per cent of the overall labour force. Contractors will be facing an increasing challenge from labour shortages, particularly for skilled workers who are always in high demand.
During the past five years, a few contractors expanded overseas to diversify revenue sources, as domestic investments were sluggish. By March, overseas projects accounted for more than half of CK’s backlog. ITD’s backlog also includes projects in India.