(Translation) Revised Opinion of the Independent Financial Advisor Regarding Asset Acquisition and Connected Transactions of Singha Estate Public Company Limited Prepared by Advisory Plus Company Limited August 27, 2015
Table of Contents Page Executive Summary 5 1 Nature and details of the transactions 9 1.1 Type and size of the transactions 9 1.2 Date of the transactions 12 1.3 Relevant parties and nature of relationship 12 1.4 Details of assets being acquired 15 1.5 Value of assets being acquired and disposed of and basis for calculation of value 18 of consideration 1.6 Sources of funds 19 2 Company profile 19 3 Reasonableness of the transactions 19 3.1 Objectives and necessity of the transactions 19 3.2 Advantages and disadvantages of entering and not entering into the transactions 20 3.3 Comparison of advantages and disadvantages between entering into the 25 transactions with a connected person and the transactions with a third party 3.4 Risks from entering into the transactions 29 4 Fairness of price and conditions for the transactions 31 4.1 Appropriateness and fairness of the transaction price 31 4.2 Fairness of the terms of payment 48 5 Conclusion of the Independent Financial Advisor s opinion 49 Attachments 1 Details of the Company - Background - Business overview - Relevant industry overview 2 Summary of relevant agreements - Key terms of the long-term lease of Singha Complex Project - Summary of the term sheet for credit facilities 3 Average rental fees of nearby projects
AP. 024/2558 August 27, 2015 To Board of Directors and Shareholders Singha Estate Plc. Subject Opinion of Independent Financial Advisor on asset acquisition and connected transactions The Board of Directors Meeting of Singha Estate Plc. ( Company ) No. 5/2015 on August 14, 2015 passed the significant resolutions which can be summarized as follows: 1. Investment in Singha Complex Project The Company approved an investment in Singha Complex project of Singha Property Development Co., Ltd. ( SPD ), a subsidiary of the Company by shareholding of 99.99% of SPD s registered and paid-up capital. SPD plans to invest in the development of a mixed-use commercial complex with office and retail spaces for rent, namely Singha Complex project ( Singha Complex Project ) which is located on approximately 9-0-22.75 rai of land at the corner of Asoke Montri Road and New Phetchaburi Road, Bang Kapi, Huai Khwang, Bangkok. The total investment value is not exceeding Baht 4,255 million (excluding the cost of land which is owned by SPD). The investment in Singha Complex Project is considered as an acquisition of assets pursuant to the Notification of the Capital Market Supervisory Board No. ThorChor. 20/2551 Re: Rules on Entering into Material Transaction Deemed as Acquisition or Disposal of Assets, and the Notification of the Board of Governors of the Stock Exchange of Thailand Re: Disclosure of Information and Other Acts of Listed Companies Concerning the Acquisition or Disposition of Assets B.E. 2547 (2004) (the Notification on Page 1
Acquisition or Disposal ). The value of such asset acquisition transaction, under the Notification on Acquisition or Disposal, is equal to 27.66%, calculated on a total value of consideration basis. However, after aggregating with other asset acquisition transactions entered into by the Company during the past six months before the date of this transaction totaling 43.52% on a total value of consideration basis, the combined value of the transactions is equal to 71.18% on a total value of consideration basis, which is considered a Class 1 transaction. Therefore, the Company is required to disclose the information memorandum on the transaction to the Stock Exchange of Thailand ( SET ), to appoint an independent financial advisor, and to hold a shareholders meeting of the Company to obtain an approval to enter into such transaction which requires affirmative votes from the shareholders of not less than three-fourths of the total votes of the shareholders attending the meeting and having the rights to vote, excluding the votes from the shareholders who have interest in such transaction. In addition, the Board of Directors Meeting also approved to propose to the Extraordinary General Meeting of Shareholders No. 1/2015, to be held on September 30, 2015, to consider and approve the authorization of the Board of Directors of the Company or the Chief Executive Officer and/or person(s) entrusted by the Board of Directors of the Company or the Chief Executive Officer to have the power to act as follows: - to determine details, amend and/or change conditions and arrangements relating to the investment in Singha Complex Project, including to have the power to contact, negotiate, amend, change and/or agree, sign and deliver agreements, documents and other evidence in connection with the investment in Singha Complex Project; - to contact, negotiate, provide information and/or submit applications for approvals or waivers, documents and other evidence to the government authorities or relevant authorities, financial institutions and persons or agencies relating to the investment in Singha Complex Project; and - to undertake any acts necessary for and relevant to the investment in Singha Complex Project. 2. Lease of office building areas in Singha Complex Project to a connected person The Company approved a lease of office building areas in Singha Complex Project to a connected person, whereby SPD agrees to lease the office building areas to Boon Rawd Brewery Co., Ltd. ( Boonrawd ) for the net leasable area of approximately 10,595 square meters over a total lease period of 50 years with a total upfront rental fee of approximately Baht 1,900 million, payable in installments within three years. However, in the case that the areas to be delivered to Boonrawd are larger or smaller than 10,595 square meters, the rental fee to be received by SPD may be adjusted up/down at a rate of not more than Baht 190,000 per square meter. Page 2
In addition, the Board of Directors Meeting also approved to propose to the Extraordinary General Meeting of Shareholders No. 1/2015, to be held on September 30, 2015, to consider and approve the authorization of the Board of Directors of the Company or the Chief Executive Officer and/or person(s) entrusted by the Board of Directors of the Company or the Chief Executive Officer to have the power to act as follows: - to determine details, amend and/or change conditions and arrangements, including to have the power to contact, negotiate and/or agree, sign and deliver agreements, documents and other evidence in connection with the lease of such office building areas; - to contact, negotiate, provide information and/or submit applications for approvals or waivers, documents and other evidence to the government authorities or relevant authorities, financial institutions and persons or agencies relating to the lease of such office building areas; and - to undertake any acts necessary for and relevant to the lease of such office building areas. The lease of such office building areas to Boonrawd is also considered as a disposition of assets pursuant to the Notification on Acquisition or Disposal with the transaction size equal to 12.35%, calculated on a total value of consideration basis. However, the Company had no other asset disposition transaction during the past six months before the date of this transaction. Therefore, the Company is not required to disclose the information on this transaction to the SET. Moreover, the transaction mentioned above is considered as a connected transaction pursuant to the Notification of the Capital Market Supervisory Board No. ThorChor. 21/2551 Re: Rules on Connected Transactions, and the Notification of the Board of Governors of the SET Re: Disclosure of Information and Other Acts of Listed Companies Concerning the Connected Transactions B.E. 2546 (2003) (the Notification on Connected Transactions ). The size of the transaction is equal to 22.87% of the net tangible assets of the Company, which is more than Baht 20 million or exceeds 3% of the net tangible assets of the Company. Therefore, the Company is required to disclose the information memorandum on the transaction to the SET, to appoint an independent financial advisor, and to hold a shareholders meeting of the Company to obtain an approval to enter into such transaction, which requires affirmative votes from the shareholders of not less than three-fourths of the total votes of the shareholders attending the meeting and having the rights to vote, excluding the votes from the shareholders who have interest in such transaction. It is also required that the notice of the shareholders meeting must be accompanied by opinion from an independent financial advisor regarding (1) reasonableness and benefits of the transactions to the listed company, (2) fairness of price and conditions for the transactions, and (3) recommendation as to whether the shareholders should vote for or against the transactions together with reasons thereof. In this Page 3
respect, the Company has appointed Advisory Plus Co., Ltd. as the independent financial advisor ( IFA ) to render such opinion to the Company s shareholders. In providing opinion regarding this transactions, the IFA has studied information and documents obtained from the Company, including publicly available information such as resolutions of the Board of Directors Meeting of the Company No. 5/2015 held on August 14, 2015, the information memorandum relating to the transactions disclosed to the SET, the Company s audited/reviewed consolidated financial statements for the years ended December 31, 2013-2014 and the six-month period ended June 30, 2015, financial projection and relevant assumptions used for project feasibility study prepared by the Company, including other information and documents relevant to the acquisition of assets from investment in such project, annual registration statement (Form 56-1), information available from the SET s website, and information obtained from interviews with the management of the Company, as well as assessment of relevant economic situations, as a basis for the analysis and rendering of opinion on such transactions. The opinion expressed herein is based on the assumption that all information and documents available from the Company and information derived from the interviews with the management of the Company are true and correct. We have considered such information with due care and reasonableness under professional standards. Our rendering of opinion is, moreover, based on the economic environment and the information prevailing at the time of conducting this study only. As such, if there is any significant change in these factors, it will likely have a material impact on the opinion provided herein. Therefore, we may not affirm as to whether there will be any potential material impact on the Company in the future. follows: Our opinion regarding the asset acquisition and connected transactions can be summed up as Page 4
Executive Summary Following the business integration, the Company restructured its business operations into three major groups: property for sale business, investment property business, and hotel business. The Company has devised a plan on business expansion through business acquisition or investment in other entities or development of existing vacant land of its subsidiaries to create value added to such properties. Consequently, the Company intends to develop land held for development owned by the Company or its subsidiaries into property for sale and investment property. The Company has assigned SPD, which owns 11-01-24 rai of land, to conduct a feasibility study on a mixed-use commercial complex with office and retail spaces for rent, namely Singha Complex project ( Singha Complex Project ), which will be developed on approximately 9-0-22.75 rai of land owned by SPD, located at the corner of Asoke Montri Road and New Phetchaburi Road, Bang Kapi, Huai Khwang, Bangkok. The Company has considered and deemed that the investment in Singha Complex Project is reasonable and appropriate and will generate returns and value added for the Company and its shareholders in the long term. Therefore, the Company s Board of Directors passed the resolutions as follows: 1. Approved an investment in Singha Complex Project of SPD, which is a mixed-use commercial complex with office and retail spaces for rent, to be developed on approximately 9-0-22.75 rai of land owned by SPD, located at the corner of Asoke Montri Road and New Phetchaburi Road, Bang Kapi, Huai Khwang, Bangkok, involving a total investment value of not exceeding Baht 4,255 million (excluding the cost of land which is owned by SPD). 2. Approved a lease of office building areas in Singha Complex Project to a connected person, whereby SPD agrees to lease the office building areas to Boonrawd for the net leasable area of approximately 10,595 square meters over a total lease period of 50 years with a total upfront rental fee of approximately Baht 1,900 million, payable in installments within three years. If the size of the leasable office building areas delivered to Boonrawd is larger or smaller than 10,595 square meters, SPD will revise the rental fee up or down to the rate not exceeding Baht 190,000 per square meter. The entry into Transaction 1 is considered as an acquisition of assets Class 2 pursuant to the Notification on Acquisition or Disposal, which refers to a transaction size equal to 15% or higher but less than 50%. Thus, the Company is obligated to disclose information to the SET and submit a letter to notify the shareholders within 21 days from the date of disclosure to the SET. However, after aggregating with other asset acquisition transactions under the Notification on Acquisition or Disposal entered into by the Company during the past six months before the date of this transaction totaling 43.52% on a total value of consideration basis, the combined value of the transactions is equal to 71.18% on a total value of consideration basis, which is considered a Class 1 transaction under the Notification on Acquisition or Disposal, with transaction size equal to 50% or higher but less than 100%. Therefore, the Company is required to disclose the Page 5
information memorandum on the transaction to the SET, to appoint an independent financial advisor, and to hold a shareholders meeting of the Company to obtain an approval to enter into such transaction which requires affirmative votes from the shareholders of not less than three-fourths of the total votes of the shareholders attending the meeting and having the rights to vote, excluding the votes from the shareholders who have interest in such transaction. The entry into Transaction 2 is considered as a disposition of assets pursuant to the Notification on Acquisition or Disposal with the highest transaction size equal to 12.35%. However, the Company had no other asset disposition transaction during the past six months before the date of this transaction. Therefore, the Company is not required to disclose the information on this transaction to the SET. At the same time, the entry into Transaction 2 is considered as a connected transaction with the transaction size equal to 22.87% of the net tangible assets of the Company, which is more than Baht 20 million or exceeds 3% of the net tangible assets of the Company. Therefore, the Company is required to disclose the information memorandum on the transaction to the SET and to seek approval from the shareholders meeting with required affirmative votes of not less than three-fourths of the total votes of the shareholders attending the meeting and having the rights to vote, excluding the votes from the shareholders who have interest in such transaction. The Company must submit a notice of the shareholders meeting, accompanied by opinion from an independent financial advisor, to its shareholders at least 14 days ahead of the date of the shareholders meeting. Thus, the Board of Directors meeting of the Company resolved to propose the entry into Transactions 1 and 2 to the Extraordinary General Meeting of Shareholders No. 1/2015, to be held on September 30, 2015, for consideration and approval. The IFA is of the opinion that the entry into Transaction 1 on asset acquisition through investment in Singha Complex Project of SPD, a subsidiary of the Company, is reasonable and beneficial to the Company. This is because the investment in Singha Complex Project, which offers office and retail spaces, will provide the Company with an opportunity to capitalize on the land held for development of SPD under its business and investment plan, which will enhance value added to SPD s property and enable the Company to generate recurring income and returns in the long term. Besides, the investment in such office and retail spaces for rent business will help to diversify business risk and enable the Company to conduct a continuous cash flow projection and new project investment planning, thereby ensuring long-term business growth. Nonetheless, the entry into this asset acquisition transaction will lead to an increase in SPD s liabilities and interest expenses. Due to inadequate funding from shareholders equity, it needs to resort to borrowing from financial institutions to cover the investment in such project. In the initial period of project development or during the construction period, SPD will not recognize any income yet and may even incur a loss at the early stage of operation. Besides, SPD could be exposed to risk involved with large-scale project development that will augment supply in the market. The project success still hinges on various external factors such as Page 6
economic condition, real estate market situation, and the public s consumption and purchasing power. If these factors are not conducive, the project development of SPD will likely be affected. From our estimation of the rate of return from such project investment by different methods, it is found that the net present value of Singha Complex Project is higher than zero, amounting to Baht 2,549.01 million, with an internal financial rate of return of 8.30% which is still higher than the project s weighted average cost of capital of 6.46% and with a payback period of 16 years. Therefore, we view that, under the established assumptions, the investment in Singha Complex Project is viable and reasonable and will provide a satisfactory rate of return to a certain extent. In our opinion, the entry into Transaction 1 by the investment in Singha Complex Project is reasonable and such project is feasible with an appropriate return from investment. As for the entry into Transaction 2 which is a connected transaction by lease of six floors of office spaces in Singha Complex Project to Boonrawd, we are of the opinion that it is a reasonable transaction as it will help increase SPD s liquidity by way of receipt of upfront rental fee in the total amount of Baht 1,900 million, which will be paid in installments within three years or expected to be completely paid by the time of completion of project construction. Moreover, the transaction will help ease the burden of acquiring tenants of such areas over a period as long as 50 years. The lease of office building areas to Boonrawd will provide returns for SPD not less than those received from the lease of such areas to a third party. This is evident from the present value of cash flow from rental fee to be received upfront by SPD from Boonrawd equal to Baht 1,790.03 million, compared with the net present value of cash flow derived in case SPD leases such office building areas to a third party amounting to Baht 1,506.00 million. Therefore, by leasing the said office building areas to Boonrawd, SPD will receive returns not less than those obtained from the lease of such areas to a third party. In addition, the lease of office building areas in Singha Complex Project to Boonrawd for a period of 50 years with a total rental fee of Baht 1,900 million is equivalent to the lease to a third party at a rental rate, as at October 2015, of Baht 1,211 per square meter, which is not less than the rental fee collected from a third party lessee of Baht 1,007 per square meter and is comparable to the rental fee rates of other Grade A office spaces in nearby areas of between Baht 800 and 1,200 per square meter. We accordingly deem that the lease of office areas on Floors 32-37 by SPD to Boonrawd will provide a reasonable rate of return not less than that received from the lease to a third party. To sum up, we consider that the entry into Transaction 2 by the lease of office building areas in Singha Complex Project by SPD to Boonrawd, which is a connected person, is a reasonable transaction and the rental fee is appropriate. Based on all above reasons, the IFA is of the opinion that the asset acquisition and the connected transactions are reasonable with a fair price and will be beneficial to the Company and, therefore, would like to recommend the shareholders to approve the entry into the said asset acquisition and connected transactions. Page 7
The shareholders may decide whether to approve the said transactions by taking into account the rationale and opinion provided herein by the IFA. However, the final decision depends primarily on the shareholders individual judgment. We hereby certify that we have rendered opinion with due care and under professional standards by paying regard to the interest of the shareholders. Page 8
1 Nature and details of the transactions 1.1 Type and size of the transactions 1.1.1 Investment in Singha Complex Project The Company approved an investment in Singha Complex project of Singha Property Development Co., Ltd. ( SPD ), a subsidiary of the Company by shareholding of 99.99% of SPD s registered and paid-up capital. SPD plans to invest in the development of a mixed-use commercial complex with office and retail spaces for rent, namely Singha Complex project ( Singha Complex Project ) which is located on approximately 9-0-22.75 rai of land at the corner of Asoke Montri Road and New Phetchaburi Road, Bang Kapi, Huai Khwang, Bangkok. The total investment value is about Baht 4,255 million. The project will offer an approximate net leasable area (NLA) of 56,596 square meters, broken down into approximate NLA for office spaces of 50,596 square meters and for retail spaces of 6,000 square meters, with parking spaces for about 1,000 cars. However, the said total investment value does not include the cost of land which is owned by SPD. Details of the value of investment in Singha Complex Project are as follows: Particulars Amount (Baht million) 1. Construction cost: 3,892 Structural work, E&M, utilities system, decoration & landscaping, etc. 2. Other related expenses: Consulting fee, management fee, finance cost, etc. 363 Total value of project investment 4,255 Calculation of size of the asset acquisition transaction Singha Complex Project has an approximate investment value of Baht 4,255 million. The transaction size calculated according to the Notification on Acquisition or Disposal and based on the Company s consolidated financial statements as at June 30, 2015 is as follows: Basis of transaction size calculation % 1. NTA 1/ N/A 2. Net profit 1/ N/A 3. Total value of consideration 4,255 * 100 / 3/ 15,381.01 = 27.66 4. Value of issued securities 2/ N/A Note: 1/ Not applicable since this is not an acquisition of securities. 2/ Not applicable because there is no issuance of securities. 3/ Total assets (Unit: Baht million) of the Company from the consolidated financial statements for a six-month period ended June 30, 2015. Page 9
The highest value of such transaction in the acquisition of Singha Complex Project, calculated under the Notification on Acquisition or Disposal, is equal to 27.66%. As such, the transaction is considered as an asset acquisition transaction Class 2 pursuant to the Notification on Acquisition or Disposal, which refers to a transaction size equal to 15% or higher but less than 50%. Thus, the Company is obligated to disclose information to the SET and submit a letter to notify the shareholders within 21 days from the date of disclosure to the SET. However, during the past six months before the date of such transaction, the Board of Directors Meeting of the Company No. 4/2015 on July 21, 2015 resolved to grant approval for Max Future Co., Ltd. ( MAX ), a subsidiary of the Company, to invest in Sun Towers Office Building project by way of entire business transfer ( EBT ) with the transaction value not exceeding Baht 4,500 million, which is considered as an asset acquisition transaction pursuant to the Notification on Acquisition or Disposal. The highest size of such transaction is equal to 43.52% on a total value of consideration basis. It is therefore deemed as an asset acquisition transaction Class 2, which refers to a transaction size equal to 15% or higher but less than 50%. Thus, the Company is obligated to disclose information to the SET and submit a letter to notify the shareholders within 21 days. After aggregating with all asset acquisition transactions entered into by the Company during the past six months before the date of this transaction, the combined value of the transactions is equal to 71.18% on a total value of consideration basis, which is considered a Class 1 transaction under the Notification on Acquisition or Disposal, with transaction size equal to 50% or higher but less than 100%. Therefore, the Company is required to disclose the information memorandum on the transaction to the SET, to appoint an independent financial advisor, and to hold a shareholders meeting to obtain an approval to enter into such transaction. The resolution of such shareholders meeting to approve the investment in Singha Complex Project requires affirmative votes from the shareholders of not less than threefourths of the total votes of the shareholders attending the meeting and having the rights to vote, excluding the votes from the shareholders who have interest in such transaction. 1.1.2 Lease of office building areas in Singha Complex Project to a connected person The Company approved a lease of high zone office building areas in Singha Complex Project to a connected person, whereby SPD agrees to lease approximately six floors of the office building in Singha Complex Project covering the net leasable area (NLA) of approximately 10,595 square meters to Boonrawd, which is a connected person having mutual directors, executives and shareholders with the Company, for a total lease period of 50 years with an approximate value of consideration of Baht 1,900 million. This transaction is deemed as an asset disposal (because the lease of office building areas to Boonrawd will cover a period as long as 50 years and Boonrawd will be responsible for all expenses to be incurred throughout the said lease period) and a connected transaction. Page 10
Calculation of size of the asset disposal and connected transaction The size of this transaction is calculated based on the Company s consolidated financial statements for a six-month period ended June 30, 2015, details of which are as follows: - Calculation of size of the asset disposal transaction Basis of transaction size calculation % 1. NTA value 1/ N/A 2. Net profit 1/ N/A 3. Total value of consideration 1,900 * 100 / 3/ 15,381.01 = 12.35 4. Value of issued securities 2/ N/A Note: 1/ Not applicable since this is not a disposal of securities. 2/ Not applicable because there is no issuance of securities. 3/ Total assets (Unit: Baht million) of the Company from the consolidated financial statements for a six-month period ended June 30, 2015. The highest size of such asset disposal transaction, calculated pursuant to the Notification on Acquisition or Disposal, is equal to 12.35%. However, the Company had no other asset disposition transaction during the past six months before the date of this transaction. Therefore, the Company is not required to disclose the information on this transaction to the SET. - Calculation of size of the connected transaction Unit: Baht million NTA value 8,306.36 3% of NTA value 249.19 Value of connected transaction 1,900 Size of connected transaction as % of NTA 22.87 Note: NTA is calculated from total assets of Baht 15,381.01 million deducted by total liabilities of Baht 5,313.72 million, noncontrolling interests of Baht 699.18 million, intangible assets of Baht 42.27 million, goodwill of Baht 1,004.25 million, and deferred tax assets of Baht 15.23 million. The size of the connected transaction in lease of approximately six floors in the high zone of office building is equal to 22.87% of the net tangible assets of the Company. Since the transaction size is more than Baht 20 million or exceeds 3% of the Company s net tangible assets, the Company is required to disclose the information memorandum on the transaction to the SET and to seek approval from the shareholders meeting with required affirmative votes of not less than three-fourths of the total votes of the shareholders attending the meeting and having the rights to vote, excluding the votes from the shareholders who have interest in such transaction. The Company must submit a notice of the shareholders meeting, accompanied by opinion from an independent financial advisor, to its shareholders at least 14 days ahead of the date of the shareholders meeting. Page 11
The Board of Directors meeting of the Company resolved to propose to the Extraordinary General Meeting of Shareholders No. 1/2015, to be held on September 30, 2015, to consider and approve the entry into the above transactions. 1.2 Date of the transactions 1.2.1 Investment in Singha Complex Project SPD will enter into this transaction after obtaining approval from the Extraordinary General Meeting of Shareholders of the Company No. 1/2015, to be held on September 30, 2015. SPD expects to begin construction of Singha Complex Project by 2015 with an estimated construction period of 30 months, and to start commercial operation by the first quarter of 2018. 1.2.2 Lease of office building areas in Singha Complex Project to a connected person SPD will enter into this transaction after obtaining approval from the Extraordinary General Meeting of Shareholders of the Company No. 1/2015, to be held on September 30, 2015. SPD expects that Boonrawd will occupy the leased areas after Singha Complex Project becomes commercially operational in the first quarter of 2018. 1.3 Relevant parties and nature of relationship 1.3.1 Investment in Singha Complex Project Employer : Singha Property Development Co., Ltd. ( SPD ) Contractors/Service providers : Designers, contractors, suppliers, and service providers in connection with the development of Singha Complex Project Relationship : SPD is in the process of selecting the designers, contractors, suppliers, and service providers in connection with the development of Singha Complex Project and, hence, their relationship cannot be identified. However, if the contractors/service providers are related to and/or connected with the Company, the Company will disclose such information and comply with the Notification of the Capital Market Supervisory Board No. ThorChor. 21/2551 Re: Rules on Connected Transaction and the Notification of the Board of Governors of the Stock Exchange of Thailand Re: Disclosure of Information and Other Acts of Listed Companies Concerning the Connected Transactions B.E. 2546 (2003). Page 12
1.3.2 Lease of office building areas in Singha Complex Project to a connected person Lessor : Singha Property Development Co., Ltd. ( SPD ) Lessee : Boon Rawd Brewery Co., Ltd. Relationship : Name 1. Mr. Chutinant Bhirombhakdi 2. Mr. Chayanin Debhakam 3. Mr. Naris Cheyklin 4. Mr. Longlom Bunnag 5. Mr. Nattavuth Mathayomchan 6. Mr. Satit Rangkasiri 7. Mr. Karoon Nuntileepong 8. Mr. Thana Thienachariya 9. Mr. Thanavath Phonvichai 10. Mr. Suphot Chaladol Nature of relationship/position 1/ The Company 2/ SPD 3/ SPM 4/ SPMSG 5/ Boonrawd Board Chairman - Director and holding 1 share in SPM Director Director/Chief Executive Officer Director/Chief Investment Officer Director/Chief Residential Development Officer Independent Director Independent Director Independent Director Independent Director Chief of Santiburi Hotel Management Director and holding 2 shares in SPD Page 13 Director and holding 1 share in SPM - Director and holding 327 shares or 5.5% of Boonrawd s paidup registered capital - Holding 75 shares or 1.3% of Boonrawd s paid-up registered capital Director - - - Director - - - Director - - - - - - - - - - - - - - - - - - - - - - -
Name 11. Mr. Methee Vinichbutr 12. Mr. Terachart Numanit 13. SPM Holding 1,990,848,570 shares or 34.83% of the Company s paidup registered capital 14. SPMSG Holding 671,376,396 shares or 11.75% of the Company s paidup registered capital Nature of relationship/position 1/ The Company 2/ SPD 3/ SPM 4/ SPMSG 5/ Boonrawd Chief Financial Director - - - Officer Chief Design Director - - - and Construction Officer - - Holding 50,961,531 shares or 99.9% of SPMSG s paid-up registered capital - - - - - 15. Boonrawd - - Holding 20,699,997 shares or 99.9% of SPM s paid-up registered capital 16. Mr. Santi Bhirombhakdi Holding 6 1,879,710,799 shares or 32.89% of the Company s paidup registered capital Holding 2 shares in SPD Page 14 Holding 1 share in SPM - - - Director/Holding 736 shares or 12.3% of Boonrawd s paid-up registered capital Note: 1/ Shareholder information of the Company as of the register book closing date of May 27, 2015. 2/ Shareholder information of Singha Property Development Co., Ltd. ( SPD ) as of April 30, 2015. 3/ Shareholder information of Singha Property Management Co., Ltd. ( SPM ) as of April 28, 2015. 4/ Shareholder information of Singha Property Management (Singapore) Pte. Ltd. ( SPMSG ) as of June 11, 2015. 5/ Shareholder information of Boon Rawd Brewery Co., Ltd. ( Boonrawd ) as of March 26, 2015.
6/ Mr. Santi Bhirombhakdi holds 1,590,104,278 shares in the Company and indirectly holds 289,606,521 shares through Morgan Stanley & Co. International Plc., making up a total of 1,879,710,799 shares. According to the register book closing as of August 31, 2015, the shareholders who are connected persons and are not entitled to cast votes include: 1 SPM group 2,662,224,966 shares Singha Property Management Co., Ltd. 1,990,848,570 shares Singha Property Management (Singapore) Pte. Ltd. 671,376,396 shares 2 Mr. Santi Bhirombhakdi group 1,879,710,799 shares Mr. Santi Bhirombhakdi 1,590,104,278 shares Morgan Stanley & Co. International Plc. 289,606,521 shares 3 Mr. Piya Bhirombhakdi 179,783 shares 4 Mr. Naiyanobh Bhirombhakdi 116,666 shares Total 4,542,232,214 shares There are two directors who may have a conflict of interest or are representatives of person who may have a conflict of interest, namely Mr. Chutinant Bhirombhakdi and Mr. Chayanin Debhakam. At the Board of Directors Meeting of the Company No. 5/2015 on August 14, 2015, these two directors did not attend such meeting and did not cast their votes for consideration and approval of the connected transaction of the Company. 1.4 Details of assets being acquired 1.4.1 Investment in Singha Complex Project SPD owns 11-01-24 rai of land located at the corner of Asoke Montri Road and New Phetchaburi Road, Bang Kapi, Huai Khwang, Bangkok. It intends to use approximately 9-0-22.75 rai of such land for development of a Grade A mixed-use commercial complex with office and retail spaces for rent in the name of Singha Complex Project. The project is situated in an area with high potential in the central business district and surrounded by residential projects, shopping malls, schools, universities, hospitals, hotels, and leading office buildings. The project is easily accessible by Sirat Expressway, Petchaburi and Sukhumvit MRT stations, Asoke BTS station, and Makkasan Airport Link station, with the front of the project site facing the 6- lane New Phetchaburi Road, and the left side facing the 6-lane Asoke Montri Road, connecting to Rama 9 Road and Sukhumvit Road. The right side is adjacent to a large condominium project with the back facing Saen Saep canal. Singha Complex Project is a 38-floor Grade A mixed-use commercial complex with office and retail spaces for rent with a parking building. The total cost of investment is approximately Baht 4,255 million, broken down into construction cost of around Baht 3,892 million and other related expenses of about Baht 363 million. Page 15
Singha Complex Project will feature a state-of-the-art energy saving office building, finely designed and constructed to ensure its modernity, durability and long useful life. The project will offer a net leasable area (NLA) of approximately 56,596 square meters, divided into office spaces for rent of approximately 50,596 square meters and retail spaces for rent of approximately 6,000 square meters, with parking spaces approximately for 1,000 cars. SPD plans to begin construction of Singha Complex Project by 2015 with an estimated construction period of 30 months, and to start commercial operation by the first quarter of 2018. Preliminary project details are as follows: Area Floor Approx. gross Net leasable area floor area (sq.m.) Sq.m. % Office spaces 1/ 28 floors (10 37) 62,049 50,596 89.40 Retail spaces 5 floors (L1 L5) 10,000 6,000 10.60 Total office and retail spaces 33 floors 72,049 56,596 100.00 Parking building 8 floors (P1 P8) 14,000 - - Basement parking 3 floors (B1 B3) 21,000 - - Total parking spaces 11 floors 35,000 - - Spaces for utilities system 4,877 - - Total 111,926 56,596 100.00% Note: 1/ SPD will lease the office areas of 10,595 square meters to Boonrawd for a period of 50 years. Page 16
Singha Complex Project Location Source: Singha Estate Plc. Singha Complex Project Layout Source: Singha Estate Plc. Page 17
Image of Singha Complex Project Source: Singha Estate Plc. 1.5 Value of assets being acquired and disposed of and basis for calculation of value of consideration 1.5.1 Investment in Singha Complex Project Singha Complex Project is a Grade A mixed-use commercial complex with office and retail spaces for rent, covering a total net leasable area (NLA) of approximately 56,596 square meters. The estimated total cost of investment is not more than Baht 4,255 million (excluding the cost of land which is owned by SPD), consisting of construction cost and other expenses, including costs of design, consultant, construction management, quantity survey, project management, etc. SPD has determined the value of consideration for such project investment by basing on the construction cost derived from the design consultant of the Company. Payment for the value of consideration will be made according to the design and/or construction progress. 1.5.2 Lease of office building areas in Singha Complex Project to a connected person The rental fee from the lease of approximately six floors of office areas in Singha Complex Project for a total lease period of 50 years is approximately Baht 1,900 million in total (excluding operational expenses, lease registration fee, property tax and insurance premium). (Please see more details in Attachment 2 Summary of crucial conditions of draft of the long-term lease agreement of Singha Complex Project between Singha Property Development Co., Ltd. and Boon Rawd Brewery Co., Ltd.) As agreed in the lease agreement, SPD will cause Boonrawd to pay the rental fee in a total of 10 installments, whereby the first installment of approximately Baht 835 million will be made by 2015, the second Page 18
to the fifth installments totaling approximately Baht 610 million will be made by 2016 in quarterly installments each of approximately Baht 152.50 million, the sixth to the ninth installments totaling approximately Baht 400 million will be made by 2017 in quarterly installments each of approximately Baht 100 million, and the tenth installment of approximately Baht 55 million will be made by the first quarter of 2018. However, in the case that the areas to be delivered to Boonrawd are larger or smaller than 10,595 square meters, the rental fee to be received by SPD may be adjusted up/down at a rate of not more than Baht 190,000 per square meter per 50 years (calculated from the upfront rental fee divided by net leasable area). The rental fee rate, other terms and conditions in the lease agreement, however, will be in accordance with the conditions that are normal course of business and subject to negotiation and agreement between SPD as the lessor and Boonrawd as the lessee. The aforementioned rental fee does not include operational expenses, lease registration fee, property tax and insurance premium, which shall be borne by the lessee. 1.6 Sources of funds Sources of funds for the investment in Singha Complex Project of Baht 4,255 million consist of the Company s capital, loans from financial institutions (to cover the construction cost), and the upfront rental fee collected from the long-term lessee, i.e. Boonrawd. 2 Company profile Please see details of company profile in Attachment 1. 3 Reasonableness of the transactions 3.1 Objectives and necessity of the transactions The Company has engaged in property for sale business, investment property business, and hotel business and plans to further develop and make use of several plots of vacant land currently owned by Company and its subsidiaries. It is the Company s policy to focus on project development pattern that fits in with the potential of each land plot to ensure the utmost benefits to the Company and its shareholders in the long term. The Company is aware that the vacant land of 11-01-24 rai owned by SPD at the corner of Asoke Montri Road and New Phetchaburi Road, which used to be the location of Japanese Embassy, is in a prime area with commercial viability. The land is close to Asoke Montri Road which is home to numerous office buildings and is intersected with Sukhumvit Road. Moreover, the land is near the central business district and is easily accessible by public transports such as Petchaburi MRT station and Makkasan Airport Link station, Page 19
and is in close proximity to Sirat Expressway entrance/exit ramps. The land is thus ideal for development of office building for rent with retail spaces also available. Accordingly, the Board of Directors Meeting of the Company No. 5/2015 on August 14, 2015 resolved to grant approval for SPD to use approximately 9-0-22.75 rai of such vacant land for development and investment in Singha Complex Project, which is a 38-floor Grade A mixed-use commercial complex with office and retail spaces for rent with the approximate total cost of investment not more than Baht 4,255 million. The project will offer a net leasable area (NLA) of approximately 56,596 square meters, divided into office spaces for rent of approximately 50,596 square meters and retail spaces for rent of approximately 6,000 square meters, with parking spaces of approximately 1,000 cars. Meanwhile, Boon Rawd Brewery Co., Ltd. ( Boonrawd ), which is a connected person of the Company and is looking for additional office spaces, therefore intends to enter into a lease agreement for six floors in the high zone of office areas in such project of the Company, covering a total net leasable area of approximately 10,595 square meters to serve as offices of Boonrawd. Boonrawd will lease such office spaces from SPD for a period of 50 years with a total upfront rental fee of approximately Baht 1,900 million. The investment in development and construction of Singha Complex Project and the lease of such office spaces to Boonrawd are consistent with the plan of the Company and SPD to develop vacant land of SPD for the utmost benefits to the Company, SPD and the shareholders in the future and ensure a more secured source of revenue to the Company in the long run. 3.2 Advantages and disadvantages of entering and not entering into the transactions 3.2.1 Advantages and disadvantages of entering into the transaction in investment in Singha Complex Project 3.2.1.1 Advantages of entering into the transaction (1) The investment being consistent with the Company s business plan The Company aspires to be the premier lifestyle developer by crafting quality settings for people to live, play, work and shop. The Company and its subsidiaries own several plots of vacant land with development potentials, especially the vacant land of 11-01-24 rai owned by SPD and located at the corner of Asoke Montri Road and New Phetchaburi Road, Bang Kapi, Huai Khwang, Bangkok. Such land is situated in a prime area with high potential because it is in the central business district and surrounded by complete amenities such as shopping malls, educational institutes, hospitals, hotels, and leading office buildings. Moreover, the land is easily accessible since it is in close proximity to Sirat Expressway entrance/exit ramps and public transports such as Petchaburi and Sukhumvit MRT stations, Asoke BTS station, and Makkasan Airport Link station. Page 20
Therefore, SPD plans to use approximately 9-0-22.75 rai of such land for development of a Grade A mixed-use commercial complex project with office and retail spaces for rent. The investment in Singha Complex Project by SPD is accordingly deemed to be compliant with the Company s business plan and will enable them to achieve their established goal, as well as allow for development of and investment in SPD s existing property for the optimum benefit and value enhancement. (2) The investment helping to generate favorable returns for the Company in the long term Singha Complex Project that will be invested in by SPD will feature a state-of-the-art energy saving office building, finely designed and constructed to ensure its modernity, durability and long useful life, thereby being categorized as a Grade A office building. The siting of this project in a strategic CBD area enables SPD to set a rental fee rate higher than other grades of office buildings in non-cbd locations. This is considered a sound investment that will generate long-term favorable returns for the Company. Based on the project investment evaluation by the IFA, the net present value (NPV) of the project s cash flow is in a positive territory and the rate of return expected from this project investment is higher than the project s weighted average cost of capital. (3) Business risk diversification and a secured income source The Company s existing core businesses are property for sale, investment property and hotel businesses, which are capital-intensive. In the property for sale business, the process from construction to sale and ownership transfer mostly takes about two to three years to complete and the Company will recognize income upon transfer of ownership to buyers. As such, revenue from sale of property is not stable. In the hotel business, revenue is primarily generated from service operations, which fluctuate seasonally. Likewise, revenue to be earned from services is not steady. Investment property business provides a more consistent source of income from space rental, but it constitutes a small proportion when compared with the total revenues of the Company and its subsidiaries. This is because the existing investment property, The Lighthouse Project, is a small four-storied shopping mall with retail spaces for rent of about 3,500 square meters only. At the same time, the Company has just acquired Sun Towers Office Building project from Sun Towers Co., Ltd. on August 10, 2015. This project is an office building for rent, with a total area of approximately 122,965 square meters and a leasable area of approximately 62,640 square meters, which will help to boost the Company s income from this business. Nonetheless, the Company has a policy to further increase income from investment property business in a bid to mitigate risk from revenues from property for sale and hotel Page 21
businesses which are more vulnerable to the economic and political instability. The Company has accordingly allowed for SPD to invest in Singha Complex Project which will enable SPD to earn a regular and greater income and will expand the proportion of income from office and retail spaces for rent when compared with the total revenues of the Company and its subsidiaries. This could help mitigate risk and strengthen income stability of the Company and could ensure long-term revenues and benefits to the Company. (4) Expansion of business size and business opportunity of the Company The investment in Singha Complex Project will lead the Company s total assets to grow from Baht 15,381.01 million as at June 30, 2015 to Baht 19,636.01 million. In addition, after Singha Complex Project is completed and ready for rent to the lessees of both office and retail spaces, SPD will earn income from such spaces rental regularly and continuously through the agreement term and will have an opportunity to generate greater revenues in line with an increase rate of the rental fees, considering that this project offers brand-new office and retail spaces for rent in a prime location in CBD area with convenient transportation. Hence, the investment in Singha Complex Project will result in business diversification and business size expansion of the Company, which will bode well for the Company and its shareholders in the long run. 3.2.1.2 Disadvantages of entering into the transaction (1) Failure to achieve the expected income The construction of Singha Complex Project is expected to take approximately 30 months. Hence, it is likely that during such construction period, there could be other developers competing in project development similar to SPD s, which will then augment supply in the market, or there might be other factors affecting its investment in such project such as internal political factor, economic factor at home and overseas, etc. This will put SPD at risk from failure to acquire the expected number of tenants and, hence, to achieve the projected income. (2) Loss incurred at the early stage of project investment The construction of Singha Complex Project will begin by 2015 and is expected to take approximately 30 months. Commercial operation is expected to commence by the first quarter of 2018, following which the lessees will start to occupy and use the leased office and retail areas under the lease agreements. As such, during the construction and sale period, the Company will not recognize any income until the construction is completed and the spaces are leased. During the 30-month construction period, the Company may incur Page 22
loss from the project. If such loss exceeds the total profit earned from its operation, the Company may be unable to pay dividend to its shareholders during the said period. (3) Requirement of huge investment funds and increase in debts The investment fund required for construction of Singha Complex Project is approximately Baht 4,255 million, which is a huge amount. Assuming that SPD uses the source of funds entirely from loans from financial institutions, it will have to bear additional debts and finance costs. After the borrowing from financial institutions in an amount of Baht 3,540 million, the Company s debt to equity ratio will edge up from 0.53 time as at June 30, 2015 to 0.88 time (the debt to equity ratios of other entities in this industry as at June 30, 2015 were in a range of 0.75 4.34 times). If in the future the Company and SPD wish to launch other projects during the construction of Singha Complex Project, the Company will consequently incur additional debts which will cause its debt to equity ratio to increase further. Although its current debt to equity ratio is not high, the Company has engaged in a large-scale, capital-intensive property project and, hence, will likely incur additional debts if it has to invest in more new projects, which will lead its debt to equity ratio to go up in the future. 3.2.2 Advantages and disadvantages of not entering into the transaction in investment in Singha Complex Project 3.2.2.1 Advantages of not entering into the transaction (1) No incurrence of additional debts Singha Complex Project is a large-scale project with an approximate total construction cost of Baht 4,255 million. SPD plans to raise loans from financial institutions to partially cover the cost of such project construction. If SPD does not enter into this transaction, it will not have to resort to such borrowing from financial institutions and, hence, will not incur debts and interest relating to the investment in such project. (2) No risk from loss of the project Singha Complex Project is a large and capital-intensive project. After completion of project construction, SPD will still have to bear a huge amount of expenses on operation and management of the office areas and retail spaces for rent. In the initial period of commercial operation, it is likely that the office and retail areas are not fully occupied or the number of tenants may not meet the projection, thus causing the obtainable rental income to be inadequate to cover the expenses and relatively leading SPD to incur loss from operation. Given that SPD does not enter into such project investment transaction, it will not face any Page 23
risk of income failing to meet the projection which will affect the operation and may result in loss from such project. 3.2.2.2 Disadvantages of not entering into the transaction (1) Delay in accomplishment of business plan The Company plans to develop the existing vacant land of the Company or its subsidiaries and to undertake business integration and expansion through acquisition of other businesses. The investment in Singha Complex Project will be made by developing the vacant land of SPD into a mixed-use commercial complex project with office and retail spaces for rent. This is a business plan that will enhance value added to SPD and the Company and will enable the Company to achieve its aspiration to be the premier lifestyle developer by crafting quality settings for people to live, play, work and shop. If SPD does not enter into this transaction, it will result in a delayed opportunity for the Company to attain its business plan. (2) Loss of opportunity to receive favorable returns The investment in Singha Complex Project will ensure recurring income from office and retail spaces rental for SPD and can serve as a funding source for further investment in other projects. It is considered a sound project investment with a reasonable rate of return. If SPD does not enter into the said project investment, it will not earn such regular and secure income and profit from operation, which is tantamount to a loss of opportunity for the Company and its shareholders to receive favorable returns. (3) The Company facing business risk and income instability Under its existing revenue structure, the Company generates income primarily from hotel business and property for sale business, both of which fluctuate in line with factors such as tourist seasons, economic and political situations, and others. Therefore, it can be said that the Company earns unstable income while having to carry fixed costs and regular selling and administrative expenses. Given that SPD does not invest in Singha Complex Project, the Company will not be able to expand the secure income portfolio and cope with risk from income instability in the hotel business and property for sale business in accordance with its plan on business risk diversification. Page 24
3.3 Comparison of advantages and disadvantages between entering into the transactions with a connected person and the transactions with a third party 3.3.1 Advantages and disadvantages of entering into the transactions with a connected person 3.3.1.1 Advantages of entering into the transactions with a connected person (1) Increase in SPD s liquidity from the upfront rental fee of approximately Baht 1,900 million SPD, a subsidiary of the Company, intends to invest in development of Singha Complex Project, which is a mixed-use commercial complex with a net leasable area (NLA) for office spaces for rent of about 50,596 square meters. In this respect, SPD will lease the office areas approximately 6 floors in high zone to Boonrawd covering an NLA of approximately 10,595 square meters for a total period of 50 years with a total upfront rental fee of approximately Baht 1,900 million, payable in installments within three years. Pursuant to conditions under the lease agreement between SPD and Boonrawd, it is agreed that SPD will receive an upfront total rental fee of Baht 1,900 million from Boonrawd. The said rental fee will be payable to SPD in a total of 10 installments, whereby the first installment of Baht 835 million will be made on the signing date of the lease agreement, which the Company expects to be executed by 2015, and the remaining nine installments (2nd 10th installments) totaling about Baht 1,065 million will be made every three months with the second installment falling due by March 2016 and the final installment expected to fall due at about the same time as the completion of Singha Complex Project construction, i.e. by March 2018. The receipt of such upfront rental fee from Boonrawd will help enhance SPD s liquidity. The Company can then manage such fund for use either as working capital in business operation or as a financing source for the said project construction, thereby reducing the need for borrowing from financial institutions to fund the development of Singha Complex Project as well as helping to save interest expenses for SPD. Assuming that the average interest rate of loans from financial institutions to finance Singha Complex Project construction will be equal to 4.25% p.a., the receipt of such upfront rental fee of approximately Baht 1,900 million from Boonrawd will help boost SPD s liquidity and save loan interest expenses in the amount of approximately Baht 80.75 million a year. If such upfront rental fee is used as revolving fund in business operation, the Company will be able to generate returns from investment. Page 25
(2) Ease of the burden of acquiring tenants of office areas in Singha Complex Project Singha Complex Project offers the approximately total net leasable area (NLA) of 50,596 square meters. The Company s entering into a lease agreement for the net leasable area of approximately 10,595 square meters, or 20.94% of the total NLA, to Boonrawd over a total lease period of 50 years can assure that such area leased by Boonrawd will be fully occupied for a period as long as 50 years, thus helping to lessen the burden of acquiring other tenants for the project. (3) The lease of office spaces to Boonrawd providing returns not less than the lease to a third party The rental fee of the office spaces for rent in Singha Complex Project in the first year (2018) is set to be Baht 950/square meter/month (based on the average rental fee of Grade A office space of CB Richard Ellis (Thailand) Co., Ltd. ( CBRE ) in Q2/2015 of Baht 870/square meter, adjusted by 3% per year inflation rate until the year of opening to commercial operation). However, the areas to be leased approximately 6 floors to Boonrawd which are in the high zone. The floor height in this zone is 3.5 meters, compared with 3 meters in the lower zone, thus offering a bright and open floor with magnificent scenery more than the lower zone. As a result, the rental fee is set to be equal to Baht 1,100/square meter/month (assuming that the rental fee of high zone floors is about 10%-15% more expensive than lower zone floors). By leasingaround six floors of the high zone in office areas of approximately 10,595 square meters to a third party at the rental fee of Baht 1,100/square meter/month for a period of 50 years, the present value of such rental fee is equal to Baht 1,506.00 million. From comparison, the present value of the upfront rental fee receivable from Boonrawd of Baht 1,792.71 million is not less than the present value of such rental fee obtainable from a third party. (4) The lease of office spaces in Singha Complex Project by Boonrawd helping to promote the project s image Boon Rawd Brewery group is a leading conglomerate with a strong financial position and longstanding presence in Thailand. It is the founder and producer of Singha beer and soda water, which are the original Thai products broadly accepted for good quality. Presently, Boon Rawd group is diversifying beyond its existing alcohol business into real estate, container, food and beverages, etc. Therefore, the intention of Boonrawd to lease the office spaces in Singha Complex Project will help promote the image of this project in terms of its quality and good services Page 26
and build confidence among the public and other tenants, while also helping to enhance the tenants image. 3.3.1.2 Disadvantages of entering into the transactions with a connected person (1) Loss of opportunity to likely receive rental fee at the upfront rental fee rate received from Boonrawd Considering that this transaction will cover a long-term lease period of 50 years, SPD will not be able to lease the said office areas to any other lessees during such long period and, hence, could lose the opportunity to consider benefits obtainable from other tenants. Nonetheless, in entering into this transaction, Boonrawd agrees to pay an upfront total rental fee of approximately Baht 1,900 million. The first installment will be made after obtaining approval from the EGM in the amount of 43.95% or equal to approximately Baht 835 million, and the remaining approximately Baht 1,065 million will be paid by installments in every three months until it is fully paid by the first quarter of 2018. The payment period from the first to the final installments will be close to the period of project construction, which is scheduled for completion by the first quarter of 2018. In view of the fact that Boonrawd agrees to pay the total rental fee for the 50-year lease of approximately Baht 1,900 million upfront and that the present value of rental fee receivable by SPD from Boonrawd is not less than the present value of returns obtainable from lease to a third party, it is therefore highly unlikely that SPD will be able to acquire a third party tenant who can offer to pay the upfront rental fee for the 50-year lease of approximately Baht 1,900 million in installments from the start to completion of project construction under the same terms and conditions as those proposed by Boonrawd. (2) Incurrence of additional burden and expenses from the entry into a connected transaction due to the requirement to seek approval from the shareholders meeting The lease of office spaces in Singha Complex Project to Boonrawd with a total upfront rental fee of approximately Baht 1,900 million is deemed as a connected transaction with transaction size more than Baht 20 million or exceeding 3% of the Company s net tangible assets. Therefore, the Company is obligated to seek approval for entry into such transaction from the shareholders meeting and to appoint an independent financial advisor to provide opinion on reasonableness of the transaction and fairness of transaction price, thereby incurring additional expenses to the Company. In case the office spaces are leased to a third party instead, the Company will be able to promptly proceed with its project development plan after obtaining approval from the Board of Directors meeting. Page 27
3.3.2 Advantages and disadvantages of entering into the transactions with a third party 3.3.2.1 Advantages of entering into the transactions with a third party (1) Transactions done with transparency similar to that performed in the usual course of business The entry into transactions with a third party will engender no doubt about benefit transfer or transparency because both parties must use their best efforts to negotiate for the best terms and conditions on their part. (2) An opportunity to do business with a broader customer base Given that SPD does not lease the office spaces to Boonrawd for a long period of 50 years, SPD must allocate the areas to third party tenants, which will be a means of broadening its customer base. Besides, those customers could potentially contribute to their mutual business expansion in the future. 3.3.2.2 Disadvantages of entering into the transactions with a third party (1) Uncertainties caused by lease of the areas for a short term If SPD does not enter into the 50-year lease agreement with Boonrawd, it must then manage and acquire tenants to fully occupy the said areas with the same payment terms of upfront rental fee and the same lease period as those agreeable to Boonrawd. This could cause uncertainties due to a short-term lease of such office spaces. (2) Loss of opportunity to receive the upfront rental fee of Baht 1,900 million If the EGM resolves to grant approval for SPD to enter into the transaction with Boonrawd, SPD will gradually receive the upfront rental fee for the 50-year lease of the office spaces of Baht 1,900 million in total from Boonrawd, which will help enhance SPD s liquidity. Meanwhile, it is less likely to be able to acquire a third party to enter into the lease agreement and pay the rental fee upfront under the same terms and conditions as Boonrawd. Thus, if SPD does not enter into this transaction with Boonrawd, SPD will lose the opportunity to receive the upfront rental fee of Baht 1,900 million. Moreover, it could also lose the opportunity to save interest expenses on loans, due to the loss of opportunity to receive the upfront rental fee, in an amount of around Baht 80.75 million a year or to use the obtainable rental fee as its working capital and further generate returns. Page 28
3.4 Risks from entering into the transactions 3.4.1. Risk from a delay in completion of Singha Complex Project construction SPD plans to invest in construction of Singha Complex Project after obtaining approval from the EGM No. 1/2015 of the Company which will be held on September 30, 2015. It expects to begin the project construction by 2015 with an estimated construction period of 30 months, and to start commercial operation by the first quarter of 2018. However, despite such planning and readiness of SPD for the said project investment, this is a large-scale project with 38-storied office building and is possibly prone to risk from construction delay caused by shortage of labor or building materials. As such, the project will not be completed as scheduled, which could cause the Company to be unable to recognize income from the spaces rental as planned and relatively lead to a decrease in the project s internal rate of return. To cope with this risk, SPD has a policy to engage a contractor and a construction supervisor which have experience and skill in a similar type of project and will be selected based on their reputation, experience and track record. In addition, SPD will clearly specify in the service contract the conditions and penalty clauses in case of failure to complete project construction according to the schedule to ensure that the contractor has sufficient experience and expertise to undertake the construction of Singha Complex Project and is able to complete the project construction as planned. 3.4.2 Risk from cost overrun in Singha Complex Project construction Singha Complex Project will feature a state-of-the-art office building, designed to ensure energy saving, durability and long useful life with the use of quality standard materials and equipment. It will therefore require a huge cost of investment with a construction period of 30 months. SPD plans to start the project construction by 2015 and expects to complete the construction by the first quarter of 2018. It is likely that during such construction period prices of building materials and equipment and other related expenses might be revised up, thereby resulting in project cost overrun. To mitigate risk incidental to building material price fluctuations and to control the project cost according to the estimation, SPD plans to sign a turnkey construction contract with the contractor so that it could ensure the construction cost is within budget and pass on such possible risk to the contractor. 3.4.3 Risk from possible damage to people or the environment caused by Singha Complex Project construction The construction of large buildings in general may cause damage to people or other properties or affect the environment to a greater degree than smaller projects. SPD could therefore risk facing lawsuit brought by those affected during its project construction. Page 29
To safeguard against this risk, SPD has devised damage prevention measures such as prevention of scraps falling out, dust control, noise reduction, etc., with the contractor to control, inspect and ensure the construction site is safe and sound. SPD also plans to take out insurance during construction to reduce the impact from any potential incident. 3.4.4 Risk from failure to achieve the project s operational targets Singha Complex Project is a large-scale capital-intensive project and the project construction will take as long as 30 months, expected to be completed and ready for commercial operation by the first quarter of 2015. Hence, it is likely that during such construction period, there could be other office building and retail space projects being commercially launched, which will then cause a drop in demand for office and retail spaces for rent. Besides, since the lease of office and retail areas in general is offered for both a short term and a long term, it is possible that when Singha Complex Project is completed and ready for commercial operation, the response to the project and number of lessees might be lower than expected. As such, it will risk failing to acquire the targeted amount of lessees and to achieve the projected income and performance. Despite the above risk, Singha Complex Project is located in a prime area and is a brand-new project owned by Singha group which is a well-known conglomerate. Therefore, the project will likely receive a positive response from customers. SPD plans to engage a highly skilled real estate consultant to undertake the management and leasing of the office and retail spaces. Moreover, SPD will launch public relations to provide the interested persons with information on the office and retail spaces for rent so that they would have another attractive option. Page 30
4. Fairness of price and conditions for the transactions 4.1 Appropriateness of project investment or operation The assessment of appropriateness of project investment or operation is made on the two transactions as follows: 1. Singha Complex Project: The project will feature a 38-floor Grade A mixed-use commercial complex with office and retail spaces for rent, offering a total net leasable area (NLA) of approximately 56,596 square meters, divided into office spaces for rent of approximately 50,596 square meters and retail spaces for rent of approximately 6,000 square meters, with parking spaces for around 1,000 cars. The project is located on approximately 9-0-22.75 rai of land at the corner of Asoke Montri Road and New Phetchaburi Road, Bang Kapi, Huai Khwang, Bangkok. The total investment value is not exceeding Baht 4,255 million (excluding the cost of land which is owned by SPD). Construction is expected to take about 30 months or 2.5 years (from October 2015 to March 2018). During January-March 2018, since there will remain only interior decoration and finishing works to be done, SPD will therefore launch an opening of the office and retail spaces for rent in such period. Commercial operation period of this project is set to be about 50 years (January 2018-December 2067). The IFA has evaluated the project viability and returns from investment by three approaches: 1) estimation of net present value of the project, 2) internal rate of return, and 3) payback period. 2. Lease of office building areas in Singha Complex Project to Boon Rawd Brewery Co., Ltd. ( Boonrawd ): SPD intends to lease approximately six floors in the high zone of the office building in Singha Complex Project of its 38-floor commercial complex, with a total gross floor area of approximately 14,555 square meters a total net leasable area (NLA) of approximately 10,595 square meters to Boonrawd, which is its related company, for a total period of 50 years with a total upfront rental fee of about Baht 1,900 million. The said rental fee will be payable in 10 installments, whereby the first installment will be made on the signing date of the lease agreement, the second installment is expected to be made by March 2016 and the remainder will be made by installments in every three months. The IFA has determined the appropriateness of returns obtainable from the lease of office spaces to Boonrawd based on the following methods: 2.1) Comparison of present value of cash flow that SPD expects to receive as if it had leased the said areas to a third party throughout the projection period with present value of the upfront rental fee to be received from Boonrawd; 2.2) Comparison of rental fee rate receivable from a third party tenant that provides benefit to SPD equal to that obtainable from the lease to Boonrawd. Page 31
The project s cash flow projection has been prepared by SPD according to its business plan, under the assumptions for projection made based on the experience in project operation of the Company and SPD, as well as analysis of industry situation and other factors that have an effect on the project operation. The IFA has reviewed such projection and made adjustment to some items of the assumptions to fit with the present related environment and the entry into the transactions, based also on information derived from interviews or enquiries with the management of the Company and SPD and from analysis of other information relating to real estate business. The said assumptions have been established on a going concern basis without any significant change under the present economic condition until the 50 th year of commercial operation and upon the end of the 50 th year of commercial operation. If the economic condition and other external factors that have an effect on the project operation materially change from the established assumptions, the appraised project value will change accordingly. Major assumptions used for the projection are as follows: Transaction 1: 1. Rental income Singha Complex Project 1.1 Income from office building rental Future rental income from the leased office areas, occupancy rate, and rental fee per square meter are projected as follows: SPD will start to earn the building rental income in January 2018. The total net leasable area is approximately 50,596 square meters, divided into approximately six Floors in the high zone (Floors 32-37) with total net leasable area of approximately 10,595 square meters and the remaining lease area approximately 22 floors (Floors 10-31) of 40,001 square meters. } The occupancy rate is projected at 60% in 2018, then rising gradually to 70%, 80% and 95% in 2019-2021 respectively and remaining constant at 95% from 2022 onwards (based on the statistics of demand, supply and vacancy rate of office spaces for rent in Bangkok during 2011-2017 prepared by CB Richard Ellis (Thailand) Co., Ltd. ( CBRE ) which forecasts that in 2017 the vacancy rate of leasable areas will drop to around 5%, or representing an occupancy rate of 95%). The Company plans to launch marketing and advertising campaigns and execute prerent agreements. This project is a mixed-use commercial complex with office and retail spaces for rent, situated in a prime area with high potential and adjacent to central business district, residential projects, shopping malls, and educational institutes. Moreover, the project is Page 32
conveniently accessible as it is close to Petchaburi and Sukhumvit MRT stations, Asoke BTS station, Makkasan Airport Link station, and Sirat Expressway entrance/exit ramps. These factors will help boost growth in the occupancy rate. Furthermore, the upcoming advent of AEC will likely encourage international firms, which are among the Company s target groups, to increasingly set up their offices in Thailand, thereby helping shore up demand for Grade A office spaces for rent and relatively enabling the Company to achieve its occupancy rate target. The rental fee in the first year of commercial operation in 2018 for Floors 10-31 is set to be an average Baht 950/square meter (based on the average rental fee of Grade A office space of CBRE in Q2/2015 of Baht 870/square meter, adjusted by 3% per year inflation rate until the year of opening to commercial operation). The average rental fee for Floors 32-37 is assumed to be Baht 1,100/square meter, based on SPD management s assumptions and the fact that the rental fee of Grade A high zone office spaces is generally more expensive than lower zone floors. Moreover, approximately six floors in the high zone are designed to have a floor height of 3.5 meters, compared with 3.0 meters on other floors, thus offering a bright and open floor with more beautiful scenery than the lower zone floors. The rental fee will be increased by 15% every three years (based on the average growth rate of office building rental fee in 2010-Q2/2015 of CBRE of about 5% per year) during 2021-2027 and then by 10% every three years from 2030 onwards. Considering that the Company may face competition from new developers of office buildings for rent of the same grade as the Company s, the Company accordingly revises the increase rate of its rental fee down to only 10% every three years so as to enhance its competitiveness and attract customers to lease its office spaces as targeted. 1.2 Income from retail space rental The total net leasable area is approximately 6,000 square meters. The occupancy rate is projected to be 90% in 2018 and to remain constant at 95% from 2019 onwards, in line with the Company s assumptions and the occupancy rate of retail spaces classified by location in 2014-Q2/2015 of more than 95% as researched by Colliers International ( Colliers ). SPD places a high degree of importance on the occupancy rate of retail spaces since the offering of modern retail spaces that match the tenants lifestyle and are complete with facilities such as a food center, fitness and bank branches will be a key factor that helps boost an office building s image and strength and indirectly attract prospective tenants to lease the office spaces. Hence, the Company plans to launch pre-rent marketing and advertising campaigns during the project construction period which will help it achieve the retail spaces occupancy rate target. Page 33
The rental fee in the first year of commercial operation in 2018 is set to be Baht 1,500/square meter (based on Bangkok retail space records in Q2/2015 prepared by Colliers with average rental fee of Baht 1,200-2,500/square meter). In the first two years of operation, SPD may grant a discount of 20%, leading the rental fee to decrease to only Baht 1,200/square meter, to attract customers and achieve its lease target. The rental fee will be increased by 10% every three years, in line with SPD s assumptions, and the rental fee increase will begin in 2021 onwards. 1.3 Income from parking rental fee The project has total parking spaces of about 1,000 cars. The project will offer a total net leasable area for office and retail spaces of 56,596 square meters. It is assumed that tenants will be given a free parking space for one car per every 100 square meters of leased area. Thus, there will be a total free parking area for about 566 cars and a total monthly paid parking area for 434 cars. The occupancy rate of parking spaces is projected at 60% of 434 cars in 2018, then rising gradually to 70%, 80% and 95% in 2019-2021 respectively and remaining constant at 95% from 2022 onwards in line with the increase rate of office spaces occupancy rate. Income from parking rental fee is estimated at Baht 1,500/car/month, increasing by 10% every three years (based on the parking rental fee rates of office buildings in CBD areas). 2. Project cost Project cost is composed of land cost of Baht 1,989 million, construction cost and other related expenses (including contingencies of about 3% of construction cost) of Baht 4,255 million, making up a total project cost of Baht 6,189 million. The project has an approximate construction area of 111,926 square meters, thus representing an average construction cost of Baht 38,011/square meter (based on the construction cost derived from the design consultant of the Company). The Company will pay for the construction cost according to the construction progress, as follows: Unit : Baht million Amount Payment period 2015 2016 2017 2018 Construction cost and other related expenses 1/ 4,254.45 681.04 1,731.94 1,434.31 407.16 1/ Construction cost and other related expenses include costs of design, consultant, construction supervision, and contingencies. Page 34
3. Administrative expenses Administrative expenses are estimated in percentage of rental income or construction cost, as the case may be, which is in line with an estimation of related expenses of real estate projects in general and the projection by SPD management, as follows: Items % Service costs and administrative expenses 1/ 33% of rental income Repair and maintenance cost 1% of rental income Insurance premium: - Industrial all risks insurance 2/ 0.2% of construction cost - Business interruption insurance 0.2% of rental income 1/ Service costs and administrative expenses consist of personnel-related expenses, property tax, cleaning service fee, security service fee, supplies and equipment expenses, and other expenses. 2/ Premium on industrial all risks insurance is assumed to increase 3% per year according to the average inflation rate throughout the projection period. The EBITDA to total revenue ratio is projected at 65%-66%, which is comparable to the industry s average ratio of around 69% of total rental income. 4. Capital expenditure Capital expenditure, other than land cost, will include minor and major maintenance to ensure the building is in good condition. The IFA estimates the minor and major maintenance cost, based on and adjusted by information from SPD management, at 25% of rental income every five years, with the first major maintenance scheduled for 2022 onwards. Depreciation is calculated by the straight line method at 5% per year. 5. Sources of funds The project s sources of funds are expected to consist mainly of loans from financial institutions and the Company s capital, as follows: Sources of funds Amount (Baht million) Funding structure (%) Cost of land The Company s capital 1,989 32.13 Cost of construction The Company s capital 660 10.67 Loans from financial institutions 3,540 57.20 Total project cost 6,189 100.00 Page 35
- Funding from financial institutions is expected to be raised in the form of long-term loans of Baht 3,540 million. Loan drawdown will begin in October 2015 and be made until completion of project construction. Loan period is expected to be 15 years, with interest payment only in years 1-3 and principal and interest payment in years 4-15. - Interest rate on such loans is projected at an average 4.25% p.a., based on the interest rates expected from financial institutions. 6. Residual value The financial projection for this project has been prepared based on the assumption that, after the 50th year of commercial operation, SPD will have a residual value of land, building and construction on the land. As such, the market value of land and residual value of building in 2067 is estimated to be as follows: (1) The estimated market value of land in 2018 is derived from current market price of land, which is equal to the cost of land to be acquired under this transaction of Baht 1,989 million, multiplied by the increase rate of land price at 4.25% over a period of about 50 years (based on the average annual growth rate of land appraisal price for fiscal years 2012-2015 of the Treasury Department that took effect on July 1, 2012, with land prices in Bangkok increasing by 17% over such period or an average yearly increase rate of 4.25%), to arrive at land value in 2067 of approximately Baht 17,498 million in total or Baht 4.83 million per square wah. (2) The residual value of building in 2018 is estimated at 40% of construction cost (construction area of about 111,926 square meters x construction cost of approximately Baht 38,011 per square meter), resulting in the residual value of building in 2067 of about Baht 1,702 million. The estimation rate of residual value of building at 40% of construction cost is based on the 2015 Costs of Constructions of Thai Appraisal Foundation, which set forth standards for estimation of value of buildings with a long actual age, whereby depreciation is calculated by a percentage of the building s actual age until it reaches 40% of the value left following which the calculation of depreciation will be ceased. The rationale behind this is that a building structure constructed under acceptable engineering standards can last for a hundred years, but the items that are deteriorating are the systems attached to the building, walls and others, which make up about 60% of the building value. Hence, it is assumed that for a building aged 30 years or over, at least the remaining structure and other parts (if any) should have a value not less than 40% of the replacement cost new. By aggregating the market value of land and the residual value of building above, we could arrive at the total residual value of Baht 19,200 million, which can be discounted to the present value as at 2015 of Baht 730.25 million. Page 36
The above estimation of land and building value has been conducted on a conservative basis. However, there could be a discrepancy between the above estimated value of building and the projection, due to the difference in maintenance budgets for each building. If importance is given to the said budget, the building can be well maintained and its value will likely be higher than projected. Singha Complex Project is among the projects with a policy to emphasize repair and maintenance of the building and its component parts. 7. Discount rate The IFA uses the weighted average cost of capital (WACC) as a discount rate in estimating net present value of the project s free cash flow. WACC is calculated at 6.46%. Formula for WACC calculation: WACC = Ke(E/V) + Kd (1-t)(D/V) Ke = Cost of equity, equal to 10.54% Kd = Average loan rate of the project, equal to 4.25%, based on the average interest rate that SPD expects to receive from financial institutions for its project development t = Corporate income tax rate of 20% V = D + E = Baht 6,189 million E/V = Percentage of financing that is equity, equal to 42.80%, based on the estimated sources of funds for the project with a debt to equity ratio of 1.34:1 D/V = Percentage of financing that is loans from financial institutions, equal to 57.20%, based on the estimated sources of funds for the project with a debt to equity ratio of 1.34:1 Calculation of Ke: Ke = Rf + β (Rm Rf) Where: Rf Risk free rate as at August 14, 2015, equal to 4.03% per year based on bid yield on government bond with a maturity of 45 years, which is a period that could reflect investment condition in different time periods better than shorter-term data (source: www.thaibma.or.th). Rm Average rate of return on the SET over the past period of 35 years, which is a period that could reflect investment condition in different time periods better than shorter-term data (source: SET data from 1980 to 2014), equivalent to 13.75%. Page 37
Beta (β) A variance between SET return and closing price of shares of the reference companies. Here, the IFA has not used the beta of the Company because it underwent a major business and shareholding restructure in 2014. We have instead adopted the average beta over the past three years of the reference SET-listed entities engaging in real estate business whose asset size as at June 30, 2015 was close to the Company s, amounting to between Baht 10,000 million and approximately Baht 30,000 million (based on the weekly statistics from Bloomberg over the past three years, which is a period that could reflect investment condition in different time periods better than shorterterm data, counted up to August 14, 2015). Such beta is adjusted to arrive at an unlevered beta, which is then adjusted by the interestbearing debt to equity ratio according to the Company s financial statement as of June 30, 2015 to derive a beta, which is equal to 0.67. We have selected a total of 13 SET-listed companies for this analysis, as follows: Name Symbol Type of business Assets (Baht million) 1. Areeya Property Plc. A Development of three types of property: 1) single house project by either selling vacant land owned by the company and providing house construction service on such land or selling land with completely built house, 2) townhouse project, and 3) condominium project in mid-town areas 12,880.54 2. Ananda Development Plc. 3. Grand Canal Land Plc. 4. Golden Land Property Development Plc. 5. L.P.N. Development Plc. ANAN Development of condominium projects in close proximity to mass transit stations in Bangkok and its vicinities and horizontal residential projects, and operation of businesses through its subsidiaries 19,949.41 GLAND Development of property for sale and for rent 19,721.57 GOLD Real estate development and related services 21,063.47 LPN Development of property for sale and for rent in the category of office condominium and residential condominium in central business district of Bangkok and its vicinities 20,978.69 Page 38
Name Symbol Type of business Assets (Baht million) 6. Major Development Plc. 7. Noble Development Plc. 8. Pace Development Corporation Plc. MJD Development of property for sale and hotel business by focusing on high-rise residential property projects or highend condominium projects NOBLE Development of property for sale, construction service, leasing and service, and construction consulting service in Thailand PACE Property development specializing in high-end residential real estate, including five-star hotel, super luxury residential condominium, and shopping mall 9. Raimon Land Plc. RML Property development specializing in condominiums for medium- to high-end markets and villa projects for niche markets in Bangkok and vacation destinations 10. Siam Future Development Plc. 11. SC Asset Corporation Plc. SF SC Development and management of shopping centers or retail business projects in Thailand Full-service real estate development, comprising 1) property for sale such as single house, townhouse and residential condominium, 2) property for rent, and 3) consulting and management service for engineering technique and supporting systems 12. U City Plc. U Full-range real estate development for lease, service, sale and management 13. Univentures Plc. UV Holding company in four lines of business: property development, zinc oxide/other chemicals, energy, and others Table summarizing net present value, payback period and internal rate of return of the project 12,701.13 21,169.46 22,362.50 10,478.66 12,843.13 30,305.53 23,270.60 31,094.84 Year of project Construction period 1 2 3 4 5 10 Unit: Baht million 2015 2016 2017 2018 2019 2020 2021 2022 2027 (Oct-Dec) EBIT 0 0 0 73 115 169 292 282 424 Less Corporate income tax 0 0 0 0 0 0 0 (10) (72) After-tax profit 0 0 0 73 115 169 292 272 352 Add Depreciation 0 0 0 213 213 213 213 222 235 Add/(Less) Working capital 0 0 0 (37) (5) (7) (15) 0 (10) Less Capital expenditure (2,669) (1,732) (1,434) (407) 0 0 0 (191) (249) Residual value of land and building Net cash flow (2,669) (1,732) (1,434) (158) 323 375 490 304 327 Page 39
Year of project 15 20 25 30 35 40 45 50 Unit: Baht million 2032 2037 2042 2047 2052 2057 2062 2067 EBIT 476 612 999 1,095 1,328 1,610 1,764 2,183 Less Corporate income tax (95) (122) (200) (219) (266) (322) (353) (437) After-tax profit 381 490 799 876 1,062 1,288 1,411 1,746 Add Depreciation 1/ 248 265 63 72 85 101 117 95 Add/(Less) Working capital 0 0 (12) 0 0 (20) 0 0 Less Capital expenditure (274) (332) (402) (442) (535) (647) (711) 0 Residual value of land and building 19,200 Net cash flow 627 423 448 507 613 723 817 21,041 PV of residual value of land and building 730.25 NPV of cash flow 1,818.76 Total NPV of the project (Baht 2,549.01 million) IRR (%) 8.30% Payback period (year) 15.82 1/ Construction is depreciated for 20 years in line with Revenue Department s tax calculation period. By using the project s weighted average cost of capital (WACC), estimated at 6.46%, as a discount rate, the net present value of Singha Complex Project is equal to Baht 2,549.01 million, which is higher than zero, with an internal rate of return of 8.30% per year which is still higher than the project s WACC of 6.46% and also higher than the expected loan interest rate of the project of 4.25%. The project s payback period is 16 years. Sensitivity analysis on the financial projection We have additionally conducted a sensitivity analysis of the financial projection to see the effects on the net present value of free cash flow, IRR and payback period of the project estimated above, by changing the key assumptions from the base case as follows: Scenario 1 Increase/Decrease of WACC by 10% from the projection Scenario 2 Increase/Decrease of rent rate by 10% and 10% from the projection Scenario 3 Decrease of occupancy rate by 5% and 10% from the projection Scenario 4 Increase/Decrease of construction cost by 10% from the projection Scenario 5 Assumption that the lease of office building areas on Floors 32-37 of Singha Complex Project to Boonrawd is approved by the EGM, which will lead SPD to receive the upfront rental fee from Boonrawd in the amount of Baht 1,900 million, payable in 10 installments within three years from 2015 to 2018 (see more details of payment in the assumptions for Transaction 2), while the assumptions for Floors 10-31 Page 40
remain unchanged, with the spaces leased to third party tenants and the yearly rental fee income receivable according to the estimated commercial operation period Scenario 6 In the base case and scenarios 1-5, revenue is projected from rental income over a 50 years period plus residual value of land and building at the end of the 50 th year. To provide additional information for the shareholders consideration, we have analyzed impacts from the case where the lease of office building areas in Singha Complex Project is operated on a going concern basis with the terminal growth estimated in a range of 1% - 3%. Base case Increase 10% Scenario 1 (WACC) Decrease 10% Scenario 2 (Rental rate) Increase 10% Decrease 10% Scenario 3 (Occupancy rate) Decrease Decrease 5% 10% Scenario 4 (Construction cost) Increase Decrease 10% 10% Scenario 5 NPV (Baht million) 2,549.01 1,478.94 3,882.72 3,257.31 1,839.68 2,188.84 1,827.77 2,229.60 2,867.86 2,875.96 IRR (%) 8.30% 8.30% 8.30% 8.78% 7.81% 8.05% 7.80% 8.00% 8.63% 9.26% PB (year) 15.82 15.82 15.82 15.03 17.16 16.30 17.20 16.45 15.27 14.34 Base case Scenario 6 (Terminal growth) 1% 2% 3% NPV (Baht million) 2,549.01 3,114.74 3,421.24 3,905.05 IRR (%) 8.30% 8.51% 8.62% 8.77% PB (year) 15.82 15.82 15.82 15.82 Conclusion From the above sensitivity analysis, the best case for the project is the change of assumptions in scenario 5, where the office building areas approximately six floors in the high zone of Singha Complex Project are leased to Boonrawd. In this case, the overall returns will increase from the base case, with the NPV rising to Baht 2,875.96 million, the IRR edging up to 9.26% and the payback period shortening to 15 years. Based on the estimation of returns from the project investment by different approaches and the sensitivity analysis, it can be concluded that, in all scenarios, the project s NPV is higher than zero, equal to approximately Baht 1,478.94 million Baht 3,905.05 million, with the IRR in a range of 7.81% - 9.26% which is still higher than the project s WACC of 6.46% and with a payback period of 15-18 years. We therefore are of the opinion that under the established assumptions the investment in Singha Complex Project is viable and provides favorable returns to a certain extent. Page 41
Transaction 2: Lease of office spaces in Singha Complex Project to Boonrawd 2.1) Comparison of present value of cash flow that SPD expects to receive as if it had leased the said areas to a third party throughout the projection period with present value of the upfront rental fee to be received from Boonrawd Assumptions for estimation of present value of cash flow that SPD expects to receive from the lease of approximately six floors in high zone of the office areas as if it had leased the said areas to a third party 1. Rental income 1.1 Income from office building rental Future rental income from the leased office areas, occupancy rate, and rental fee per square meter are projected as follows: SPD will start to earn the building rental income in January 2018. The total net leasable area of approximately six floors in high zone is 10,595 square meters. The occupancy rate is projected to be 60% in 2018 and to rise to 70%, 80% and 95% in 2019-2021 respectively and then to remain constant at 95% from 2022 onwards. SPD plans to launch marketing and advertising campaigns and execute pre-rent agreements. This project is a mixed-use development with office and retail spaces for rent, situated in a prime area with high potential and adjacent to central business district, residential projects, shopping malls, and educational institutes. Moreover, the project is conveniently accessible as it is close to Petchaburi and Sukhumvit MRT stations, Asoke BTS station, Makkasan Airport Link station, and Sirat Expressway entrance/exit ramps. These factors will help boost growth in the occupancy rate. Furthermore, the upcoming advent of AEC will likely encourage international firms, which are among SPD s target groups, to increasingly set up their offices in Thailand, thereby helping shore up demand for Grade A office spaces for rent and relatively enabling SPD to achieve its occupancy rate target. The average rental fee in the first year of commercial operation in 2018 for approximately six floors in high zone is set to be Baht 1,100/square meter, based on SPD management s assumptions and the fact that the rental fee of Grade A high zone office spaces is generally more expensive than lower zone floors. Moreover, approximately six floors in high zone are designed to have a floor height of 3.5 meters, compared with 3.0 meters on other floors, thus offering a bright and open floor with more beautiful scenery than the lower zone floors. Page 42
The rental fee will be increased by 15% every three years (based on the average growth rate of office building rental fee in 2010-Q2/2015 of CBRE of about 5% per year) during 2021-2027 and then by 10% every three years from 2030 onwards. Considering that SPD may face competition from new developers of office buildings for rent of the same grade as SPD s, the increase rate of its rental fee is thus revised down to only 10% every three years so as to enhance its competitiveness and attract customers to lease its office spaces as targeted. 2. Service costs and administrative expenses Service costs and administrative expenses are estimated in percentage of rental income or construction cost, as the case may be, which is in line with an estimation of related expenses of real estate projects in general and the projection by SPD management, as follows: Items % Service costs and administrative expenses 1/ 33% of rental income Repair and maintenance cost 1% of rental income Insurance premium: - Industrial all risks insurance 2/ 0.2% of construction cost - Business interruption insurance 0.2% of rental income 1/ Service costs and administrative expenses consist of personnel-related expenses, utilities fees, property tax, cleaning service fee, security service fee, supplies and equipment expenses, and other expenses. 2/ Premium on industrial all risks insurance is assumed to increase 3% per year according to the average inflation rate throughout the projection period. The EBITDA to total revenue ratio is projected at 65%-66%, which is comparable to the industry s average ratio of around 69% of total rental income. 3. Capital expenditure Capital expenditure, other than land cost, will include major maintenance to ensure the building is in good condition. The major maintenance cost is estimated at 25% of rental income every five years, with the first major maintenance scheduled for 2022 onwards. Depreciation is calculated by the straight line method at 5% per year. 4. Discount rate The IFA uses the weighted average cost of capital (WACC) as a discount rate in the estimation of net present value of free cash flow that SPD expects to receive from the lease of approximately six floors of Page 43
office areas in high zone, or equal to 6.46%, which is the same discount rate adopted for the whole project (see the calculation of the discount rate in the assumptions for Transaction 1, Item 8). Table summarizing net present value of free cash flow of the project, Floors 32-37 (assuming they are leased to a third party) Year of project Construction period 1 2 3 4 5 10 Unit: Baht million 2015 2016 2017 2018 2019 2020 2021 2022 2027 (Oct-Dec) EBIT 0 0 0 7 16 25 52 50 79 Less Corporate income tax 0 0 0 0 0 0 0 0 (13) After-tax profit 0 0 0 7 16 25 52 50 66 Add Depreciation 0 0 0 47 47 47 47 49 51 Add/(Less) Working capital 0 0 0 (7) (1) (1) (3) 0 (2) Less Capital expenditure 0 0 0 0 0 0 0 (38) (51) Net cash flow of project 0 0 0 46 61 70 95 60 65 Year of project 15 20 25 30 35 40 45 50 Unit: Baht million 2032 2037 2042 2047 2052 2057 2062 2067 EBIT 89 116 197 216 262 318 348 431 Less Corporate income tax (18) (23) (39) (43) (52) (64) (70) (86) After-tax profit 71 93 158 173 210 254 278 345 Add Depreciation 54 57 13 15 17 21 24 19 Add/(Less) Working capital 0 0 (2) 0 0 (4) 0 0 Less Capital expenditure (56) (67) (81) (89) (108) (131) (144) 0 Net cash flow of project 70 83 87 98 119 140 158 364 NPV of cash flow 1,506.00 Assumptions for estimation of present value of the upfront rental fee that SPD will receive from the lease of office spaces to Boonrawd The assumptions in this scenario are different from the assumptions used in the case of lease of the office areas to a third party described above. In this case, the assumptions include rental fee income and all expenses to be incurred from the office spaces for rent business in general. The said difference is that in this scenario it is assumed that the upfront rental fee that SPD will receive from the lease of office spaces to Boonrawd of Baht 1,900 million is net of all expenses to be incurred. This is because, pursuant to conditions in the lease agreement, Boonrawd will be responsible for expenses incurred during the lease of the office spaces throughout the lease term. Hence, under these assumptions, the expenses incurred will differ from those in case of the lease to a third party, except for corporate income tax on the upfront rental fee that must still be borne by SPD. Page 44
1 Rental fee throughout the 50-year lease period The total rental fee throughout the lease term of 50 years for the leased areas of approximately six floors in the high zone is equal to Baht 1,900 million, payable in 10 installments, whereby the first installment of Baht 835 million will be made on the signing date of the long-term lease agreement around October 2015. The remaining nine installments will be made at three-month intervals, with the second installment (expected to be made in March 2016) to the fifth installment payable at Baht 152.50 million each, the sixth to the ninth installments at Baht 100 million each, and the tenth installment at Baht 55 million. The said rental fee is net of all expenses to be incurred because, pursuant to conditions in the lease agreement between the lessee and the lessor, the lessee will be responsible for all expenses incurred during the lease of the office spaces throughout the lease term, including: - Lease registration fee; - Water supply and electricity bills to be collected by the lessor based on actual meter readings at the standard rate specified by the lessor for this project; - Common facilities expenses (including cleaning service, security service, repair and maintenance service, trash removal service, etc.), the amount of which will be determined by the lessor based on actual costs after start of commercial operation; - Transfer fee, tax, property tax and stamp duty on the lease of office spaces, including insurance and other expenses to be incurred in the future such as guarantee deposit for electricity usage and guarantee deposit for decoration; - Industrial all risks insurance to be taken out by the lessee covering the leased areas and properties of the lessee; and - Costs of repair, maintenance and renovation of Singha Complex Project to be borne by the lessee. Table summarizing net present value of the upfront rental fee receivable from Boonrawd (Unit: Baht million) 2015 2016 2017 2018 Oct Mar June Sep Dec Mar June Sep Dec Mar Rental fee receivable from Boonrawd 835.00 152.50 152.50 152.50 152.50 100.00 100.00 100.00 100.00 55.00 PV of Rental fee receivable from 1,815.40 Boonrawd Less PV of corporate income tax 1/ 25.37 NPV of rental fee receivable from Boonrawd 1,790.03 1/ Present value of corporate income tax is calculated based on tax payable on the total upfront rental fee of Baht 1,900 million which SPD will gradually recognize as income over the 50-year lease period, less interest expenses. Page 45
Under the above assumptions for estimation of net present value of cash flow from the lease of approximately six floors of office areas as if the said areas had been leased to a third party by using the project s weighted average cost of capital (WACC), estimated at 6.46%, as a discount rate, the net present value of cash flow is estimated at Baht 1,506.00 million. When compared with the net present value of cash flow from the upfront rental fee that SPD will receive from Boonrawd of Baht 1,790.03 million, it is found that if SPD leases the office spaces to Boonrawd, SPD will obtain returns not less than those obtainable from the lease to a third party. Sensitivity analysis on the financial projection We have additionally conducted a sensitivity analysis of the financial projection in case approximately six floors in the high zone of the office areas are leased to a third party so as to see the effects on the net present value of cash flow, by increasing the rental fee per square meter by 5%, 10% and 15% from the base case projection. The outcome is as shown below: Unit: Baht million Lease to Boonrawd and/or its subsidiaries Base case Lease to general customers Increase of rental Increase of rental fee/sq.m. fee/sq.m. +5% +10% Increase of rental fee/sq.m. +15% NPV of cash flow 1,790.03 1,506.00 1,576.97 1,647.77 1,718.43 Conclusion From the sensitivity analysis on an increase of the rental fee from the base case assumptions, we found that the net present value of cash flow will increase to between Baht 1,506.00 million and Baht 1,718.43 million. When compared with the net present value of cash flow from the upfront rental fee that SPD will receive from Boonrawd of Baht 1,790.03 million, we consider that, under the said assumptions, the lease to Boonrawd will provide returns not less than those receivable from a third party lessee, and this transaction is accordingly deemed appropriate. 2.2) Comparison of rental fee receivable from a third party that provides returns for SPD equal to those received from the lease to Boonrawd - Estimation of rental fee rate at which SPD expects to lease the office spaces to a third party, using the assumptions in Item 2.1) The rental fee for office spaces that SPD expects to lease to a third party is based on the assumptions for Transaction 2 Item 2.1), with the average rental fee in the first year of Page 46
Conclusion commercial operation in 2018 for approximately six floors in the high zone of the office area assumed to be Baht 1,100/square meter and adjusted by 3% per year inflation rate (to be in line with the assumptions for Transaction 1 Item 1.1, where the rental fee in 2018 is estimated based on the average rental fee of Grade A office space of CBRE in Q2/2015 of Baht 870/square meter, adjusted by 3% per year inflation rate until 2018, meaning that the rental fee in 2018 is discounted to the year 2015 by the same discount rate of 3% per year). As a result, the rental fee as at October 2015 is estimated to be Baht 1,007/square meter. - Estimation of rental fee receivable from a third party that provides returns equal to the rental fee obtainable from the lease to Boonrawd The rental fee receivable from a third party, net of all expenses according to the assumptions in Item 2.1) and discounted to the present value of cash flow, is equal to the present value of rental fee from the lease of office spaces to Boonrawd, which is Baht 1,900 million payable in 10 installments within three years and is equivalent to a present value of Baht 1,790.03 million (see details in Item 2.1)) or equal to a rental fee rate of Baht 1,323/square meter in 2018. To compare with the current rental fee rate of Grade A office spaces in nearby areas, we have discounted the rental fee by the inflation rate of 3% per year and arrived at a rental fee of Baht 1,211/square meter as at October 2015. The estimated rental fee compared with the rental fee of nearby Grade A office spaces Rental fee (Baht/square meter) 1. Office spaces in Singha Complex Project - Rental fee that provides total returns equal to 1,211 present value of total upfront rental fee receivable from Boonrawd of Baht 1.900 million - Rental fee receivable from a third party lessee 1,007 2. Interchange 21 Tower 1/ 950-1,200 3. Exchange Tower 1/ 1,100 4. Bhiraj Tower 1/ 800-875 Note: 1/ Source: www.cbre.co.th It is evident that the lease of office spaces in Singha Complex Project to Boonrawd for a period of 50 years with a total rental fee of Baht 1,900 million is equivalent to the lease to a third party with a rental fee as at October 2015 of Baht 1,211/square meter. Such rental fee rate is not less than the rental fee receivable from a third party of Baht 1,007/square meter and is comparable to the rental fee rates of Grade A office Page 47
spaces in nearby areas which are in a range of Baht 800 1,200/square meter. Therefore, we view that the returns obtainable from the lease of approximately six floors of office spaces to Boonrawd are reasonable. 4.2 Fairness of the terms of payment Under the draft lease agreement between SPD and Boonrawd, Boonrawd agrees to pay the rental fee of about Baht 1,900 million upfront in installments, whereby the first installment of Baht 835 million will be made by 2015, the second to the fifth installments totaling Baht 610 million will be made by 2016 in quarterly installments each of Baht 152.50 million, the sixth to the ninth installments totaling Baht 400 million will be made by 2017 in quarterly installments each of Baht 100 million, and the tenth installment of Baht 55 million will be made by the first quarter of 2018. In this respect, there is a penalty clause in the event of any payment default by Boonrawd, whereby Boonrawd shall be subject to a late payment fee at 15% per year of the amount in default to SPD, calculated from the default date onwards. As regards the agreement renewal, it is agreed that the lessee shall have the right to request a renewal of the lease agreement by so notifying the lessor in writing at least two years ahead of expiration of the longterm lease agreement. The rental fee rate and lease period for the subsequent term shall be as to be further agreed upon by the two parties. However, the lessee shall be granted the right of first refusal in the said agreement renewal as well as the right of first offer. All expenses to be borne by the lessee shall be agreed upon on an arm s-length basis. Costs of repair, maintenance and renovation of Singha Complex Project shall be allocated by SPD to Boonrawd based on a mechanism to be further agreed upon. If in the future such transaction is considered a connected transaction, the Company shall act in compliance with the Notification of the Capital Market Supervisory Board No. ThorChor. 21/2551 Re: Rules on Connected Transactions, and the Notification of the Board of Governors of the SET Re: Disclosure of Information and Other Acts of Listed Companies Concerning the Connected Transactions B.E. 2546. From our consideration of the conditions for the connected transaction under the said MOU, we are of the opinion that the terms of payment, the obligations of each party, the renewal conditions such as right of first refusal and right of first offer, and the penalty for payment default are consistent with the general practices for this type of lease transaction. Thus, the conditions mentioned above are deemed reasonable and beneficial to SPD. Page 48
5 Conclusion of the Independent Financial Advisor s opinion The IFA is of the opinion that the entry into asset acquisition transaction through investment in Singha Complex Project of SPD, a subsidiary of the Company, and the connected transaction by leasing approximately six floors of office spaces in such project to Boonrawd and or its subsidiaries are reasonable and beneficial to the Company. This is because the investment in Singha Complex Project, which offers office and retail spaces, is considered reasonable and beneficial and will provide the Company with an opportunity to capitalize on the land held for development of SPD under its business and investment plan, which will enhance value added to SPD s property and enable the Company to generate recurring income and returns in the long term in addition to its existing projects that are under implementation. Besides, the investment in such office and retail spaces for rent business will help to diversify business risk and enable the Company to conduct a continuous cash flow projection and new project investment planning, thereby ensuring long-term business growth. Nonetheless, the entry into this asset acquisition transaction will lead to an increase in SPD s liabilities and interest expenses due to the needs to raise loans from financial institutions to cover the investment in such project. In the initial period of project development or during the construction period, SPD will not recognize any income yet and may even incur a loss at the early stage of operation. Besides, SPD could be exposed to risk involved with large-scale project development that will augment supply in the market. The project success still hinges on various external factors such as economic condition, real estate market situation, and the public s consumption and purchasing power. If these factors are not conducive, the project development of SPD will likely be affected. From our estimation of the rate of return from such project investment by different methods, it is found that the net present value of this project is higher than zero, amounting to Baht 2,549.01 million, with an internal financial rate of return of 8.30% which is still higher than the project s weighted average cost of capital of 6.46% and with a payback period of 16 years. Therefore, we view that, under the established assumptions, the investment in Singha Complex Project is viable and reasonable and will provide a satisfactory rate of return to a certain extent. As for the entry into the connected transaction by lease of six floors of office spaces in Singha Complex Project to Boonrawd and/or its subsidiaries, we are of the opinion that it is a reasonable transaction as it will help increase SPD s liquidity by way of receipt of upfront rental fee in the total amount of Baht 1,900 million, which will be paid in installments within three years or expected to be completely paid by the time of completion of project construction. Moreover, the transaction will help ease the burden of acquiring tenants of such office areas in Singha Complex Project and ensure that the said office spaces will be fully occupied over a period as long as 50 years. Page 49
The lease of office building areas to Boonrawd will provide returns for SPD not less than those received from the lease of such areas to a third party. This is evident from the present value of cash flow from rental fee to be received upfront by SPD from Boonrawd equal to Baht 1,790.03 million, compared with the net present value of cash flow derived in case SPD leases such office building areas to a third party amounting to Baht 1,506.00 million. Therefore, by leasing the said office building areas to Boonrawd, SPD will receive returns not less than those obtained from the lease of such areas to a third party. In addition, the lease of office building areas in Singha Complex Project to Boonrawd for a period of 50 years with a total rental fee of Baht 1,900 million is equivalent to the lease to a third party at a rental rate, as at October 2015, of Baht 1,211 per square meter, which is not less than the rental fee collected from a third party of Baht 1,007 per square meter and is comparable to the rental fee rates of other Grade A office spaces in nearby areas of between Baht 800 and 1,200 per square meter. We accordingly deem that the lease of approximately six floors in the high zone office areas by SPD to Boonrawd is reasonable and provides an appropriate rate of return. Based on all above reasons, the IFA is of the opinion that the asset acquisition and the connected transactions are reasonable with a fair price and will be beneficial to the Company and, therefore, would like to recommend the shareholders to approve the entry into the said asset acquisition and connected transactions. The shareholders may decide whether to approve the said transactions by taking into account the rationale and opinion provided herein by the IFA. However, the final decision depends primarily on the shareholders individual judgment. We hereby certify that we have rendered opinion with due care and under professional standards by paying regard to the interest of the shareholders. Yours sincerely. Advisory Plus Company Limited Thawatchai Vorawandthanachai (Mr.Thawatchai Vorawandthanachai) Managing Director Vatcharin Lerdsuvankul (Mr.Vatcharin Lerdsuvankul) Supervisor Page 50
Attachment 1 1. Company Background Singha Estate Plc. ( the Company ) was formerly named Rasa Property Development Plc. The Company was established on August 14, 1995 under the name of Panich Poompatana Co., Ltd. with a registered capital of Baht 10 million, to mainly engage in real estate development of housing and condominium. The Company was renamed to Rasa Property Development Plc. and was listed on the Stock Exchange of Thailand on April 12, 2007April 30, 2004 under RASA stock symbol. On September 12, 2014, the Company was renamed to Singha Estate Plc. and made a change to its corporate seal, which was undertaken as part of its business integration plan approved by the Extraordinary General Meeting of Shareholders No. 1/2014 on June 9, 2014. The Company issued and allocated its new ordinary shares in exchange for the ordinary shares of S Bright Future Co., Ltd. ("SBF"), as consideration in kind to Singha Property Management Co., Ltd. ("SPM") and Singha Property Management (Singapore) Pte. Ltd. ( SPMSG ) in the amount of 1,801,441,632 shares and 1,130,964,175 shares, or 38.23% and 24.00% of the Company s paid-up capital, respectively; and also issued and allocated 1,229,946,524 new ordinary shares, or 26.10% of the Company s paid-up capital in exchange for ordinary shares of Santiburi Co., Ltd., as consideration in kind to Mr. Santi Bhirombhakdi ( Mr. Santi ). Subsequently, SPMSG sold 247,617,536 shares, or 5.25% of the Company s paid-up registered capital, to Damerius Pte. Ltd. ( Damerius ), which is 100% owned by Mr. Santi and is considered as a related person under Section 258 (4) of Khun Santi. As a result, SPMSG s holding declined to 883,346,639 shares or 18.75% of the Company s paid-up registered capital. At present, the Company has a total registered capital of Baht 7,348,290,786, of which Baht 5,715,337,268 is paid, divided into 5,715,337,268 shares each of Baht 1 par value. Its head office is located at 968 U Chu Liang Building, 20 th Floor, Rama IV Road, Silom, Bangrak, Bangkok 10500. The Company has altogether nine subsidiary companies 2 as follows: 1) S Estate Commercials Inter Co., Ltd. ( S Estate Inter ) 2) S Commercials (Singapore) Pte. Ltd. ( S Commercials ) 3) S Estate Commercials Co., Ltd. ( S Estate ) 4) Singha Property Development Co., Ltd. ("SPD") 5) Max Future Co., Ltd. ("MAX") 6) S Hotel Management Co., Ltd. ("SHM") 7) S Hotel Phi Phi Island Co., Ltd. ("SPP") 8) Phi Phi Village Asset Management Co., Ltd. ( PPVAM ) 9) Nirvana Development Co., Ltd. ("Nirvana") Attachment 1 Details of the Company Page 1
The Company and its subsidiaries engage in three main businesses which are: (1) property for sale operated by MAX and Nirvana, (2) property for investment operated by SPD and MAX, and (3) hotel business operated by SPP and PPVAM. Shareholding Structure SINGHA ESTATE PLC. 51.00% 99.99% 99.99% 99.99% 99.99% 99.99% Nirvana Development Co., Ltd. 1 Nirvana Construction Co., Ltd. Nirvana Rama 9 Co., Ltd. Nirvana U Co., Ltd. Subthanarin Co., Ltd. Nirvana River Co., Ltd. 99.99% 99.99% 51.00% 51.00% S Estate Commercials Inter Co., Ltd. 3 100.00% S Commercials (Singapore) Pte. Ltd. 3 S Estate Commercials Co., Ltd. 3 Singha Property Development Co., Ltd. Max Future Co., Ltd. 2 49.00% 49.00% 99.99% 99.99% S Hotel Management Co., Ltd. S Hotel Phi Phi Island Co., Ltd. 99.99% Phi Phi Village Asset Management Co., Ltd. Remarks: /1 The Company made equity investment in Nirvana Development Co., Ltd. in a proportion of 51.00% on April 27, 2015. /2 Max Future Co., Ltd. received the entire business transfer from Suntowers Co., Ltd. on August 10. 2015. /3 The Company conducted a shareholding restructure by establishing a holding company composed of S Estate Commercials Inter Co., Ltd., S Commercials (Singapore) Pte. Ltd., and S Estate Commercials Co., Ltd. to hold equity shares in SPD and MAX. 2. Business Operations of the Company and Subsidiaries 2.1 Business operation of the Company (1) Property for sale The Company has devised a diversified policy of property for sale business, covering single houses, townhomes and condominiums under different brands, in order to fulfill demand of medium- to highend customers. The Company also has a policy to expand its property for sale business through joint venture with and acquisition of business of other companies. In 2014, the Company had two property for sale business projects, developed prior to its business integration (the Company completed its business integration in September 2014.), comprising Intro Condominium Project and RASA Maxx Ville Project. Currently the sales of both projects have been closed and total revenues from which have been recognized. Moreover, in April 2015, the Company acquired shares of Nirvana Development Co., Ltd., a company engaging in property for sale business, representing 51% of its paid-up capital. The projects of the Company and its subsidiaries are listed as follows: Attachment 1 Details of the Company Page 2
- Intro Condominium Project: designed with a unique architectural design and complete with facilities and amenities for urban living. All units feature an optimum design with a relaxing and refreshing ambience created by a large green area at the front of the project site. It is located in a prime downtown area in close proximity to shopping malls, schools, hospitals and office buildings, as well as expressways, BTS/MRT stations, and interchange points to other electric train lines. The project, covering a land area of 3 rai 1 ngan 33 square wah, offers a 37-storied condominium with approximately 450 units for sale at a price ranging from Baht 2.5 million to Baht 13.3 million. The total project value is Baht 1,450 million. - RASA Maxx Ville Project: a modern tropical two-storied townhome project suitable for new generation s modern and perfect lifestyle, emphasizing functionality, perfect combination, fine quality materials, easy use and pleasant atmosphere amid a variety of plants together with a multi-purpose area. Sited on a land area of 20-2-75.1 rai, the project offers 217 units of 18.8-39.8 square wah townhomes for sale at a price of Baht 2.0 million Baht 3.9 million (approx.) with a total project value of about Baht 520 million. - Projects operated by Nirvana and its subsidiaries: consists of residential property projects for sale such as single houses, townhomes and commercial buildings, together with such services as land allocation, construction design and contractor services for customers who buy lands from Nirvana. (2) Investment Property Investment property business has high growth potential. Therefore, development and management of shopping centers and office buildings for rent are parts of the 5-year business plan of the Company. The main sources of revenues come from rental revenue and services revenue. Currently, the Company has one shopping center under its management, i.e. The Light House, and one office building for rent, i.e. Suntowers building. - The Light House is a project developed prior to the business integration. It is a small 4-storied shopping center project with a leasable space of 3,500 sq.m., located on Charoen Nakhon Road. It offers space rental for diverse types of shops, such as restaurants, retail shops, clinics, travel agencies for both domestic and international trips, schools, spas, etc. - Suntowers building is a big Grade A office building, located on an area of 5 rai 3 ngan 19.8 square wah near Vibhavadi Rangsit Road. Its location is in the center of northern Bangkok offering a wide range of transportation options as it is close to tollway, BTS and MRT. It offers a total rental space of 62,640 sq.m. consisting of two buildings: A-building of 33 stories and B- building of 41 stories. It has rentable space available for retail shops under the name of Sun Plaza 1 with complete facilities, e.g. meeting rooms, fitness center and helicopter landing pad. With rental of additional area of 8 rai 2 ngan 30 square wah, it has been developed partly as rentable space for retail shops under the name of Sun Plaza 2 and as car park. Attachment 1 Details of the Company Page 3
Moreover, the Company is going to develop a project, namely Singha Complex, as an office building for rent and rentable space for retail shops (mixed-use commercial complex). Construction work is expected to commence upon approval from the Extraordinary General Meeting of Shareholders No. 1/2015, and commercial operation by quarter 1 of 2018. (3) Hotel business Hotel business and hotel management service are part of the Company s 5-year business plan. The Company has a policy to grow business through joint investment and business acquisition. Currently the Company has two hotels in operation, i.e. Santiburi Beach Resort and Spa, a business transferred to the Company in September 2014 as part of its business integration, and Phi Phi Island Village Beach Resort, which the Company acquired in November 2014 and also invested in Phi Phi Village Asset Management Co., Ltd. which is lessee of land, properties and has the right to manage and receive returns from Phi Phi Island Village Beach Resort. Details of both hotels are as follows: - Santiburi Beach Resort and Spa is a 5-star hotel operating for more than 20 years to date. It is located on Mae Nam Beach, Samui Island, Surat Thani Province, on a total land area of 56 rai 3 ngan 93.7 square wah and offering 78 guest rooms and villas. The hotel is popular among tourists for its quality service standard, and ranks among top accommodations of Samui Island. - Phi Phi Island Village Beach Resort is a 4-star hotel with a private beach. Located on Phi Phi Don Island, Ao Nang, Mueang, Krabi Province, it offers bungalow-type accommodation close to nature and complete with facilities, comprising 112 villas and 5 clusters on a total area of 167 rai 1 ngan 42 square wah. 2.2 Business operation of subsidiaries 1 (1) S Estate Commercials Inter Co., Ltd. ( S Estate Inter ) S Estate Inter was registered as a limited company on July 24, 2015 with a paid-up registered capital of Baht 4,062 million. It is a 99.99% subsidiary of the Company engaging in purchase, sale, exchange, rent and lease of land, buildings and constructions of all types, and operating as a holding company. (2) S Commercials (Singapore) Pte. Ltd. ( S Commercials ) S Commercials was registered as a limited company on August 3, 2015 with a paid-up registered capital of USD 56,796,178. It is a subsidiary of the Company which has an indirect shareholding of 99.99%. It operates as a holding company. 1 Excluding Bhiromphat Co., Ltd. as it has ceased operation since January 5, 2015 and is now under liquidation process. Attachment 1 Details of the Company Page 4
(3) S Estate Commercials Co., Ltd. ( S Estate ) S Estate was registered as a limited company on July 29, 2015 with a paid-up registered capital of Baht 2,080 million. It is a subsidiary of the Company which has an indirect shareholding of 99.99%. S Estate engages in purchase, sale, exchange, rent and lease of land, buildings and constructions of all types, and operating as a holding company. (4) Singha Property Development Co., Ltd. ( SPD ) SPD was incorporated on June 12, 2012 with a paid-up registered capital of Baht 2,562 million, to engage in property rental and development business. SPD is a subsidiary of the Company which has an indirect shareholding of 99.99%. It currently has a vacant land of 11 rai 1 ngan 24 square wah, located on New Phetchaburi Road and Asok Montri Road, Bang Kapi, Huai Khwang, Bangkok. It has planned to develop an office building and rentable space for retail shops (mixed-use commercial complex) on an area of 9 rai 22.75 square wah, which is in the process of requesting approval from the extraordinary general meeting of shareholders. (5) Max Future Co., Ltd. ( MAX ) MAX was incorporated on August 6, 2013 with a paid-up registered capital of Baht 1,500 million, to engage in property for commerce and property for sale business. MAX is a subsidiary of the Company which has an indirect shareholding of 99.99%. It currently has a vacant land of 45 rai 2 ngan 6 square wah, located on Pradit Manutham Road, Nuan Chan, Bung Kum, Bangkok. On August 10, 2015, MAX obtained the entire business transfer from Suntowers Co., Ltd. (6) S Hotel Management Co., Ltd. ( SHM ) SHM was incorporated on September 15, 2014 with a paid-up registered capital of Baht 10 million. It is a 99.99% subsidiary of the Company engaging in management, investment and development of hotel business. (7) S Hotel Phi Phi Island Co., Ltd. ( SPP ) SPP was incorporated on November 24, 2014 with a paid-up registered capital of Baht 10 million. SPP is a subsidiary of the Company which has an indirect shareholding of 99.99%. It operates the business of Phi Phi Island Village Beach Resort. (8) Phi Phi Village Asset Management Co., Ltd. ( PPVAM ) PPVAM was incorporated on July 20, 2011 with a paid-up registered capital of Baht 50 million. PPVAM is a subsidiary of the Company which has an indirect shareholding of 99.99%. It manages the business operation of Phi Phi Island Village Beach Resort and Spa. (9) Nirvana Development Co., Ltd. ( Nirvana ) Nirvana was incorporated on February 1, 2005 with a paid-up registered capital of Baht 878.77 million. It is a 51% subsidiary of the Company. Nirvana engages in property development business especially residential property such as single houses, commercial buildings and town houses. It also offers Attachment 1 Details of the Company Page 5
contractor service for customers who purchase land plots from Nirvana. Currently, Nirvana has five subsidiaries, consisting of one contractor company, i.e. Nirvana Construction Co., Ltd., and four property development companies, i.e. Nirvana Rama 9 Co., Ltd., Nirvana U Co., Ltd., Subthanarin Co., Ltd., and Nirvana River Co., Ltd. Nirvana holds 99.99% of the total paid-up registered capital in each of these subsidiaries. Revenue Structure Revenue structure 2013 2014 6M/2015 Baht mil % Baht mil % Baht mil % Revenues from property business Sales of houses and condominium - - 142.77 35.48 389.62 49.39 Rental revenue 0.84 0.31 3.31 0.82 6.29 0.80 Total revenues from property business 0.84 0.31 146.08 36.30 395.91 50.19 Revenues from service - hotel business 260.76 94.92 219.63 54.58 371.56 47.10 Other revenues 13.11 4.77 36.72 9.12 21.40 2.71 Total revenues 274.70 100.00 402.43 100.00 788.87 100.00 3. Industry Condition Property business Residential property In 1Q/2015, the property business in respect of both vertical and horizontal residential property slowed down. The situation slightly picked up in 2Q/2015, fueled by the expansion of vertical property especially high-end condominiums located along the BTS/MRT lines for speculation purpose viewing that they generate better returns than deposit interest rates offered by banks as the prices of land and condominiums in high potential locations tend to increase continuously. Meanwhile, medium- and lowend condominiums, as well as horizontal property such as houses and townhomes, remained sluggish amid the slow economic recovery, hence delaying customers decision to purchase property. Coupled with high household debt, financial sectors strictly controlled approvals of credit facilities. To conclude, due to the said factors, the property business outlook in 1H/2015 improved only slightly. Attachment 1 Details of the Company Page 6
Figure showing property registrations (unit) in Bangkok metropolitan region during 2005-2015. Units Housing estates Flats and condominiums Own construction 150,000 100,000 50,000-2005 2007 2009 2011 2013 Jan-May 2015 Source: Data on property business indicators as of July 31, 2015 by Bank of Thailand The property business prospects for 2H/2015 are expected to improve slightly as a result of several positive factors, such as government's investments in infrastructure projects, declining interest rates, the advent of ASEAN Economic Community (AEC) and so on, which would help boost consumers confidence and stimulate their spending and investments. However, the expansion would mainly cover the areas along the BTS/MRT lines and the target group is principally high-end customers who have high purchasing power. Office building space In 1H/2015, the total rentable space of office buildings in Bangkok was 8.4 million sq.m., an increase from a year earlier by 86,000 sq.m., which has come from AIA Sathorn Tower and Bhiraj Tower at EmQuartier. The overall occupancy rate has increased by 4.8% per year or 100,000 sq.m. while the vacancy rate has remained at lower than 10%, the same as in 2014. Rental fee rates of office buildings in Bangkok have moved up by 4-7% per year. Average rental fees of Grade A and Grade B office buildings located in the CBD rose from Baht 688 and Baht 553 per sq.m. per month respectively in 2010 to Baht 870 and Baht 687 per sq.m. per month respectively in 2Q/2015. Meanwhile, average rental fees per sq.m. per month of Grade A and Grade B office buildings located outside the CBD increased from Baht 477 and Baht 431 respectively in 2010 to Baht 646 and Baht 593 respectively in 2Q/2015 (according to Bangkok Office Building Report issued by Research Department, CB Richard Ellis (Thailand) Co., Ltd. ("CBRE")). Moreover, newly constructed office buildings in the CBD charged rental fees of as high as Baht 900-1,200 per sq.m. per month. In view of this, office building for rent business still tends to grow and expand further on. Attachment 1 Details of the Company Page 7
Office building for rent business in Bangkok in 2015 is predicted by CBRE to continue its pace with high demand from customers. Therefore, rental fee rates should still rise especially for the office buildings for rent in CBD of Bangkok and the newly constructed ones with convenient locations along the BTS/MRT lines and tollway entrances, the number of which is small. In addition, with the upcoming AEC, foreign firms are looking for locations to establish their offices, resulting in the growth of demand for office buildings for rent. Figure showing take-up, supply and vacancy rates of office buildings for rent in Bangkok 2001-2017 Source: Remark: CB Richard Ellis (Thailand) Supply, take-up and vacancy rates of office buildings for rent in Bangkok during 2015-2017 are forecast figures. Figure showing rental fee rates of office buildings in Bangkok during 2010-2Q/2015. Baht per sq.m. CBD Grade A CBD Grade B Non CBD Grade A Non CBD Grade B 900 700 500 300 Source: Remark: 2010 2011 2012 2013 2014 Q2/2015 CB Richard Ellis (Thailand) CBD refers to areas in Silom, Sathorn, Rama 4, Phloenchit, Witthayu, Asok and Sukhumvit (from Soi 1 - Soi 24). Attachment 1 Details of the Company Page 8
Retail space As of 2Q/2015, retail space in Bangkok and surrounding provinces covered a total area of approximately 7.09 million sq.m., an increase of 1.47 million sq.m. from 2010. Most retail space in Bangkok and surrounding provinces is in shopping malls, community malls, office buildings, etc. Normally, retail space for rent operators will open for space reservation to be made before official opening of their business. Most projects are almost fully reserved. Viewing this, demand for retail space for rent tends to increase continuously, hence enabling the operators to raise the rental fee rates as well. However, in 2015, several major retail space operators have slowed down their projects as the economy has not yet fully recovered and consumers still control their spending. Some shopping malls in Bangkok and surrounding provinces have ceased their business operations and some transformed into small scale businesses. Retail space for rent business in 2H/2015 should continue expanding as there will be new retail space projects covering 0.72 million sq.m. Most of them will be located in outer areas of Bangkok. Investment in retail space projects is in line with demand for rent of retail space as an increasing number of global brands and foreign firms are interested in setting up branches and retail shops in Thailand. With the prospect of rising demand, rental fee rates are expected to go up as well. Rental fee rates of retail space in the central areas of Bangkok connected to the BTS/MRT lines are set maximum at approximately Baht 3,000-Baht 4,000 per sq.m. per month. Meanwhile, rental fee rates of retail space in the outer areas of Bangkok are set at approximately Baht 800-Baht 3,500 per sq.m. per month, or an average of Baht 1,270 per sq.m. per month, according to Bangkok Retail Report 2Q/2015 issued by Research Department, Colliers International ("Colliers"). Figure showing annual available supply and accumulated supply of retail space 2007-2016 (forecasts) Source: Remark: Colliers International (Thailand) Data on annual available retail space during 2015-2016 are forecasts. Attachment 1 Details of the Company Page 9
Figure showing occupancy rates of retail space classified by location during 2014-2Q/2015 Source: Remark: Colliers International (Thailand) Average rental is calculated based on rental of 1 st floor of each project. Hotel business Hotel business in 1H/2015 has been on an improving trend as tourists are increasingly confident in Thailand's political situation. Foreign visitor inflows went up from 11,472,881 in 1H/2014 to 14,861,443 in 1H/2015, or a 29.54% growth. The increased number came mainly from Chinese and Malaysian tourists. European tourists have constantly visit Thailand even though the number of whom has dropped due to the effects of EURO zone's economic problem and sharp weakening of Euro currency. Although during the past period, people infected with Middle East Respiratory Syndrome or MERS were found in Thailand and Thailand being faced with aviation safety issues, no significant impact has been posed on Thailand s tourism and hotel business. For hotel business in the South of Thailand, where the majority of tourists have been European tourists, despite the declining number of European tourists, the overall tourism and hotel business in the South is still promising thanks to the greater inflows of Chinese and Malaysian tourists. Attachment 1 Details of the Company Page 10