RESEARCH & INVESTMENT ADVISORY PHA LAI THERMAL JSC - PPC … · Business Overview: PPC has stable output and revenue of about 6bn KWh and VND 4,000bn in recent years. The company

No part of this material may be (i) copied, photocopied or duplicated in any form by any mean or (ii)

redistributed without the prior written consent of Saigon Securities Incorporation.

1

SUMMARY

Profile: Pha Lai Thermal Power Joint Stock Company was previously known as a

dependent unit of EVN, which was established in 1982. With total designed capacity

of 1040MW, PhaLai Thermal Power JSC generates average 6bn KWh/ year,

accounting for 8% of total electricity in Vietnam. PPC is now the largest coal fired

power plant in Vietnam with most of input of coal bought from TKV.

Business Overview: PPC has stable output and revenue of about 6bn KWh and

VND 4,000bn in recent years. The company targeted to generate 6,250KWh in 2011,

and revenue of VND 4,080bn. By the end of H1/2011, PPC generated 3,224KWh,

sold 3,106mn KWh to EVN. Input for the plant is mostly Coal and Fuel Oil bought at

favorable price of about 50% market price. However, increasing coal price and new

PPA signed with EVN, effective from 2010 to 2013, are putting burden on profit

margins of PPC.

Financials: Since 2010, gross profit margin and other profit margin declined

significantly since new formula to calculate electricity price applied and increasing

other costs such as maintenance cost and labor cost.

Coal/FO and depreciation account for 60% and 20% of COGS, respectively. While

input price is increasing, depreciation is declining since Plant 1 was fully depreciated

in 2010 and Plant 2 will be fully depreciated in 2015, increasing profit margin by 13-

15%.

Most of long term loan is ODA loan, amounting to more than JPY 30bn, or 6,000bn

VND, resulting in VND 800-900bn forex loss/year, doubling financial income although

total investment and cash reaches VND 5,500bn.

Strengths/Opportunities Risks/Weaknesses

One of 3 largest power plants in

Vietnam with capacity of 1040MW.

Stable output with more than 6bn

KWh/year

Low depreciation expense, since

PP1 was fully depreciated and PP2

is expected to fully depreciated in

2015

Increase in input price will be

transferred to electricity price.

Electricity price is quickly finalized

each year making planning easier.

High debt in JPY, creating

significant unrealized forex loss

each year.

Low return from cash and financial

investment.

Highly controlled by EVN, with 3 of

5 BOD members are

representatives of EVN. Electricity

price is likely to be decided by

EVN, instead of negotiation.

Investment conclusion:

PPC is one of the largest thermal plants in Vietnam with high annual output. Even the

revenue is high, gross profit did not cover forex loss in recent year and the situation

may continue if VND depreciation against JPY surpass 15%/year. In short and mid-

term, we do not see much upside potential for PPC since its troubles still persist.

However, in the long term, when the VND is quite stable and its fixed asset is fully

depreciated, profit margin of PPC will be improved significantly. At current price, we

recommend HOLD for this stock

STOCK INFO – PPC (HOSE)

2011 Target price (VND)

Current Price on 15 Jul (VND) 6,800

Current Share Outstanding (m) 326,235,000

Market Cap (VND Bln ) 2,251

State Owner Ratio (%) 67.82%

Foreign Owner Ratio (%) 17.21%

PPC ’s volume & Price Performance

Source: Reuters, SSI Research

INCOME STATEMENT Q1/2011 2011F

Net sales 1,152,892 3,930,981

COGS 964,074 3,248,928

Gross profit 188,818 682,053

Selling expense - -

G&A expenses 18,777 61,075

Total operating expenses

18,777 61,075

Operating profit (EBIT) 170,041 620,978

Financial income 104,012 338,064

Financial expense 82,885 948,772

Interest expense 60,215 215,950

Gain/Loss from financial activities

21,126

(610,708)

Other income 1,061 20,834

Other expense 889 12,972

Gain/Loss from other activities

172 7,862

Earnings before income tax provision

191,340 18,133

Income tax provision 20,231 1,360

Net earnings 171,108 16,773

RESEARCH & INVESTMENT ADVISORY

ADVISORYTƯADVISOR

Kien Nguyen

Research Analyst

[email protected]

PHA LAI THERMAL JSC - PPC SECTOR: ULTILITIES

INITIATING REPORT 18.07.2011

mailto:[email protected]

RESEARCH AND INVESTMENT ADVISORY


redistributed without the prior written consent of Saigon Securities Incorporation 2

Electricity Industry Overview:

Commercial output growth doubles GDP Growth

Source: GSO

It is estimated that every 1% growth in country‟s GDP will generate 2% growth of demand for electricity in Vietnam.

Over the period of 2004-2010, the actual sales for electricity grew on average by 13.7% while the average GDP

growth over the same period was 7.3%. Average annual growth in the coming year is expected at 15-17%.

Source: GSO

EVN contribute most to national electricity network

In 2010, total power output amounted to 91.6bn KWh. Of which, EVN generated 59.1bn KWh, accounting for 65% of

total output. Previously, EVN generated more than 75% of total output, indicating that IPPs and electricity import are

increasing their contribution to the national electricity network. This year, we expect output from IPPs and import will

surpass one from EVN.

Thermal and Hydro Power Plants are main source of electricity in Vietnam

Source; Master Plan VI

7.7% 8.4% 8.2% 8.5%

6.2% 5.32%

6.78% 7%

13.7% 13.2% 14.3% 13.8%

12.8% 13.5% 14.5% 15.1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2004 2005 2006 2007 2008 2009 2010 2011F

GDP growth

Commercial power output growth 14.6 26.6 53.5 93

227

363

484

11.2 22.4 45 81

210

340

450

0

100

200

300

400

500

600

1995 2000 2005 2010 2015 2020 2025

Production

Sales

bn KWh

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011F

bn

kW

h

Chart 1: Power production

Total power outputEVN's productionPower bought from IPPs & China

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011F

bn

kW

h

Chart 2: Commercial power output

Commercial power output

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000

2010

2015F

2020F

2025F

Hydro powerGas thermal powerCoal thermal powerOil thermal powerNew power sourcesImported powerNuclear power

MW




Thermal power now accounts for more than 50% of total electricity output, while Hydro power contributes 36%. Hydro

power portion is expected to decline next decade, be replaced by new sources of electricity such as renewable

sources. Hydro power output is heavily impacted by the weather and rainfall, especially in the North of Vietnam.

On the other hand, Thermal power output depends on total time that the generators operate in a year. The profit for

these generators depends on the prices of input (including coal, FO and DO), depreciation and maintenance cost of

the generators. Currently, diesel price is at 15,000 VND/liter, which can produce only 5 kWh. Thus, depending on the

production cost of oil fired power generation, EVN would make a loss of around 3,000 VND/kWh if used oil & gas fired

power plants (production cost would come to around 3,300-4,300 VND/kWh vs. average retail price of 1,060

VND/kWh).

Power purchased from China is also expensive, at 6.5 US cents, plus 10% import tax and transmission cost, the total

cost of around 1,500 VND/kWh, which makes Vietnam retail electricity power price about 40% than electricity power

purchased from China..

Industrial sector is the largest consumer of electricity

Industrial and residential usage account for about 35.9% and 53.7% of the total demand, respectively, followed by

services sector (businesses, hotels and restaurants, etc.) accounting for 4.2% of the demand. Agriculture, forestry

and fishery in Vietnam are rather labor than capital intensive; thus they are not major users of electricity. While the

service sector has maintained stable, agriculture‟s sector‟s share has fallen.

Electricity market in Vietnam is still a monopoly market:

At present, Electricity of Vietnam Corporation (EVN), a state-owned enterprise with more than 50 subsidiaries, holds a

monopoly in most of the sub-sectors: transmission and distribution of the electricity. EVN is responsible for supplying

the electricity required for continued economic development and the consumption need of the people, using power

tariffs approved by the Government. EVN is also responsible for investment into power generation and network

expansion to meet the country‟s power demand. This is the traditional model of the electricity market. The model limits

competition amongst electricity generators, and their motivation to improve business effectiveness, and create a

barrier for foreign investors to invest in the industry.

However, the decision making process involving electricity sector is rather complicated, as indicated in the diagram

below. EVN is under the management of Ministry of Industry and Trade (MOIT) but a number of decisions are being

managed by the other ministries. The Prime Minister gives the final approval of policies and guidelines.

54%

4%

36%

6% Industrial sector

Service sector

Residential usage

Others




Organizational structure of the sector

*In rural areas EVN sells power to local private companies and then these companies will sell to households

Source: EVN, Decision 163/2007/QD-TTg, SSI research

Electricity Market Roadmap: Long way to go

In 2004, the Vietnamese national assembly passed the new electricity Law that outlines the development of a

competitive electricity market in three phases (1) the first phase focuses on creating competition in power generation

(2) the second phase introduces competition for bulk supply of electricity (wholesale) include supply directly to major

industrial customers (3) the final phase involves competition at the retail level. MOIT anticipates this market

restructuring process may take as long as 20 years.

Ministry of

Trade and

Industry (MOIT)

Policy making

Guidelines

development

Ministry of Home

Affairs (MOHA)

Involved in issues

related to

appointing,

rewarding or

Ministry of Finance

(MOF)

Supervise execution

of goals, functions

assigned to EVN by

the PM

Ministry of

Planning &

Investment (MPI)

Involved in

implementing EVN‟s

goals, strategy, long

Electricity Regulatory

Authority of Vietnam (ERAV)

Submit to MOIT: regulations on

the process of establishing

retail electricity price

Promote electric power reform

and participating in the

formulation of electric power

master plans

Prime Minister

Final approval of policies and

guidelines

EVN

- Generation: 65%

- Transmission: 100%

- Distribution*: ~100%

Independent

power

producers (IPPs)

- Generation: 30 %

- Including local

and foreign

Sell

power to

EVN via

PPAs

Industrial &

commercial

customers

Services customers

Urban and rural

households

Imported

- Power imports from China: 5%




Source: Master Plan VI

Recently, We noticed that a series of decisions related to electricity sector have been passed since the beginning of

the year to pave way for the gradual implementation of competitive power market, starting with the competitive

generation power market (Competitive generation power market is the first level of the competitive power market, with

many generating units selling power to a single wholesale buyer).

The following are the summary of these documents:

Circular 41/2010/TT-BTC: stipulates pricing methodology and procedures to establish and issue frame for whole sale

electricity price and the passage of Power Purchase Agreement (PPA).

Decision 40/QD-DTDL issued 16 May 2011: provides the classification benchmark for thermal power generating

units and for ceiling price calculation for these units. This is considered guidance for thermal power companies in

calculating their ceiling price to be offered in the competitive generation market.

Decision No.53/QD-DTDL on the procedure to “mimic” the competitive generation market, which would gradually

come into operation in the coming time starting with an experimental period in July 2011.

Shortage of capital due to unattractiveness

Electricity shortage has been at about 3% for the last 5 years. EVN estimates that it need average USD 3bn/ year for

new power plants and electricity infrastructure from 2011 to 2015.

Since electricity price sold to EVN is much lower than in other countries in the Region like China, Cambodia and Laos,

the electricity industry does not attract foreign investors. The electricity sector also encountered lots of difficulties due

to lack of capital in 2010. The actual investment in the sector in 2010 reached only 45 trillion VND, fulfilling only 77%

of the government‟s target and declined 6% compared to 2009. This also resulted in the delays in power project




implementation and added the burden to Vietnam electricity sector already suffering shortage of electricity due to

adverse weather conditions.

Source: GSO

PPC business Overview

Company Profile

Pha Lai Thermal Power Joint Stock Company was previously known as a dependent unit of EVN, which was

established in 1982. PhaLai Thermal Plant includes PhaLai 1 Plant (PP1), including 4 GUs operated since 1980s, and

Phalai 2 Plan (PP2), including 2 GUs operated since 2001 and 2002. With total designed capacity of 1040MW,

PhaLai Thermal Power JSC generates average 6bn KWh/ year, accounting for 8% of total electricity in Vietnam. PPC

is now the largest coal fired power plant in Vietnam with most of input of coal bought from TKV.

On 19 May 2006, the company was officially listed on HNX under ticker PPC, and then moved to HOSE since 26 Jan

2007.

Ownership Structure

Source: PPC’s 2010 annual report

25

36 38

48 45

100%

81%

97% 77%

47%

6%

25%

-6%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

0

10

20

30

40

50

60

2006 2007 2008 2009 2010

trill

ion

VN

D

Actual investment % of the year's target YoY growth

11%

51%

12%

3%

1%

17% 5% VN Inds

EVN

EVNFC

ABB

Foreign Inds

Foreign Insts

other VN Insts




Stable output and Revenue

PPC includes 2 groups, Pha Lai 1 plant (including 4 GUs operated from 1980s) with total capacity of 440MW and Pha

Lai 2 plant (including 2 GUs operated from early 2000s) with total capacity of 600MW.Six 6 turbines with capacity to

generate average 6bn KWh/year ; however, Pha Lai Plant actually generated nearly 7bn KWh in recent years.

Source: PPC, annual reports

Thank to stable output of PPC in recent years, PPC revenues have remained around VND 4,000. Revenues not only

depend on quantity of output, it also depends on the electricity price agreed between PPC and EVN each year under

the PPA. Since 51% of PPC is held by EVN, price negotiations do not likely favor PPC side. In 2011, PPC targets to

generate at least 5.4bn KWh, or 6,250mn Kwh in the best case, and revenues of VND 4,080.4bn. By the end of June,

PPC generated 3,424mn KWh, sold 3,106mn Kwh to EVN. We see that the output of 6bn KWh in 2011 is achievable.

For thermal power companies in general, and for PPC in specific, there is a mechanism for calculate the electricity

price paid by EVN. The formula applied to PPC as follow (the formula applied since Jan 2010 to 2013).

+ + )

Source: PPC

In which:

Stand for New contract(2010-2013) Old contract(2006-2009)

Electricity price at the month i 698.74 VND/KWh 581.9 VND/KWh

Fixed cost stated in PPA 319.52 VND 368.69 VND

Floating cost stated in PPA 379.22 VND 213.21 VND

Coal portion in floating cost 94.06% 93.73%

FO portion in the floating cost 5.94% 6.28%

Average bought price of coal in the month I, excluding VAT

590,000 VND/Ton 332,633 VND/ton

Average bout price of FO in the month i , excluding VAT

11,868,180 VND/ton 4,777,300 VND/ton

Source: PPC

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

3,600

3,650

3,700

3,750

3,800

3,850

3,900

3,950

4,000

4,050

4,100

4,150

2007 2008 2009 2010 2011

Target Actual Revenue

bn

VN

D




For example, in June 2011, Coal price was 626,000VND/Ton and FO price was 15.04mn VND/Ton.

Therefore, PC in June 2011 was:

+ + )

= 319.52 + 379.22 * (94.06% * + 5.94% * ) = 726.52 VND/KWh

Input for electricity production

Most of input for PPC includes Coal and Fuel Oil(FO). Coal is bought from TKV, which has monopoly position to

exploit coal in Vietnam at favorable price of about 50-60% to companies in other industry and export price. Pha Lai

Plant has a good location for coal transportation by both the railway and waterway, closed to Vang Danh and Mao

Khe Mines. The coal price has increased steadily recently, but PPC has been able to transfer increases in input costs

to price of output sold to EVN, so the change in input will not impact gross profit of PPC. Coal price increased by 27-

48%, depending on types of coal, in Mar 2010 and increased by 5% in March 2011.

PPC Financial Analysis

Profitability Ratios: Profit Margin declined

2008 2009 2010 Q1/2011

Gross Profit Margin 28%

29%

17%

16%

EBIT 26%

27%

16%

15%

EBITDA 51%

48%

34%

30%

SG&A expense

2%

2%

2%

2%

ROA -2%

8%

0%

1%

ROE -6% 21% 0% 0%

Although EVN allow PPC to transfer input price increase into output price increase through the formula (mentioned

above). Gross profit margin declined significantly from 29% in 2009 to only 17% in 2010 and 16% in Q1/2011. The

reasons for that include:

In 2010, PPC applied new formula to calculate the electricity price sold to EVN. It is clear that the relative value of

electricity price (electricity price to input price) declined when new formula applied.

Fixed cost (depreciation expense) account for large portion of COGS, when revenue fall (as in 2010) the profit

margin declined accordingly.

In addition, the other reasons for the fall may include increasing labor cost, maintenance cost.

Break-down of COGS in recent years




Source: PPC’s financial reports

Coal and Fuel Oil (FO) accounted for 59.12%, 63.2% and 61%, of cost of goods sold in 2009, 2010 and the first

quarter of 2011, respectively. We see that input costs account for 52% of revenues in 2010 and Q1/2011, when the

new formula for electricity price was applied. This confirms that increase in input price (both coal and FO) is offset by

increase in output price.

The other big contribution to COGS is depreciation expenses of 6 Generation Units (GUs) run by PPC. The four first

GUs operated in 1980s and were fully depreciated, while the GU No 5 and 6 started operation in 2000s, and will be

fully depreciated in 2015.

In 2010, depreciation expense was about VND 790.4bn, which is VND 86bn lower than that of 2009. We expected

that the depreciation expense in 2011 will stay around VND 700bn since Power Plant 1 has been fully depreciated.

The Power Plant 2 is expected to be fully depreciated by 2015, thus profit margin will increase significantly by about

13-15% by that time,

The third largest expense in COGS is maintenance cost. Maintenance cost is the expense for annual maintenance of

GUs, usually in summer (when the hydro power plants operate at their high capacity). Maintenance expense can

range from 60-80bn/GU. We expect that the maintenance expense in 2011 may reach VND 250bn since GUs No 2, 4,

and 5 are under maintenance.

ROE and ROA were highest in 2009, since the net income in that year amounted to VND 892bn, thanks to low forex

loss and high gross profit margin. In 2010 and expected in 2011, ROE and ROA will be closed to nil since we does

not expect JPY will depreciate against VND. At current JPY/VND= 255.97, PPC is incurring a forex loss of more than

VND 900bn.

Financial Operations: Net loss as income covers only a half of expense

Financial expense is the key indicator to bottom line

Financial expenses, which mostly include interest costs and forex loss, are main reasons for low profit in 2010. Loss

from financial income ate up 25% and 90% of gross profit in 2009 and 2010 respectively. Under the situation when

gross profit is unlikely to improve significantly, forex loss is still the biggest concern for PPC.

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

2009 2010 Q1/2011

Others

Materials

Labor cost

recurring repair

Maintenance

Depreciation

Coal and FOVN

D




To fund construction of Pha Lai 2 Power Plant, the company borrowed a ODA semi-annual installment loan from

JBIC in 2006.The interest is fixed at 2.43% charged by JBIC, plus 0.2%/year charged by EVN. The annual principal

payment is 1,124,639,158 JPY. The interest is calculated on outstanding loan. The loan will mature by 20 March

2028. The balance of the loan by the end of 2010 was ¥30.6bn, or equivalent to VND 6,910.6bn. With the high

balance of the loan, 10% depreciation of VND to JP Yen, PPC will make loss of more than VND 600bn each year. We

can see that, the depreciation of VND against JPY and Forex Loss in recent years have been quite consistent.

Source: SBV and PPC’s audited reports

Financial income is not proportional with abundant cash in hand.

PPC has significant amount of cash on hand, with more than VND 1bn cash and cash equivalent and more than VND

2bn short term investment. In addition, PPC has more than VND 2bn long term financial investments. The total

investment reaches about VND 5,500bn, covering 80% of long term loan. However, since the PPC‟s long term debt is

ODA funded and EVN needs capital for investment, it does not use cash to pay loan at that time. Financial income

generated from all these investment covers only a half of forex loss. It indicates the low return of the financial

investments.

4.5%

29.9%

8.5%

12.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2007 2008 2009 2010

Forex Loss and VND depreciation against JPY

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

2007 2008 2009 2010

Long term Loan Short term loan Cash on Hand




Source: PPC’s Q1/2011 financial report

The two largest long term investment are investments in Quang Ninh and Hai Phong Power Plants, which amounted

to amount to VND 1,660bn, accounting for 65.1% of total long term investment. As other power plants, these two

plants have not yet generated dividend for PPC since they are at the first stage of operation. It can partially explain for

low return from investment of PPC.

Investment Portfolio Value(VND) Ownership Percentage

1. EVNFC 70,800,000,000 10%

2. HaiPhong Thermal Power Plant 1,056,195,432,500 19.4%

3. Thermal Power Plant Maintenance Service Co 7,500,000,000 15%

4. QuangNinh Thermal Power Plant 817,295,117,400 15%

5. BuonDon Hydro Power Plant 50,250,000,000

6. Equity Investment 46,498,000,000

7. Fixed income investment 318,151,962,500

8. Long term loan 350,000,000,000

9. Other investment 200,000,000,000

Total 2,916,690,512,400

Other investment include bonds of BIDV, HBB, EVN, EVNFC… with interest rates ranging from 10% to 14%/year.

Working capital management

2008 2009 2010 Q1/2011

Op. Working capital ratio

96%

95%

97%

86.0%

Days‟ receivables

87.6

72.4

100.1

135.2

Days‟ inventory

72.7

70.0

70.2

61.8

Days‟ payables

17.4

17.7

17.7

11.3

Cash conversion cycle(CCC) 143 125 153 186

Operating working capital, days of inventory and payables have remained stable in recent years. However, days of

receivables have increased from 72 days in 2009 to 100 days in 2010 and 135 days in Q1/2011.This is due to

increased accounts receivable from EVN. Receivables increased by 30% in 2010 and 49% in Q1/2011 only. The

situation will still persist for long time since EVN is claiming that it in the difficult situation and shortage of capital. The

high receivable creates a material loss of cost opportunity for PPC.

3%

37%

0% 28%

2%

0%

11%

12%

7% EVN International

HaiPHong Thermal PowerPlant

Thermal Power PlantMaintenance Service Co

QuangNInh thermal PowerPlan

BuonDon Hydro Power Plant

Equity Investment




Liquidity Ratios:

2008 2009 2010 Q1/2011

Current Ratio

471%

566%

548%

588%

Quick Ratio

416%

495%

474%

507%

Cash Ratio

51%

153%

152%

78%

PPC always ensure a high liquidity balance sheet. However, in Q1/2011, cash ratio fell to below 100% since more

than VND 200bn cash on hand was lent to EVN under long term investment.

Leverage ratios

2008 2009 2010 Q1/2011

Liabilities-to-equity ratio 214% 172% 210% 193%

Debt-to-equity ratio 195% 160% 197% 183%

Net debt to equity ratio 180% 128% 160% 166%

Interest coverage -175% 608% 103% 418%

PPC is highly leveraged since long term debt amounted to more than VND 6,000bn while total equity is just nearly

VND 4,000bn; just liability and debt are nearly double equity. PPC is the most leveraged company in listed electricity

companies, such as TBC (5%), VSH (21%), BTP(182%), TMP(65%), SJD(91%). Profit even did not cover interest

expense in 2008 and just covered interest expense in 2010. Although interest coverage is high in Q1/2011, the profit

has not taken forex loss into account.

PPC’s Long term story

PPC does not have the long term plan but keep its all activities stable in next 2-3 years. The company maintains the

current long term investment. Electricity supply will be kept above 6bn KWh each year. With indicated formula to

calculate electricity price, we expect that gross profit will be stable at least until 2013. Investment in Hai Phong and

Quang Ninh Power Plants is unlikely to generate dividend for PPC in mid-term. Therefore, profit of PPC will depend

on following factors:

More stable VND/JPY forex. We estimate that if VND depreciation against JPY each year is below 12.5%, PPC‟s

bottom line may be positive.

Stable or declining AR to EVN since longer days of AR will limit financial income of PPC from short term deposit.

Since 2014, PPC will be more profitable thanks to following factors;

PP2 will be fully depreciated by that time, adding more than VND 100bn to EBIT of PPC.

Competitive electricity market created with higher chance for the company to improve profit margin.

There is a little chance that EVN may reduce its ownership in PPC. The lower EVN‟s holdings, the higher

bargaining power for PPC.




Valuation and Investment recommendation

Strengths/Opportunities Risks/Weaknesses

One of 3 largest power plants in Vietnam with

capacity of 1040MW. Stable output with more than

6bn KWh/year

Low depreciation expense, since PP1 was fully

depreciated and PP2 is expected to fully depreciated

in 2015

Increase in input price will be transferred to

electricity price. Electricity price is quickly finalized

each year making planning easier.

High debt in JPY, creating significant unrealized

forex loss each year.

Low return from cash and financial investment.

Highly controlled by EVN, with 3 of 5 BOD members

are representatives of EVN. Electricity price is likely

to be decided by EVN, instead of negotiation.

All GUs is run at full capacity to meet shortage of

electricity, while they need to be maintained.

Valuation: We use Price multiples and EV/EBITDA methods to since Cash flow and earnings of PPC are highly

dependent on financial expense.

P/BV P/EBIDA EV/EBITDA with regional peers

Companies P/BV P/EBITDA

Peers Company Profile EV/EBITDAA

DADADA GUIZHOU QIANYUAN

POWER CO-A(China)

Operate and construct coal fired and

hydro power plants

11.57

KSK ENERGY

VENTURES LTD(India)

Develop power plants , offer source of

electrical power to international and

domestic business

10.09

JAIPRAKASH POWER

VENTURES

(India)

Generate electricity , operate a private

sector power plant

7.75

Average EV/EBIDA 9.80

PPC „s EBITDA(VND mn) 930,398

83,799

PPC‟ EV(VND mn) 9,117,900

Less Net Debt(VND mn) (6,177,728)

)

Less Preferred stock -

Less Minority Interest -

Firm‟s market capital(VND mn) 2,940,172

No of shares 326,235,000

Fair value(VND) 9,012

VSH 0.69 4.34

TBC 0.95 6.61

TMP 0.9 2.97

SJD 0.63 1.62

KHP 0.66 0.93

BTP 0.36 0.72

SBA 0.58 1.78

NBP 1.06 1.33

TIC 0.83 n/a

SEB 0.82 2.80

HJS 0.57 1.57

NLC 0.58 1.81

RHC 0.88 2.51

DNC 0.49 0.69

Average 0.75 2.30

PPC 10,48 2,852

Fair Value(VND) 7,834 6,560

Average Price VND 7,802 (13% higher than current price of VND 6,800)

Investment recommendation:

PPC is a large power company with stable output and electricity price. However, since the company is now highly

leveraged and closely controlled by EVN with 51% of ownership, PPC‟s profit and dividend are heavily affected by

VND/JPY and interest rates. For the short and mid-term, when the electricity market has not yet fully applied, we do

not see much upside for the stock. However, since 2015, when the PP2 is fully depreciated and there may be a




competitive market, PPC will more profitable. With the price is now quite fair and absence of a clear upside potential,

we recommend HOLD for the stock. VND/JPY forex rate should be closely watched, since it will affect bottom line of

PPC significantly.

Appendix

INCOME STATEMENT 2008 2009 2010 Q1/2011 2011F

Net sales 3,881,915 4,420,950 4,183,077 1,152,892 3,930,981

CGS 2,798,493 3,139,704 3,468,931 964,074 3,248,928

Gross profit 1,083,423 1,281,246 714,146 188,818 682,053

Selling expense - - - - -

G&A expenses 61,719 72,738 64,991 18,777 61,075

Total operating expenses 61,719 72,738 64,991 18,777 61,075

Operating profit (EBIT) 1,021,704 1,208,508 649,155 170,041 620,978

Financial income 293,006 379,646 409,708 104,012 338,064

Financial expense 1,795,579 703,119 1,052,682 82,885 948,772

Interest expense 170,040 175,713 203,183 60,215 215,950

Gain/Loss from financial activities (1,502,573)

(323,474)

(642,973)

21,126

(610,708)

Other income 16,916 7,512 5,575 1,061 20,834

Other expense 7,289 6,076 5,719 889 12,972

Gain/Loss from other activities 5,972 1,436 (144) 172 7,862

Earnings before income tax provision (468,053) 886,471 6,038 191,340 18,133

Income tax provision (255,269) (5,544) 1,912 20,231 1,360

Net earnings (212,784) 892,015 4,126 171,108 16,773

EPS

BALANCE SHEET 2008 2009 2010 Q1/2011 2011F

Unit: mn VND

Current Assets 4,738,664 5,099,163 4,944,062 4,779,927 4,799,981

Cash & cash equivalent 512,801 1,383,303 1,370,775 632,729 724,179

Short-term Investment 2,735,648 2,205,000 1,757,502 1,782,502 1,834,356

Accounts Receivable 931,921 876,954 1,147,534 1,708,148 1,572,392

Inventories 557,198

601,820

667,135

653,319

668,267

Other current assets 1,096 32,086 1,116 3,228 787

Fixed Asset Long-term investment 6,058,646

6,644,680

6,597,354

6,633,700

6,144,256

Long-term receivables

Fixed Assets 5,502,035 4,452,376 3,656,430 3,428,791 3,252,800

Property Investment

Long-term financial Investment 239,200 1,869,920 2,612,837 2,876,625 2,812,836

Other Assets 317,410 322,384 328,087 328,284 78,620

Total Assets 10,797,310 11,743,843 11,541,416 11,413,626 10,944,237

LIABILITIES 7,361,025 7,424,075 7,813,669 7,514,771 7,478,646




BALANCE SHEET 2008 2009 2010 Q1/2011 2011F

Total current liabilities 1,006,054 901,350 902,111 812,634 1,035,599

Short-term Debt 343,423 372,648 418,825 418,825 460,825

Accounts Payable 133,258 152,237 167,864 119,670 130,627

Payroll

14,314 41,134 27,848 13,637 50,241

Income Taxes 24,005 17,859 32,833 11,996 58,965

Other current liabilities 491,054 317,472 254,740 248,506 334,941

Long-term Liabilities 6,354,971 6,522,725 6,911,558 6,702,137 6,443,047

6,443,047

Long-term debt 6,353,326 6,521,343 6,910,618 6,701,206 6,441,082

Other long-term liabilities 1,644 1,382 939 931 1,965

EQUITY 3,436,285 4,319,768 3,727,747

3,898,855

3,465,591

Owners' Equity 3,431,986 4,317,000 3,727,747 3,506,432 3,441,989

Chartered Capital 3,262,350 3,262,350 3,262,350 3,262,350 3,262,350

Capital Surplus - - 108,544 - -

Other Funds 362,100 362,100 392,423 108,544 174,922

Retained Earnings (127,460) 757,554 55,297 226,405 69,721

Other resources and fund 4,299 2,768 - 392,423 23,602

Minority interest - - - -

TOTAL LIABILITIES AND EQUITY 10,797,310 11,743,843 11,541,416 11,413,626 10,944,237

.


WWW.SSI.COM.VN

SAIGON SECURITIES

INC.

Member of the Ho Chi

Minh Stock Exchange,

Regulated by the State

Securities Commission.

HO CHI MINH CITY

72 Nguyen Hue Street,

District 1 Ho Chi Minh City

Tel: (848) 3824 2897 Fax:

(848) 3824 2997 Email:

[email protected] (848) 3824 2997 Email: [email protected]

HA NOI

1c Ngo Quyen Street Ha Noi City Tel: (848) 3936 6321 Fax: (848) 3936 6311

DISCLAIMER

The information, statements, forecasts and projections contained herein,

including any expression of opinion, are based upon sources believed to

be reliable but their accuracy completeness or correctness are not

guaranteed. Expressions of opinion herein were arrived at after due and

careful consideration and they were based upon the best information then

known to us and in our opinion are fair and reasonable in the

circumstances prevailing at the time. Expressions of opinion contained

herein are subject to change without notice. This document is not and

should not be construed as, an offer or the solicitation of an offer to buy or

sell any securities. SSI and other companies in the SSI and/or their

officers, directors and employees may have positions and may affect

transactions in securities of companies mentioned herein and may also

perform or seek to perform investment banking services for these

companies.

This document is for private circulation only and is not for publication in

the press or elsewhere. SSI accepts no liability whatsoever for any direct

or consequential loss arising from any use of this document or its content.

The use of any information, statements forecasts and projections

contained herein shall be at the sole discretion and risk of the user.

CONTACT INFORMATION

Phuong Hoang Director of Equity

Research

[email protected]

Kien Nguyen Research Analyst [email protected]



Documents

RESEARCH & INVESTMENT ADVISORY PHA LAI THERMAL JSC - PPC … · Business Overview: PPC has stable output and revenue of about 6bn KWh and VND 4,000bn in recent years. The company