Pha Lai Thermal Power (PPC), Electricity Generation

12/01/2015

Key Metrics
Foreign Ownership	34%
Foreign Limit	49%
Outstanding Shares	326.2m
Fully Diluted Share Count	326.2m
12M High VND	28,400
12M Low VND	17,200
Ownership
EVN Genco 2	52.3%
REE Corp	22.3%
Halley Sicav	6.0%
Others	19.4%

12/01/2015

 

Price: VND 18,200                    Target Price: VND21,700                 Upside + Div: 27.5%

Market Cap: USD 257m          Daily Val 30 Day: USD 0.1m            Foreign room: 15%

Key Metrics	2013A	2014A	2015F	2016F
Revenue, VND Billion	6,589	7,482	7,998	8,172
NPAT less Minority Interest (VNDb)	1,630	1,045	636	1,329
Revenue growth	59.5%	13.6%	6.9%	2.2%
EBIT growth	152.7%	-57.9%	89.3%	56.7%
EPS growth (*)	66.5%	-29.9%	42.0%	40.3%
PER at market price	6.1	8.6	9.5	5.0
PBR at market price	1.1	1.0	1.0	0.9
ROE	20.4%	12.3%	16.9%	22.1%
Dividend Yield at market price	8.2%	13.7%	8.2%	11.0%
Net Debt / Equity %	0.8	0.6	0.5	0.4

Notes: (*) EPS growth less one-off profit while PER is calculated on company reported EPS adjusted for bonus & welfare.

–  We increase TP for PPC by 4% and upgrade it from M-PF to BUY as a multitude of factors are working in favour of PPC from drought conditions to a vibrant economy that together are having a dual positive affect on utilisation rates, forces strong enough to override the temporary oversupplied situation in the North. Recent share price decline further improve upside.- Fully depreciated asset will lift EPS growth by 40.3% for 2016 while signals from the company suggest positive Pha Lai 1’s PPA re-negotiation next year (but applicable from 2017).

–  We retain our forecast on 2015 dividend payment of VND1,500 (8.2% yield) vs. company’s guidance of VND2,000 due to FX loss. However, we expect in 2016 PPC will be able to pay out VND2,000 (11.0% yield) if JPY/VND does not appreciate more than 5% and USD/VND does not appreciate more than 5%. Of note, JPY is anticipated to depreciate by in 2016. 

– PPC is trading at forward PER of 5.0x, 50% discount compared to its peers.

Expected drought and higher economic growth benefits both PPC and HPPP. PPC’s output in third quarter increased significantly by 28% and pushed 9M15’s output up by 4% despite 1H15’s decline of 4%, 3Q15 rising due to drought. We revise up utilization rate assumption for PPC and HPPP from 62%-65% to 70%-73% for both years (2015 & 2016). As such, PPC’s core NPAT was revised up by 42%.

PPA for Pha Lai 1 to be the same. According to one member of PPC’s Board of Directors, PPA of Pha Lai 1 which will be re-negotiated after 2015 is expected to remain the same. This relieves the risk that earnings of Pha Lai 2 will be used to make up for worse performance of Pha Lai 1. In addition, BOD member also explained that pressure to dispose PPC’s stake in HPPP is not significant.

PPC cannot pay VND2,000 for 2015 but will be able to 2016. We forecast that PPC’s reported NPAT will be VND636b for 2015 if JPY/VND does not move markedly for the rest of the year. This will allow PPC to pay out VND1,500 per share only, lower than its current guidance of VND2,000 per share. However, such dividend policy is extremely feasible for 2016.

 

Company At A Glance

Business                      Electricity generator

Key Sales Drivers         Utilization rate & electricity price

Key Cost Drivers          Coal price & maintenance cost

Key Risks                     Oversupplied situation in the Northern market & JPY appreciation

Major Clients                Viet Nam Electricity Group (EVN)

Leadership                   Mr. Lam Pham (Chairman) & Mr. Thu Pham (CEO)

Headquarters                Pha Lai ward, Chi Linh town, Hai Duong province

Website                        www.ppc.evn.vn

Email                           ngoclt@evn.com.vn

Telephone                    (+84) 320 3881 126

SELECT COMPANY METRICS

Revenue Mix %	Gross Profit Contribution
Cost Structure %	Capital Structure %

Source: PPC’s financial statements & VCSC

Financial Statements

INCOME STATEMENT	2014A	2015F	2016F		BALANCE SHEET	2014A	2015F	2016F
VND Billion					VND Billion
Revenue	7,482	7,998	8,172		Cash & cash equivalents	1,187	1,473	1,612
Cost of goods sold	-6,985	-7,139	-6,891		Short term investment	3,446	3,753	3,753
Gross Profit	497	859	1,281		Accounts receivables	2,138	1,895	1,936
Sales & Marketing exp	0	0	0		Inventories	705	840	811
General & Admin exp	-107	-120	-122		Other current assets	4	4	4
Operating Profit (EBIT)	391	739	1,159		Total Current assets	7,480	7,965	8,116
Financial income	1,055	314	342		Fix assets, gross	13,673	13,943	14,213
Financial expenses	-143	-400	-114		– Depreciation	-12,587	-13,035	-13,115
In which, interest expense	-138	-115	-108		Fix assets, net	1,086	908	1,098
Sh’d profit / loss fr associates	-10	10	69		LT investment	1,431	1,431	1,431
Net other income / (loss)	8	8	0		LT assets other	1,327	1,327	1,327
Profit before Tax	1,302	671	1,457		Total LT assets	3,844	3,666	3,856
Income Tax	-247	-30	-118		Total Assets	11,324	11,631	11,972
NPAT before MI	1,054	641	1,339		Accounts payable	326	308	297
Minority Interest	-9	-5	-10		Short-term debt	327	349	349
NPAT less MI, reported	1,045	636	1,329		Other ST liabilities	873	1,081	1,105
NPAT less MI, adjusted,	688	977	1,370		Total current liabilities	1,526	1,739	1,751
EBITDA	1,086	1,187	1,239		Long term debt	4,083	4,018	3,669
					Other LT liabilities	0	0	0
					Total LT debt	4,083	4,018	3,669
EPS basic reported, VND	3,202	1,949	4,074		Total Liabilities	5,608	5,757	5,420
EPS basic adjusted (1), VND	2,108	2,994	4,200		Preferred Equity	0	0	0
EPS fully diluted (2), VND	2,108	2,994	4,200		Paid in capital/Issued capital	3,262	3,262	3,262
					Add. share capital/sh. premium	0	0	0
RATIOS	2014A	2015F	2016F		Retained earnings & other equity	2,412	2,570	3,248
Rev growth	13.6%	6.9%	2.2%		Minority interest	42	42	42
Op. profit (EBIT) growth %	-57.9%	89.3%	56.7%		Total equity	5,716	5,874	6,552
PBT growth	-42.2%	-48.4%	117.1%		Liabilities & equity	11,324	11,631	11,972
EPS growth, adjusted	-29.9%	42.0%	40.3%
Profitability
Gross profit margin	6.6%	10.7%	15.7%		CASH FLOW	2014A	2015F	2016F
Op. profit (EBIT) margin	5.2%	9.2%	14.2%		VND Billion
EBITDA margin	14.5%	14.8%	15.2%		Beginning Cash Balance	1,186	1,187	1,473
NPAT less MI margin	14.0%	8.1%	16.3%		Net Income	1,045	648	1,330
ROE	12.3%	16.9%	22.1%		Dep. & amortization	701	448	80
ROA	5.9%	8.5%	11.6%		Change in Working Capital	-227	298	1
					Other adjustments	-736	0	0
Efficiency					Cash from Operations	782	1,394	1,411
Days Inventory On Hand	42.9	39.5	43.7		Capital Expenditures, net	-200	-270	-270
Days AR	86.5	92.0	85.6		Investments, net	280	-307	0
Days AP	15.8	16.2	16.0		Cash from Investing	80	-577	-270
Cash Conversion Days	113.7	115.3	113.2		Dividends Paid	-481	-489	-652
					∆ in Share Capital	0	0	0
Liquidity					∆ in LT debt	-380	-41	-349
Current Ratio	4.9	4.6	4.6		∆ in ST debt	–	–	–
Quick Ratio	4.4	4.1	4.2		Other financing cash flows
Cash Ratio	0.8	0.8	0.9		Cash from Financing	-860	-531	-1,002
Debt / Assets	0.4	0.4	0.3		Net Change in Cash	1	286	139
Debt / Capital	0.4	0.4	0.4		Ending Cash Balance	1,187	1,473	1,612
Net Debt / Equity	0.6	0.5	0.4
Interest Coverage	2.8	6.5	10.2

Source: Company financial statements, VCSC forecasts. (1) EPS basic adjusted is earnings per share less extraordinary profits and less contributions to employee bonus and welfare fund per Circular 200.

Quarter Results

2015F	1QA	2QA	3QA	4QF	YTD Actual	Company Guidance	VCSC Forecast
Revenues, VND Billion	2,002	2,262	1,782	1,952	6,046	7,419	7,998
NPAT guidance, unadjusted	51	317	73	195	441	613	636
NPAT guidance, adjusted	149	327	270	230	746	n.a.	977
Gross profit margin	6.7%	8.3%	14.4%	14.4%	9.6%
Op Profit (EBIT) margin	5.4%	7.3%	13.1%	11.9%	8.4%
NPAT less MI (adj.) margin	2.6%	14.0%	4.1%	10.0%	7.3%
Revenue, YoY growth	-7.3%	7.2%	30.4%	6.1%
Op Profit (EBIT) YoY growth	-61.9%	n.a.	n.a.	-12.3%
2014A
Revenues, VND Billion	2,160	2,111	1,366	1,840	7,482
NPAT guidance, unadjusted					1,045
NPAT guidance, adjusted					516
Gross profit margin	14.4%	0.6%	-8.9%	16.1%	6.6%
Op Profit  (EBIT) margin	13.2%	-0.6%	-10.8%	14.3%	5.2%
NPAT less MI (adj.) margin	10.3%	-2.3%	24.8%	29.8%	14.0%
Revenue, YoY growth	21.5%	13.1%	13.8%	5.5%	13.6%
Op Profit (EBIT) YoY growth	-19.6%	n.a.	n.a.	251.8%	-57.9%

 

Note: NPAT adjusted = NPAT less minority interest less extraordinary earnings less bonus & welfare fund

P&L Forecast

	FY 14A		FY15 Old Forecast		FY15 New Forecast		FY15F vs. FY14A	Explanation new vs. old forecast
VND Billion
Revenues	7,482		7,230		7,998		6.9%	Utilization rate revised from 65% to 73%
Gross profit	497		634		859		72.7%
Sales & marketing exp	0		0		0		n.a.
General admin exp	-107		-108		-120		12.2%
Operating profit (EBIT)	391		526		739		89.3%
Interest income	362		314		314		-13.3%
Interest expense	-138		-115		-115		-16.9%
Non-operating profit	696		-151		-278		n.a.	More FX loss due to JPY/VND appreciation
Income from associates	-10		93		10		n.a.	Lower reported income from HPPP as HPPP’s earnings was hurt by 5% appreciation of USD/VND.
Profit before tax	1,302		674		671		-48.4%
Profit after tax	1,054		632		641		-39.2%
NPAT less MI, unadj	1,045		628		636		-39.1%
NPAT less MI, adj	688		687		977		42.0%
EBITDA	1,086		974		1,187		9.4%
							Basis points movements
Gross profit margin %	6.6%		8.8%		10.7%		4.1%
Sales & marketing % sales	0.0%		0.0%		0.0%		0.0%
General admin % sales	1.4%		1.5%		1.5%		0.1%
EBIT margin %	5.2%		7.3%		9.2%		4.0%
EBITDA margin %	14.5%		13.5%		14.8%		0.3%
NPAT margin %	14.0%		8.7%		8.0%		-6.0%
Effective tax rate %	19.0%		6.2%		4.5%		-14.5%

Drought benefits PPC as well as HPPP

We revise up utilization rate assumptions for PPC from 65% to 73% in 2015 and from 62% to 73% in 2016. Likewise, HPPP’s utilization rates are adjusted accordingly.

Through 10 months of 2015, coal thermal power plants nationwide increased its contribution to Vietnam electricity system from 32% to 36%. This explains PPC and HPPP’s strong output year to date.

The fact that reservoirs across three regions have just been able to store from 20% to 50% of their design capacity at present indicates that 2016 will be another dry year for hydro power plants. Consequently, thermal power plants will continue to benefit.

Figure 1: PPC & HPPP’s utilization rate assumption changes

			HPPP
	PPC

 

Source: PPC, HPPP & VCSC

PPC’s 9M result: FX loss obscures robust core earnings

PPC’s 3Q result came out with revenue growing by 31% and EBIT reached VND234b vs. a loss of VND146b in the same period last year. Core earnings jumped to VND270b, circa six-fold compared to 3Q14A. Output in this 3Q increased significantly by 28% and pushed 9M15’s output up by 4% despite 1H15’s decline of 4%. Severe drought as well as strong GDP growth benefited PPC remarkably despite a temporarily oversupplied situation in the North which we mentioned in our initiation report. However, PPC suffered FX loss of VND 214b vs. FX gain of VND 420b last year, resulting in 3Q15A NPAT declining 78% compared to 3Q14A.

For 9M15A result, revenue was up 7%. Meanwhile, EBIT soared by 304% on higher sales volume as well as lower depreciation expense of VND91b. In addition, 9M15A core NPAT has grown by 71% vs. 9M14A despite reported NPAT’s decline by 11% due to 7% appreciation of JPY vs. VND.

 

Figure 2: PPC’s 3Q and 9M results (VNDb)

Item	3Q14A	3Q15A	Change (%)	9M14A	9M15A	Change (%)
Electricity output (m kWh)	1,086	1,391	28%	4,367	4,538	4%
Revenue	1,365	1,782	31%	5,642	6,045	7%
Gross profit	-121	257	n.a.	200	578	189%
EBIT	-146	234	n.a.	126	509	304%
Interest income	173	88	-49%	371	243	-35%
Interest expense	-34	-31	-9%	-108	-90	-17%
Forex gain/loss	420	-214	-151%	170	-290	-271%
Income from JV	0	0	n.a.	35	95	171%
PBT	413	77	-81%	594	472	-21%
Reported NPAT	338	73	-78%	495	441	-11%
Core NPAT	34	270	698%	436	746	71%

Source: PPC & VCSC

Similarly, PPC’s 26% stake in associated company – Hai Phong thermal power plant (HPPP)’s earnings was also hurt by VND’s depreciation by 5% as of 30 Sep 2015. 3Q15A suffered huge loss of VND395b due to translation loss on its USD463m-denominated loan. As a consequence, for 9M15A, HPPP delivered core earnings of VND474b but reported NPAT still showed a loss of VND139b.

Through nine months, HPPP also benefit from drought and revenue has grown by 21% on the back of stronger output, however, bottom line saw more subdued growth of 2% due to ongoing expense for first years of operation.

 

Figure 3: HPPP’s 3Q15A and 9M15A results

Item	3Q14A	3Q15A	Change (%)	9M14A	9M15A	Change (%)
Revenue	1,739	1,968	13%	5,843	7,042	21%
Gross profit	163	192	18%	1,116	1,173	5%
EBIT	139	167	20%	1,064	1,106	4%
Financial income/expense	-183	-607	232%	-812	-1,246	53%
Interest expense	-250	-212	-15%	-598	-632	6%
Forex gain/loss	67	-395	-689%	-214	-614	187%
Reported NPAT	-45	-440	886%	252	-139	n.a
Core NPAT	-111	-45	5%	466	474	2%

 

Source: HPPP & VCSC

We expect that HPPP’s core earnings will improve gradually owing to better cost control as well as lower interest expense going forward on lower loan balance. HPPP is estimated to contribute ~VND200b core earnings for PPC every year.

In terms of reported NPAT, we estimate that HPPP will only contribute materially for PPC from 2017 onwards. For 2015, HPPP was hurt by VND depreciation of 5% while for 2016 we assume that HPPP will book the final FX loss during construction period of VND392b.

VNDb

Figure 4: HPPP’s earnings outlook

Source: HPPP & VCSC

PPC is expected to pay cash dividend of VND2,000 per share for 2016

We run two scenarios on foreign exchange rates, USD/VND and JPY/VND to see how these rates affect PPC’s capability of dividend payment:

• Scenario 1: JPY/VND remains flat and USD/VND appreciates by 2%
• Scenario 2: JPY/VND appreciates by 5% and USD/VND appreciates by 5%

We see that PPC will still be able to follow its dividend policy of VND2,000 per share if JPY does not appreciate more than 5% and USD does not appreciate more than 5%.

Figure 5: PPC’s dividend budget vs. reported NPAT

 

 

Source: PPC, HPPP & VCSC

 

Meanwhile, we note that currency experts are forecasting an uptrend for USD/JPY in 2016 given Japan is struggling with soft domestic capital expenditure and challenging global business conditions.

Figure 6: JPY/USD exchange rate trend

Source: The Economy forecast Agency

History of recommendations

Source: Bloomberg & VCSC

 

VCSC Rating and Valuation Methodology

Absolute, long term (fundamental) rating: The recommendation is based on implied total return for the stock defined as (target price – current price)/current price + dividend yield, and is not related to market performance. This structure applies from 27 May 2015.

RATING	DEFINITION
BUY	Total stock return including dividends over next 12 months expected to exceed 20%
OUTPERFORM (O-PF)	Total stock return including dividends over next 12 months expected to be positive 10%-20%
MARKET PERFORM (M-PF)	Total stock return including dividends over next 12 months expected to be between negative 10% and positive 10%
UNDERPERFORM (U-PF)	Total stock return including dividends over next 12 months expected to be negative 10%-20%
SELL	Total stock return including dividends over next 12 months expected to be below negative 20%
NOT RATED	The company is or may be covered by the Research Department but no rating or target price is assigned either voluntarily or to comply with applicable regulation and/or firm policies in certain circumstances, including when VCSC is acting in an advisory capacity in a merger or strategic transaction involving the company.
RATING SUSPENDED	A rating that happens when fundamental information is insufficient to determine an investment rating or target. The previous investment rating and target price, if any, are no longer in effect for this stock.

 

Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12-month horizon. Future price volatility may cause temporary mismatch between upside/downside for a stock based on market price and the formal recommendation, thus these performance parameters should be interpreted flexibly.

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Disclaimer

Analyst Certification of Independence

I , Duong Dinh, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

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