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EXECUTIVE Q&A
SHARE INVESTOR
Chutima: Low-rise will remain the focus |
In the first of a new twice-monthly series of interviews with executives of listed Thai companies, Chutima Tangmatitham, assistant managing director for accounting and finance with MK Real Estate Development Plc (http://www.mk.co.th), discusses the company's strategy and outlook.Business:
1. Please explain MK's business model.
MK Real Estate is a real estate residential developer. We focus on low-rise residential units located around outer Bangkok. Our product range includes single detached houses and semi-detached houses (duplexes). The average price of our products ranges between two and five million baht, although there are a few projects, because of location, where units sell between eight and 10 million baht. Relative to other listed developers, MK is a mid-size residential developer, but when including private developers, MK is considered to be one of the larger developers.
2. What is MK's strength?
a) Who are your target customers?
First-time home buyers with minimum salaries of 50,000 baht a month.
b) How do you choose location to develop your project?
MK has a land bank of properties located around Pathum Thani, Rarm Intra and Bang Na. We also are looking at potentially acquiring additional land and the key things we look for are convenience, in terms of transport; it should be near an expressway or located around the MRT.
c) How do you manage your cost and maintain margin?
Without a doubt gross margin will contract slightly, thus we are sacrificing some margin for sales, but overall we're satisfied with our performance so far.
3. What is your target revenue and revenue growth this year (revenue was 1,986 million baht in 2007)?
This year we aim for 25-30% growth to reach 2.5 billion baht in revenue. As of the end of the first quarter of 2008, we had a total (sales) backlog of 1.1 billion baht, most of which will be recognised this year. In addition, we have more pre-built projects that will be completed by March 2009. In total we have 17 projects today.
4. Due to higher construction costs, will MK be able to pass these costs on to its customers through price increases?
Not completely, although this is an issue that we will have to look at toward the end of this year.
5. Will MK be expanding into different segments of the real estate market such as condominiums, more low-end or high-end?
Not likely. MK will continue to focus on low-rise residential units. Our reasons for doing so are because to successfully be a low-end developer you need economies of scale, and entering condominiums today is much more difficult than before. There are more rules and regulations and the costs are rising, both in construction costs and for land plots in good locations.
Industry Outlook:
1. How does MK perceive the current demand for housing?
Demand is still there, although these days because there are more developers, more projects, as well as the economic crunch, people are taking into consideration more factors before purchasing a new home. Because of this MK has to understand how to fit their needs, which is why we have introduced, for example, more duplexes at a price range of 500,000 to one million baht cheaper than single detached houses.
2. Has MK benefited from the tax incentive policy from government?
Yes we have, although in the longer term you really need to look at how the overall economy is performing. For example, when the tax break for property developers ended in 2003, the overall economy in 2004 was improving and this was reflected in our financial performance.
3. How does MK compete with others in the market (location, price or brand)?
a. Who are your direct competitors with the same target customers?
Everyone is our competitor today because they are targeting the medium-price market segment, as this is a segment with strong and continual demand.
Financial Performance:
1. Last year MK's margins dropped substantially, why?
Gross profit margin dropped from 41% in 2006 to 38% in 2007; net profit margin dropped from 20% to 16%. This was due to intense competition in the market. We had to offer more discounts or promotional benefits to customers.
2. Why did gross profit margin improve to 39.2% in the first quarter of 2008?
The improvement is due to the bookings of sales, for example from our older land bank we will achieve good gross margins, but by the end of the year the average gross margin should be similar to that of last year.
3. In the first quarter of 2008, SG&A costs increased substantially, is this purely related to marketing expenses?
This is seasonal, it is related to salaries and bonuses paid to our employees.
Miscellaneous:
1. What do you feel are the biggest risks facing your business today?
Uncertainty, Thai politics and the economy. We will have to be patient until the confidence comes back.
2. Where do you see MK in five years from now?
MK will remain to be a solid company with solid growth, targeting projects in outer Bangkok locations that will remain attractive due to the new mass-transit systems.
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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