CPN takes very seriously sustainable risk management to add value to the relevant parties. It studies and applies COSO ERM 2017 to its context. It therefore formulated risk management policies to develop comprehensive business risk management and turn it into a corporate work culture. CPN constantly analyzes comprehensive aspects of risks, both internal and external, considers the likelihood for each risk, and assesses the direct and indirect impacts of risks on business. To accommodate the findings, CPN maps out concrete work plans in parallel with suitable risk management measures for the prevention, supervision, and control of assorted risks to ease impacts to manageable levels. Below are the key risks with business impacts.
Based on the vision of becoming "the most admired and dynamic regional and retail property developer with world-class rewarding experience", CPN plans to expand its property development business in different asset classes domestically and internationally, especially in Asia and Southeast Asia. The expansion plan encompasses investment, joint ventures and mergers and acquisitions of high-potential businesses. The risks that are associated with CPN's business strategies comprise:
Risks from economic slowdown and political uncertainty
Toward the end of this year, the Thai economy slowed down due to exports that showed signs of deceleration, caused by the trade war between the U.S. and China, which impacted partner countries' economies. Furthermore, the tourism industry that had grown for many years slowed down in the second half of 2018, due to the drastic decline of Chinese tourists. Although private consumption tended to recover in the durable goods segment such as automobile, non-durable goods that represented household consumption remained unchanged. That is why CPN has defined its investment policy in line with prevailing surrounding factors by launching Central Phuket Floresta, which was the extension of an existing shopping complex, in September 2018 and undertaking a facelift on existing shopping complexes, namely Central World, CentralPlaza Chiang Rai and CentralPlaza Chonburi, to satisfy the needs of today's consumers and grow asset values to accommodate long-term business growth.
Because of the economic downturn, CPN had an opportunity to implement joint ventures and M&As with prospective businesses as a channel for its sustainable growth. This year, CPN's major acquisition was the purchase of GLAND (Grand Canal Land Plc.) stocks. It was a property developer of residential and commercial projects and owns many high-potential pieces of land that can be developed for CPN's future growth.
Risks from competition
The overall retail business continues to be highly competitive because of rising demand. New shopping complexes have been launched in high-potential areas in Bangkok and its perimeter as well as tourist provinces or major economic zones. Many mega-projects are expected to launch in the next few years. However, consumers' behavior currently shifts to more varieties of service channels to better serve their lifestyles such as ordering products or food online and doing transactions via mobile banking.
In conducting risk management, CPN conducts market research, analyzes competitors, and carefully investigates project viability. It formulates strategies to develop projects into the Center of Life, offering new functional areas in the shopping complex to create new atmosphere and experience that serves the lifestyles of each target segment. The composition of retail shops and service is appropriately laid out, together with activities that meet the needs of communities. Then, it lines up a digital platform and technological systems to enhance efficiency of communication and services for customers so as to enhance sophistication and create impressive experience. Finally, CPN strives to give higher efficiency and effectiveness to shopping complexes management.
Risks from domestic investment
Another type of risk is risks of developing new shopping complexes, which are capital intensive. The key factors for CPN performance are land acquisition, project planning and design, tenant procurement and customer findings in residential projects.
Many property developers are currently competing to acquire land, especially that located in prime areas. CPN therefore conducts studies and research to identify outstanding locations to develop future projects, acquires land plots before the areas become urbanized, and purchases large plots of land. This helps CPN purchase land at a reasonable price and support its future business expansion toward mixed-use project development, which combines shopping centers, office buildings, hotels and residential areas.
In project planning and design, CPN peruses and surveys information on target groups, direct and indirect competitors, and other key marketing information for market positioning and winning strategies before analysis of viability and investment cost-effectiveness. Finally, CPN tables its findings for committees at the management level and director level to approve before such information finds way into actual design, development, and construction.
CPN has been developing new shopping complexes and expanding branches while adhering to key risk management guidelines as follows: 1) Expanding the tenant base by acquiring new tenants and building capacity of existing tenants by valuing them as business partners that will jointly enjoy sustainable growth. Sales and Tenant Relations teams regularly monitor retail outlets' performance to formulate plans with the tenants, give advice, and support retail outlets' operations in different aspects, such as hosting training sessions and seminars to offer new business ideas and perspectives. CPN also holds co-promotion activities with partners such as credit cards and The 1 Card and listens to issues or suggestions to further improve the efficiency of tenant service. 2) When new shopping malls are open for service, CPN regularly monitors and evaluate their performances such as traffic, lease rates and project's returns compared with targets. If the performance of any shopping malls does not achieve targets, CPN's Asset Management team and Sales and Marketing team will conduct analyses to further propose suitable corrective measures.
Based on current competition in the residential markets marked by supply gluts and customers' spending with caution as well as the lack of encouragement measures issued by the public sector over this year, one sees a slowdown in the residential market. CPN therefore comprehensively conducted studies and formulated plans for all project development, from survey, customer and rival research, project design, construction administration, sale, to after-sale services. It also monitored key indicators such as bookings, customers' payment history, approval for customers' loan applications and waiting lists of customers interested in the projects. The construction of condominium projects in Chiang Mai, Khon Kaen and Rayong sold in 2016 was completed and achieved the transfer volumes as expected. Condominium projects in Nakhon Ratchasima, Chiangrai and Chiangmai 2 located in the area of shopping mall were resounding successes, with 100% booking in all three. This year CPN developed two additional projects, one condominium project on Paholyothin 34 Road and one detached-house project on Barom Rachachonnanee Road, with positive response.
Foreign Investment Risk
CPN has expanded its investment to the Southeast Asian region to enhance opportunities for long-term growth and geographically diversify risks. Currently, it is developing its first project in Malaysia and undertaking feasibility studies for investment in other prospective CLMV countries such as Vietnam.
In supporting its foreign expansion strategy, CPN conducted studies and research on various aspects, for example, customers, competitors, marketing, social environment, culture and applicable laws; applied useful knowledge and information from subsidiaries of Central Group to analyze the feasibility and returns on investment; and submitted analysis results to the Board of Directors for consideration before making decisions on investment. Furthermore, CPN has approached business allies with competency and experience in property development in each targeted country, to jointly develop businesses and strengthen each other's operation. The Central i-City in Malaysia, for example, is a joint venture between CPN and a subsidiary of Malaysia's I-Berhad, an eminent property development company listed on Malaysia's Bursa Stock Exchange. The joint venture has been set up to invest in shopping mall development as part of mixed-use projects, incorporating office space, hotel and residential areas.
Since foreign investment is a new area, CPN conducted business with caution and restructured the organization to assign units responsible for closely monitoring and following up with the project progress so that CPN could come up with risk management plans and timely solve problems.
Changes from external factors and corporate strategies drive CPN to adapt to major changes as seen below:
- Focusing on growth, the corporate strategy adjusts the current business pattern and seeks new business opportunities such as joint ventures, mergers and acquisitions and foreign investment. CPN's adaptation to those changes is the key factor for the project success and corporate reputation. As a result, CPN has ensured its preparedness by adjusting policies, implementing management restructuring, reviewing work flow, and developing employees' knowledge and ability to serve the Company's growth.
- Risk of adaptation to IT disruption significantly affects CPN's business. To adapt itself, CPN has to apply technologies to directly and indirectly optimize its competitiveness. Furthermore, it has to seize new opportunities by deploying new technologies such as Big Data Analysis, AI Technology, Internet of Things and Augmented Reality in tool development to improve its services and operation and better serve the needs of customers and partners. It also enhances employees' knowledge, capacity and adaptability to be ready for changes. The key strategy in 2018 will be carried on in the following year.
Human Resources Risk
Human resources are vital to corporate success. CPN's objective is to do a good job of human resource management, have a sufficient and capable workforce in line with business expansion, and keep personnel happy at work and always ready to dedicate to the creation of decent work for CPN. Admittedly, the present labor market is highly competitive, making it critical for CPN to take personnel recruitment and retention of quality personnel very seriously. Below are mitigating measures.
- Recruitment of competent personnel from assorted channels. Internally, for instance, CPN investigates job rotation, transfers to hometowns, and promotion, and externally CPN uses social media and websites, searches leading universities' websites, and launches the Friend Persuades Friend, among others.
- Designation of key positions in various functions to groom successors. This move would enable such functions to continue uninterrupted when positions become vacant due to retirement or resignation.
- Personnel competency development. CPN commands concrete methods, including career path planning, individual development planning, and greater synergy with the Central Group in personnel development, including joint curriculum development and ongoing sharing of expertise and experience among affiliates' executives.
- Measures designed to retain personnel through ongoing relations activities between employees and CPN, including On Boarding activities for newcomers, New Year Greeting Communication Day, CPN Volunteers, Family Day, and Sport Day. An annual employee survey, called Power of Voice, provides findings and recommendations that find ways into improved processes and work environment. One of CPN's sustainability missions clearly focuses on employee en gagement and their quality of life.
Cyber Security Risk
CPN recognizes cyber threats as a result of dependence on more and more technologies and digitalization. This dependence breeds more information thefts and cyber-attacks, affecting CPN's business continuity and reputation. CPN therefore issued several risk management measures. For system security, CPN has been developing and enhancing computer systems such as hardware, software and computer network to protect them from new types of attacks. For personnel, CPN created awareness of cyber threats, communicated with employees via several channels such as educating them via e-mail and the CPN newsletter and held a seminar instructed by third-party specialists. To deal with potential incidents, CPN adjusted its business continuity plan (BCP) and disaster recovery plan to align with the environment and computer systems in use. It annually implements a BCP drill and puts cyber insurance in place to mitigate the damage in case of incidents.
CPN strictly observes applicable laws and regulations to ensure a compliant, reliable and transparent conduct of its business operations, Compliznce risks can be summarized as below:
Compliance risk concerning environmental and safety laws
Under CPN's sustainability policy, which emphasizes environmentally friendly development and management of shopping complexes to forge a safe atmosphere, the management system on safety and environmental standards is applied as guidelines to ensure that related units strictly observe CPN's policies and applicable laws, with preparation for future laws. Outside experts were hired to review and provide recommendations to further ensure that CPN's practices are correct and appropriate.
Fraud and Corruption Risk
Committed to operating its business sustainably, CPN focuses on good corporate governance and an effective internal control system. Besides defining the clear Anti-corruption Policy and enforcing strict compliance, CPN has joined the Collective Action Coalition against Corruption (CAC) and certified that it formulated an anti-corruption policy and guidelines that fully conforms to CAC's criteria. CPN also prepares and communicates a Code of Conduct to suppliers and contractors to emphasize its standpoint. (See details in the SD section.)
In prohibiting and managing risks arising from corrupt practices, CPN has set up measures to control and monitor key work processes that are at risk of corrupt practices, with an Internal Audit team conducting risk assessment and spot-checking to reaffirm the correctness, honesty and transparency of these processes, along with prohibiting risky behavior. Communication channels are also opened for stakeholders and whistleblowers to voice their complaints or recommendations directly to the Audit Committee or the President. A committee will be appointed to consider and investigate complaints through a systematic, transparent and accountable process to ensure confidence and trust in its fair investigation process for all related parties.
CPN's policy is to maintain continued growth contributed by shopping complexes, residential, and other businesses that carve suitable investment opportunities. To achieve this objective, CPN must be able to handle the financial risks listed below.
CPN implements a prudent monetary policy regarding capital expenditure. Comprehensive investment analysis is undertaken for each project so that only high-potential projects are submitted to the Investment Committee for meticulous consideration and approval. Regarding the sources of fund, CPN maintains its capital structure with a low debt-to-equity ratio (up to 1) and applies appropriate financial instruments in sourcing capital, such as the preparation to use a real-estate investment trust (REIT) as an alternative funding source.
After its commercial launch, CPN constantly assesses the returns on each project and modifies strategies so that the project would achieve its targeted returns. These measures contribute to reducing financial risk and enabling CPN to maintain a robust financial status, thus increasing CPN's flexibility in sourcing sufficient funds for future business expansion at appropriate levels of finance costs and rates of return on investment.
CPN's credit-risk prevention policies include 1) collecting deposits from tenants, 2) terminating leases for tenants who have defaulted on rents for a long time and accelerating coordination to negotiate and find solutions with them, and 3) closely following up debt collection so that most tenants pay their rents in time. In case of overdue payments, related units will cooperate to effectively deal with default payment.
CPN's core business connects with properties and diverse groups of stakeholders, for example, customers who purchase products and services, tenants and surrounding communities. These groups highly expect that CPN's operation will ensure their safety. CPN therefore recognizes and commits itself to conducting risk management for safety from dangerous threats, which include:
Natural Disaster Risk
Global warming is causing increased recurrence of abrupt changes in weather conditions with severe impacts. Therefore, many areas of Thailand faced natural disasters such as thunderstorms, floods and earthquakes, which pose major risks to CPN's properties and services.
CPN requires each shopping complex to assess its naturaldisaster risks because natural disasters vary in different areas. For example, the North is more prone to thunderstorms, hail storms and earthquakes, while flash floods and monsoons are more common in the South. CPN also put in place risk mitigation measures, such as the requirement to constantly inspect the strength of buildings and facilities, together with preparation of mitigation actions and tools. The latter includes dredging of drainage passages, adding water pumps at flood-prone shopping complexes, finding alternative water sources to alleviate drought, and inviting experts in building structures to assess earthquake impacts and provide recommendations on how to handle future incidents. CPN also reviews and prepares a crisis management plan to cover more scenarios, with regular drills to ensure personnel's crisis preparedness.
Statistics on natural disasters and the solution outcomes are systematically monitored and collected as incident cases for analysis to improve response plans and the effective management of these plans before reporting them to the Risk Management Committee for acknowledgment and consideration.
Risk arising from Unrest
Incidents of unrest or terrorism currently pose critical threats to international communities no matter where they are. Recognizing such threats, CPN undertakes the following risk management measures:
- Coordinate and monitor information provided by government agencies or relevant bodies for an accurate and timely assessment of each situation. The color-code system, which indicates the severity of situation on a real-time basis, is utilized to communicate with relevant parties for proper preparation and responses under specified guidelines.
- Provide relevant employees with knowledge and training to be alert and capable of observing unsafe incidents, with regular conduct of crisis response drills.
- Install an adequate number of modern safety equipment, such as Walkthrough Metal Detector and CCTV camer as, which effectively provide detailed recording of incidents and contribute to suppression of unrest incidents.
Other Crisis Risks
Recognizing the importance of business continuity management, CPN's Business Continuity Management Committee (BCM Committee), chaired by the President, is responsible for establishing policies and supervising formulation of business continuity plans, together with annual business continuity drills for further improvement.