Next move to be smooth as silk
EDL‐Generation Buy (15E TP LAK11,676 / US$ 1.44)
Company Update
Close LAK6,950 / US$0.86
Earnings upgrade/Earnings downgrade/Overview unchanged
February 13, 2015
Next move to be smooth as silk
Jan‐15
Jun‐14
EDL‐Gen
Apr‐13
Sep‐12
Mar‐12
Aug‐11
Jan‐11
LSX
Nov‐13
120% 100% 80% 60% 40% 20% 0% ‐20%
Share data
Post‐acquisition NP calling for moderate growth at 6% CAGR in 2015‐19E
Reuters / Bloomberg
EDL.BK/EDL LS
Paid‐up Shares (m)
1,226.22
Par (USD, Kip)
0.49 / 4,000
Market cap (Kip bn/USDmn)
8,583.5 / 1,059.2
Foreign limit / actual (%)
20% / 14.27
52 week High / Low (Kip)
7,200 / 5,900
Avg. daily T/O (shares 000)
79.28
Estimated free float (%)
14.27
Beta
1.10
URL
www.edlgen.la
Note: BCEL‐KT Securities is the underwriter of EDL‐Gen. BCEL‐KT Securities Co., Ltd. is a joint venture company between BCEL Bank and KT ZMICO Securities (Thailand).
Patcharin Karsemarnuntana Analyst, no 17834 [email protected] 66 (0) 2695‐5837
Re‐rated PBV expected on the next growth move We roll over EDL‐Gen’s SOTP‐based TP to 2015E at 11,676 kip/share to factor in the 392MW equity capacity additions of “To‐do list” projects spun off by Electricity du Laos through its recent debentures issuance. Its share price is currently trading at undemanding valuation against regional peers despite an attractive dividend yield of 6% p.a. Given its next growth move through the acquisition of “To‐do list” projects, we believe its current 1.3x 2015E PBV deserves to be re‐rated to the higher band, a repeat of the result from its first successful move in 2013‐14. We make 2015‐19E earnings revisions by ‐2%/+8%/+12%/+15%/+22% given the expected flow of earnings contributions from “To‐do list” projects. This will more than offset the larger interest expenses from new debt raising (both project debts of new power assets and the recent debenture issuance), resulting in moderate growth in 2015‐19E NP at 6% CAGR vs. the pre‐acquisition projection at 2% CAGR. Its gearing ratio to be manageable; DSCR to be at a comfortable level In order to capture the growth opportunities from power assets spun off from EDL, huge capital expenditures will be required, causing its projected free cash flow to turn negative in 2015‐17E. However, we expect its gearing to be manageable with the projected D/E ratio to run up and likely peak at 0.94x in 2017E (vs. its threshold policy of 2x) before subsequently declining from 2018E onwards; meanwhile, its debt service coverage ratio (DSCR) will stand at a comfortable level of 1.9‐ 5.0x during 2015‐19E. Potential growth as the source of upside risk As it will seek to capture the escalating power demand growth in the Greater Mekong Sub‐region (GMS) and in Lao PDR, the company’s growth prospects are on the upside with capacity expansion opportunities lining up in the form of “Wish list” projects, i.e., a cluster of new power assets to be further spun off by EDL. This will be a source of upside risk should the company’s power capacity reach its long‐term target of 2,272MW within 2020E, which could challenge its D/E ratio. Financial and Valuation FY Ended 31 Dec Revenues (Kipmn) Net profit (Kipmn) EPS (Kip) EPS growth (%) Dividend (Kip) BV (Kip) FY Ended 31 Dec PER (x) EV/EBITDA (x) PBV (x) Dividend yield (%) ROE (%) Net gearing (%)
2012 913,103 602,469 590.08 (13.4) 450 4,561
2013 1,347,33
2014E 1,277,54
2015E 1,421,73
971,742 792.61 34.3 475 4,897
912,518 744.17 (6.1) 447 5,195
902,135 735.71 (1.1) 441 5,489
2016E 1,919,728 999,557 815.16 10.8 489 5,815
2012 14.1 11.4 1.5 6.5 12.7 15.8
2013 8.8 7.8 1.4 6.8 16.8 12.9
2014E 9.3 8.1 1.3 6.4 14.7 10.9
2015E 9.4 8.7 1.3 6.4 13.8 38.1
2016E 8.5 7.8 1.2 7.0 14.4 71.1
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 1 of 16
Roll over TP to 2015E, with incremental value from “To‐do list” projects We roll over EDL‐Gen’s SOTP‐based TP to 2015E at 11,676 kip/share (equivalent to US$1.4/share), a meaningful 29% increase from our earlier 2014E TP (9,028 kip/share). This has factored in 1) the company’s capacity growth with projected 392MW equity capacity additions (to 1,273MW in the next five years), including 292MW from the 100%‐ owned projects and 100MW from IPP projects under the “To‐do list” projects spun off by Electricity du Laos (EDL) in 2015‐19E with assumed 7‐12% project IRR; and 2) the company’s higher leverage with the newly‐issued Bt6.5bn debentures (approximately US$200mn) to fund the equity call of the new power assets. Given that the expected earnings contributions from new power assets will more than offset the larger interest expenses from new debt raising (both project debts and new debentures), we expect the company to deliver moderate earnings growth at 6% CAGR during 2015‐19E and sustained 14‐15% ROE in the period, vs. the pre‐acquisition growth of 2% CAGR and declining ROE. Meanwhile, its growth prospects look promising with capacity expansion opportunities lining up in the form of “Wish list” projects, i.e., a cluster of new power assets to be further spun off by EDL. This will be a source of upside risk should the company’s power capacity reach its long‐term target of 2,272MW within 2020E. Figure 1: Summary of EDL‐Gen’s 2015E SOTP‐based valuation Source: KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 2 of 16
Figure 2: EDL‐Gen’s capacity growth story A) Capacity growth through the “To‐do list” projects
B) Long‐term capacity target, with the “Wish list” projects to be a source of upside risk
Source: EDL‐Gen, KT ZMICO Research Note: We expect the target acquisition on these new power assets to be a year after the commercial operating date (COD) Figure 3: EDL‐Gen’s projected earnings growth and ROE A) Projected 2014‐19E NP – pre‐ & post‐acquisition
B) Projected 2014‐19E ROE – pre‐ & post‐acquisition
Source: KT ZMICO Research
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 3 of 16
Re‐rated PBV trading on the continuing growth story Our SOTP‐based 2015E TP of 11,676 kip/share (with DCF methodology applied for each power project towards the end of its concession period/power purchase agreement) consists of the value contribution from the existing projects of 8,928 kip/share (including the seven hydroelectric power plants and the four IPPs totaling 881MW) and the “To‐do list” projects of 2,748 kip/share (given the 392MW power capacity addition). The company’s share price is currently trading at undemanding valuation on most fronts (9.45x 2015E PER, 1.3x PBV, and 0.09x PBV/ROE) against regional peers (at the average of 13.3x 2015E PER, 1.8x PBV, and 0.12x PBV/ROE). Meanwhile, its EV/MW is competitive at US$1.37mn/MW in 2015E, even in the peak year of US$1.46mn/MW in 2016‐2017E on the growth cycle, compared with Thailand power operators in the same mode – GLOW at US$1.66mn/MW and CKP at US$3.95mn/MW. Moreover, EDL‐Gen’s profit/MW is quite high at Bt3.67mn/MW given the expected high margin of the hydroelectric power fleet, vs. Thai power operators of Bt1.2‐3.1mn/MW. Finally, its 2015E dividend yield of 6.4% is more appealing than regional peers at 3.8%. Given its upcoming capacity expansion and the continuation of moderate earnings growth through the acquisition of the “To‐do list” projects after the recent successful Bt6.5bn debentures issuance, we believe its current 1.3x 2015E PBV deserves to be re‐ rated to the higher band. This would be a repeat of the story in 2013‐14 when PBV was re‐rated to 1.2‐1.3 PBV (up to +0.5SD) on the larger profit contribution of the four acquired IPPs after a successful secondary equity offering in mid‐2012, vs. 1‐1.1x PBV in 2012. With the combination of its continuing growth phase and the expected increase of foreign trading activities following better infrastructure and the development of the Lao Securities Exchange (LSX), we expect the discount gap of its current share price to our 2015E TP to be narrowed. Thus, we reaffirm our “Buy” rating on EDL‐Gen. Figure 4: EDL‐Gen’s 2015E valuation comparison with Thailand power operators A) EDL‐Gen’s 2015E multiple valuation against peers
B)
EDL‐Gen’s EV/MW towards 2019E
CKP
EGCO
GLOW
RATCH
EDL‐Gen
2015E PER (x)
59.93
10.37
14.49
12.54
9.45
2015E PBV (x)
1.44
1.07
2.59
1.34
1.27
2015E PBV/ROE (x)
0.50
0.10
0.14
0.12
0.09
2015E ROE (%)
2.88
10.62
18.79
10.99
13.77
2015E Dividend yield (%)
0.67
3.75
3.45
4.05
6.35
2015E EV/MW (US$/MW)
3.95
0.99
1.66
0.50
1.37
2015E profit/MW (Btmn/MW)
1.23
2.07
3.13
1.16
3.67
2015E debt‐to‐equity (x)
1.39
0.64
1.02
0.42
0.60
Source: KT ZMICO Research Note: EDL‐Gen’s 2015E multiple valuation reflects a certain contribution of “To‐do list” projects based on our assumed year of asset transfer.
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 4 of 16
Figure 5: EDL-Gen’s valuation comparison with regional peers Name
Mkt Cap
CLP HOLDINGS LTD DATANG INTL POWER GEN CO-H HUANENG POWER INTL INC-H HUADIAN POWER INTL CORP-H CHINA POWER INTERNATIONAL CHINA RESOURCES POWER Hong Kong KOREA ELECTRIC POWER CORP S. Korea TENAGA NASIONAL BHD YTL POWER INTERNATIONAL BHD PETRONAS GAS BHD Malaysia NTPC LTD TATA POWER CO LTD POWER GRID CORP OF INDIA LTD RELIANCE POWER LTD LANCO INFRATECH LTD India MANILA ELECTRIC COMPANY Philippines ELECTRICITY GENERATING PCL RATCHABURI ELEC GEN HODG GLOW ENERGY PCL SPCG PCL CK POWER PCL Thailand EDL-GENERATION PCL Laos AVERAGE
(USDmn) 27,224 13,038 21,419 9,526 4,336 15,255 25,950 21,356 3,161 11,901 18,835 3,649 12,753 2,665 239 6,981 2,577 2,739 3,983 798 586 1,050
PER (x) 14E 16.05 9.84 8.50 7.56 7.55 7.90 9.57 3.73 3.73 11.69 12.00 25.01 16.23 12.58 28.95 14.77 16.44 na 18.18 17.13 17.13 10.80 12.31 14.25 17.40 55.62 22.07 9.34 9.34 13.75
15E 15.80 6.91 8.05 7.90 7.29 7.37 8.89 7.06 7.06 11.22 12.46 23.93 15.87 11.86 15.29 12.37 12.54 na 13.02 16.86 16.86 10.37 12.54 14.49 12.61 59.93 21.99 9.45 9.45 13.30
PBV (x) 14E 1.77 1.04 1.87 1.74 1.28 1.29 1.50 0.47 0.47 1.65 1.11 3.98 2.24 1.33 1.63 2.07 0.81 5.44 2.26 3.87 3.87 1.14 1.42 2.87 4.61 1.60 2.33 1.34 1.34 2.00
15E 1.70 1.01 1.70 1.56 1.18 1.15 1.38 0.44 0.44 1.51 1.05 3.76 2.10 1.28 1.52 1.84 0.76 2.86 1.65 3.56 3.56 1.07 1.34 2.59 3.58 1.44 2.00 1.27 1.27 1.77
EV/EBITDA (x) 14E 10.49 9.71 6.46 6.75 7.96 7.42 8.13 5.70 5.70 7.31 8.26 13.77 9.78 9.66 8.13 10.32 15.57 14.72 11.68 7.97 7.97 18.47 13.08 9.51 13.58 10.35 13.00 8.09 8.09 9.19
15E 10.32 9.43 6.10 6.44 7.52 6.60 7.73 5.45 5.45 7.10 8.61 13.20 9.64 8.64 7.43 8.66 8.86 10.75 8.87 7.97 7.97 19.62 12.78 8.60 10.65 11.39 12.61 8.71 8.71 8.71
YLD (%) 14E 3.96 3.10 4.80 4.03 4.53 4.07 4.08 3.02 3.02 2.54 2.59 2.72 2.62 3.42 1.43 2.39 0.00 na 1.81 4.09 4.09 3.75 3.81 3.51 2.15 0.72 2.79 6.42 6.42 3.55
15E 4.01 4.26 5.16 3.98 4.60 4.45 4.41 3.47 3.47 2.89 2.59 2.79 2.76 3.67 1.73 2.80 0.41 na 2.15 4.23 4.23 3.75 4.05 3.45 3.17 0.67 3.02 6.35 6.35 3.77
ROE (%) 14E 11.28 9.38 18.03 19.34 14.11 17.18 14.89 14.35 14.35 14.44 9.31 16.45 13.40 10.69 5.39 14.35 5.05 nm 8.87 23.37 23.37 10.88 11.98 21.28 32.14 2.93 15.84 14.75 14.75 15.07
15E 10.92 10.77 17.04 15.90 13.05 16.53 14.04 6.54 6.54 13.82 8.44 16.13 12.80 11.28 9.61 15.90 5.93 nm 10.68 21.95 21.95 10.62 10.99 18.79 30.46 2.88 14.75 13.77 13.77 13.50
Source: KT ZMICO Research, Bloomberg Note: EDL‐Gen’s 2015E multiple valuation reflects a certain contribution of “To‐do list” projects based on our assumed year of asset transfer. Figure 6: Multiple valuations of the regional power operators
A) Regional power valuation by PBV/ROE
B) Regional power valuation by dividend yield
Source: KT ZMICO Research, Bloomberg REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 5 of 16
Figure 7: EDL‐Gen’s PBV band and the development of its market capitalization
Source: KT ZMICO Research, Bloomberg “To‐do list” projects to strongly drive its power generation EDL‐Gen’s growth story is set to continue through the acquisition of new power assets (“To‐do list” projects) after the recent successful Bt6.5bn debentures issuance. These new power assets spun off by EDL are likely to drive EDL‐GEN’s capacity growth by 392MW (+44%), with wholly‐owned 292MW and equity‐owned 100MW IPP projects. This will boost the company’s power capacity from 881MW at current to 1,273MW over the next five years (~8% CAGR), bringing the proportion of 100%‐owned projects : IPPs to 53% : 47% (vs. the pre‐acquisition proportion 44% : 56%). According to the schedule, we expect these new power asset acquisitions to make full‐ year contributions a year after their commercial operating dates (COD); thus, EDL‐Gen’s power capacity is expected to see a big jump in 2015‐17E after the three 100%‐owned projects, namely Houay Lamphanh Ngai (88MW), Nam Khan 2 (130MW) and Nam Khan 3 (60MW), come into its power portfolio, followed by the IPP projects in 2018‐19E. Thus, its power generation is set to make a big jump by 39% to 6,217GWh (equity power generation) after the completion of the acquisitions of new power assets with their full‐ year contributions (vs. pre‐acquisition at 4,463GWh), with a 52% contribution from wholly‐owned power plants and the remaining 48% from IPPs. This implies an average 51% plant factor for its entire power portfolio. Note that its power generation is 61% sold domestically from electricity output generated from its 100%‐owned hydroelectric power plants and 39% exported, mainly from the IPPs, namely Theun Hinboun (THPC), Nam Ngum 2 and Houay Ho. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 6 of 16
Figure 8: EDL‐Gen’s capacity growth and breakdown between 100%‐owned projects and IPP projects Source: EDL‐Gen, KT ZMICO Research Figure 9: Expected equity power generation by project
Source: EDL‐Gen, KT ZMICO Research Note: Projected equity power generation based on full‐year contributions REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 7 of 16
Post‐acquisition NP calling for moderate growth at 6% CAGR during 2015‐19E We have slightly fine‐tuned our 2014E NP for EDL‐Gen by +1% to 912,518mn kip to factor in the larger profit contribution from affiliates, particularly in the case of Theun Hinboun due to the good performance of its power generation, along with the higher interest expenses from its recent Bt6.5bn debentures issuance in mid‐Dec 2014. We expect our 2014E NP estimate to be achievable (9M14 NP accounted for 77% of our full‐year forecast). Stripping out the forex impact, we expect the company to deliver 922,073mn kip core profit, with an expected half‐on‐half profit contribution from its seven wholly‐ owned hydroelectric power plants (due to achieving power generation of 1,893GWh vs. 9M14 of 1,532GWh) and from its four IPPs with THPC as the main driver. We make 2015‐19E earnings revisions by ‐2%/+8%/+12%/+15%/+22% given the expected earnings contributions from new power assets (“To‐do list” projects) following 1) the larger power generation with projected 11% CAGR after the consolidation of the 100%‐ owned projects; and 2) the higher profit contributions from IPPs. This will more than offset the larger interest expenses from new debt raising (both project debts of new power assets and recent debentures issuance), resulting in moderate growth in 2015‐19E NP at 6% CAGR vs. the pre‐acquisition projection at 2% CAGR. We expect the profit contributions between its 100%‐owned projects and IPPs to be at nearly 50% : 50% in the next five years, with Nam Ngum 1 and Houay Lamphan Ngai as the major contributors among the wholly‐owned projects, and THPC as the key contributor of the IPPs. Apart from the increasing power generation, the well‐established electricity tariff structure (mostly on a cost‐plus basis with 1% escalating growth per annum) and the sustained costs of the hydroelectric power plants (with depreciation expenses as the major costs accounting for 56‐68% in 2015‐19E, and the remainder being maintenance costs, SG&A expenses and others) will enable the company to enjoy a high gross margin of 71‐75% in 2015‐19E, and an EBITDA margin of 89‐91%. Figure 10: EdL-Gen’s earnings forecasts, energy generation and profit-making ability A)
Projected 2014‐19E core profit and NP and % growth
B) Projected equity power generation by 100%-owned projects (only consolidated projects) in 2014-19E
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 8 of 16
C) Projected profit contribution from its 100%-owned projects and IPPs
E)
Projected gross margin and EBITDA margin
D) % profit contribution from its 100%owned projects and IPPs
F)
Projected interest expenses – postand pre-acquisition
Source: KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 9 of 16
Its gearing ratio to be manageable; DSCR to stand at a comfortable level Given the expected average investment cost of US$2.0/MW and the approximate 22% equity injection, we expect the company to require US$167mn for the equity call (including US$110mn for the 100%‐owned power plants, US$47mn for the IPPs, and another US$10mn cash injection) to fund these “To‐do list” projects, trading off for the additional equity capacity of 392MW. Thus, the proceeds required for the new power asset acquisitions, with the planned refinancing of its existing high cost‐of‐fund US$30mn loan from ADB on top, amount to US$197mn, matching its recent debentures issuance. In order to capture the growth opportunities from the power assets spun off from EDL, huge capital expenditures will be required, particularly in 2015‐17E with the acquisition of major 100%‐owned projects, namely Houay Lamphanh Ngai, Nam Khan 2 and Nam Khan 3. Thus, its projected free cash flow will turn negative in 2015‐17E before reversing to positive from 2018E onwards. Given that new debt raising will be primarily used to fund both the equity call and project debt, its leverage will definitely be on a rising trend. However, we expect its gearing to be manageable with the projected D/E ratio to run up and likely peak at 0.94x in 2017E (vs. its threshold policy of 2x) before subsequently declining from 2018E onwards following the larger contribution from new power assets. Meanwhile, the favorable project debt with a 5‐7 year grace period and the new debentures with bullet maturity in the next 5‐10 years will result in its debt service coverage ratio (DSCR) standing at a comfortable level of 1.9‐5.0x during 2015‐19E. Figure 11: Details of “To‐do list” projects
Source: EDL‐Gen, KT ZMICO Research
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 10 of 16
Figure 12: EdL-Gen’s planned capital expenditures and financial position A) Projected capex and free cash flow during 2015-19E
B) Projected investment cost per MW of “To-do list” projects
C) Projected debt-to-equity ratio during 2014-19E
D) Projected debt service coverage ratio (DSCR) during 2014-19E
Source: EDL‐Gen, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 11 of 16
Potential growth as the source of upside risk As it will seek to capture the escalating power demand growth in the Greater Mekong Sub‐ region (GMS) and in Lao PDR, the company’s growth prospects are on the upside with capacity expansion opportunities lining up in the form of “Wish list” projects, i.e., a cluster of new power assets to be further spun off by EDL. This will be a source of upside risk should the company’s power capacity reach its long‐term target of 2,272MW within 2020E, which could challenge its D/E ratio. Figure 13: EDL‐Gen’s long‐term potential capacity growth
Source: The Company, KT ZMICO Research
Foreign exchange risk is manageable and will be further mitigated On the operational level, most of its electricity tariffs are charged in kip, particularly in the case of the 100%‐owned projects, against some expenses in US$ (i.e., maintenance costs, interest expenses, and principal repayments). Therefore, foreign exchange risk is possible given the expected depreciation of the kip against the US$ over the next few years. Nevertheless, a clause in the Power Purchase Agreement states that in the case of a fluctuation in the exchange rate of more than 10% (from the agreed‐upon rate of 8,000kip/US$), EdL‐Gen would be able to renegotiate with EDL. Meanwhile, its IPPs would be less impacted by currency fluctuations given that their tariff structure of 50% : 50% indexation to the US$ and baht provides a natural hedge to a certain degree, as in the case of THPC and Nam Ngum 2. Thus, the risk on currency fluctuation is manageable, with some mechanisms for further mitigation. These include the balancing of its US$‐denominated revenue with US$‐ denominated loans, with the dividend received from the existing four IPPs both in terms of baht and US$ as well as the dividend received from those IPPs on the “To‐do list” to be mostly in terms of US$ (90% at a maximum). However, in terms of the balance sheet line, there will inevitably be an unrealized foreign exchange impact given that most of its loan facilities are US$‐denominated loans. Note that its recent baht debentures issuance to acquire the “To‐do list” projects has already made a cross currency swap into US$ to protect against currency fluctuation risk. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 12 of 16
Why Laos? The Greater Mekong Sub‐region (GMS), with an area covering 2.6mn square kilometers and a combined population of around 326mn, is drawing investors’ interest as a new frontier for Asian economic growth. Six countries, including Cambodia, the People's Republic of China (specifically Yunnan Province and Guangxi Zhuang Autonomous Region), Lao PDR, Myanmar, Thailand, and Vietnam, have entered into a program of sub‐ regional economic cooperation. This will lead to more diversified economies and open market‐based systems, along with the growth of commercial relationships among the six Mekong countries in the form of cross‐border trade, investment, and labor mobility. Moreover, it will necessitate the development and utilization of hydroelectric power plants on a sub‐regional basis. We believe Lao PDR will play a major role in the development of hydroelectric power plants due to the country’s physical geography. The country has an abundance of mountainous areas, with the major tributaries of the Mekong River covering 35% of the total Mekong River basin, as well as relatively high annual rainfall. Lao PDR’s commitments for power supply to the GMS are sizable, including Thailand amounting to 7,000MW by 2020 and Vietnam totaling 5,000MW by 2020. To facilitate meeting the power requirements under these commitments as well as the power demand in the GMS (with projected peak demand to expand by 14% CAGR, more than doubling from 81,830MW in 2013 to 203,325MW by 2020E), Lao PDR’s installed capacity has the potential to reach 14,384MW in 2020E (vs. 3,245MW in 2013), implying 24% CAGR. Beyond the supply requirements of its grid‐connected domestic consumers, Lao PDR’s power generation is mainly for export at an 75% proportion. Note that EDL‐Gen aims for a 16% share of the pie, with its power capacity targeted to reach 2,272MW within 2020E. Figure 14: Greater Mekong Sub‐region and Lao PDR’s growing power industry A) Greater Mekong Sub‐region peak load demand profile (MW)
B) Lao PDR’s power demand and supply outlook
Source: Ministry of Energy and Mines, EDL‐Gen REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 13 of 16
Financial tables
Financial Summary
mnKips 2012
2013
2014E
2015E
2016E
779,887 (185,990) 593,897 105,605 0 4,613 22,998 913,103 727,113 (61,846) 665,267 (35,680) (27,118) 602,469 491.32
862,429 (205,084) 657,345 453,746 0 6,700 24,463 1,347,338 1,142,254 (113,489) 1,028,765 (30,845) (27,327) 971,742 792.47
824,086 (214,493) 609,593 459,479 2,492 1,045 (9,555) 1,277,548 1,063,055 (94,929) 968,126 (31,436) (24,172) 912,518 744.17
895,842 (239,603) 656,238 538,830 2,820 1,045 (16,807) 1,421,731 1,182,127 (103,982) 1,078,145 (124,830) (51,180) 902,135 735.71
1,412,702 (424,803) 987,899 512,411 3,050 1,045 (9,480) 1,919,728 1,494,925 (123,021) 1,371,904 (301,201) (71,146) 999,557 815.16
Consolidated Balance Sheets Cash and cash equivalents Current assets Property, plant and equipment-Net Investment in JV and interests in associates Non-current assets Total assets
164,511 623,077 3,944,900 1,722,049 384,198 6,674,224
159,914 708,194 4,011,109 1,869,992 477,876 7,067,171
1,892,954 2,549,105 3,620,343 2,084,745 778,944 9,033,138
1,443,910 2,151,361 5,477,569 2,412,313 778,944 10,820,188
1,187,001 2,290,593 7,799,868 2,635,342 778,944 13,504,748
Current liabilities Long term loans Non-current liabilities Total liabilities Paid up capital Retained earnings Total equities
207,289 874,603 0 1,081,892 4,904,867 436,292 5,592,332
256,989 805,295 0 1,062,284 4,904,867 744,348 6,004,887
216,664 2,446,580 0 2,663,244 4,904,867 1,109,355 6,369,894
220,998 3,868,442 0 4,089,440 4,904,867 1,432,921 6,730,748
267,799 6,106,378 0 6,374,177 4,904,867 1,788,744 7,130,571
602,469 158,579 (22,998)
971,742 167,060 (24,463)
912,518 171,423 9,555
902,135 194,004 16,807
999,557 361,566 9,480
49,404 (155,833) (1,713,633) (1,037,721) (210,843) (537,268) 1,557,131 0 (228,700) 342,795 164,511
1,736 (233,269) 191,516 641,185 (86,595) (582,453) 0 0 (27,863) 164,511 159,914
(156,173) 219,343 0 640,845 1,639,706 (547,511) 0 0 1,733,040 159,914 1,892,954
(46,310) (2,051,230) (92,527) (1,312,162) 1,404,399 (541,281) 0 0 (449,044) 1,892,954 1,443,910
(359,126) (2,683,865) 0 (1,895,418) 2,238,244 (599,734) 0 0 (256,908) 1,443,910 1,187,001
Consolidated Income Statement Electricity sales Cost of sales Gross profit Profit from associates and JV Dividend income Other income Currency exchange gains Total revenue Gain before expenses Administrative expenses Profit before financial costs and tax Finance costs Income tax Net profit EPS (FD)
Cash flow Net earnings DD&A Unrealized FX Gain (Loss) Other non-cash charges Cash earnings Change in working capital Capex Investments in affiliates Free cash flows Debt Financing Dividend paid Capital increase Others Net cash flows Cash equivalents -beginning Cash equivalents -ending
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 14 of 16
Financial Summary Per share data and financial ratio EV - fully diluted (kip) EPS - fully diluted (kip) EPS - weighted (kip) DPS (kip) BV (kip) PER (x) PBV (x) EV/EBITDA (x) Div. yield (%) Div. payout ratio (%) Percentage Growth (%) Sales Growth Normalized Profit Growth Net Profit Growth EPS growth (%) EBITDA Growth Profitability Ratio (%) Gross profit margin EBIT margin EBITDA margin Net profit margin ROE ROA ROCE S-T SOLVENCY OR LIQUIDITY RATIOS (x) Current ratio Quick ratio Cash ratio Net working capital to total assets
2012
2013
2014E
2015E
2016E
7,670.8 491.3 590.1 450.0 4,560.6 14.1 1.5 11.4 6.5 91.6
7,584.0 792.5 792.6 475.0 4,897.1 8.8 1.4 7.8 6.8 59.9
7,515.6 744.2 744.2 446.5 5,194.8 9.3 1.3 8.1 6.4 60.0
9,040.9 735.7 735.7 441.4 5,489.0 9.4 1.3 8.7 6.4 60.0
11,083.4 815.2 815.2 489.1 5,815.1 8.5 1.2 7.8 7.0 60.0
(11.6) 2.1 6.9 (24.3) 4.4
10.6 63.5 61.3 61.3 45.3
(4.4) (2.7) (6.1) (6.1) (4.8)
8.7 (0.3) (1.1) (1.1) 11.6
57.7 9.8 10.8 10.8 36.3
74.4 72.9 90.2 66.0 12.7 10.1 10.5
78.1 76.4 88.8 72.1 16.8 14.1 14.6
76.0 75.8 89.2 71.4 14.7 11.3 11.7
75.2 75.8 89.5 63.5 13.8 9.1 9.3
71.5 71.5 90.3 52.1 14.4 8.2 8.4
3.0 3.0 0.8 0.1
2.8 2.7 0.6 0.1
11.8 11.8 8.7 0.3
9.7 9.7 6.5 0.2
8.6 8.5 4.4 0.1
0.2 0.2 18.6 3.9 1.2 0.2 1.1
0.2 0.2 33.4 7.4 1.2 0.1 0.6
0.4 0.4 30.8 6.6 1.4 0.1 0.6
0.6 0.6 8.6 5.1 1.6 0.4 2.0
0.9 0.9 4.6 4.0 1.9 0.7 2.9
L-T SOLVENCY OR FINANCIA LEVERAGE (x) Total debt/Equity ratio Interest bearing debt/Equity ratio Interest coverage ratio Debt service coverage ratio Asset/Equity (Equity multiplier) Net debt/Equity Net debt/EBITDA
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 15 of 16
DISCLAIMER This document is produced using open sources believed to be reliable. However, their accuracy and completeness cannot be guaranteed. The statements and opinions herein were formed after due and careful consideration for use as information for the purposes of investment. The opinions 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. The use of any information contained in this document shall be at the sole discretion and risk of the user.
KT ZMICO RESEARCH – RECOMMENDATION DEFINITIONS STOCK RECOMMENDATIONS BUY: Expecting positive total returns of 15% or more over the next 12 months OUTPERFORM: Expecting total returns between ‐10% to +15%; returns expected to exceed market return over six months period because of specific catalysts UNDERPERFORM: Expecting total returns between ‐10% to +15%; returns expected to below market return over six months period because of specific catalysts SELL: Expecting negative total returns of 10% or more over the next 12 months
SECTOR RECOMMENDATIONS OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index by at least 10% over the next 12 months. NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index by 10% over the next 12 months.
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 16 of 16
Company Update
Close LAK6,950 / US$0.86
Earnings upgrade/Earnings downgrade/Overview unchanged
February 13, 2015
Next move to be smooth as silk
Jan‐15
Jun‐14
EDL‐Gen
Apr‐13
Sep‐12
Mar‐12
Aug‐11
Jan‐11
LSX
Nov‐13
120% 100% 80% 60% 40% 20% 0% ‐20%
Share data
Post‐acquisition NP calling for moderate growth at 6% CAGR in 2015‐19E
Reuters / Bloomberg
EDL.BK/EDL LS
Paid‐up Shares (m)
1,226.22
Par (USD, Kip)
0.49 / 4,000
Market cap (Kip bn/USDmn)
8,583.5 / 1,059.2
Foreign limit / actual (%)
20% / 14.27
52 week High / Low (Kip)
7,200 / 5,900
Avg. daily T/O (shares 000)
79.28
Estimated free float (%)
14.27
Beta
1.10
URL
www.edlgen.la
Note: BCEL‐KT Securities is the underwriter of EDL‐Gen. BCEL‐KT Securities Co., Ltd. is a joint venture company between BCEL Bank and KT ZMICO Securities (Thailand).
Patcharin Karsemarnuntana Analyst, no 17834 [email protected] 66 (0) 2695‐5837
Re‐rated PBV expected on the next growth move We roll over EDL‐Gen’s SOTP‐based TP to 2015E at 11,676 kip/share to factor in the 392MW equity capacity additions of “To‐do list” projects spun off by Electricity du Laos through its recent debentures issuance. Its share price is currently trading at undemanding valuation against regional peers despite an attractive dividend yield of 6% p.a. Given its next growth move through the acquisition of “To‐do list” projects, we believe its current 1.3x 2015E PBV deserves to be re‐rated to the higher band, a repeat of the result from its first successful move in 2013‐14. We make 2015‐19E earnings revisions by ‐2%/+8%/+12%/+15%/+22% given the expected flow of earnings contributions from “To‐do list” projects. This will more than offset the larger interest expenses from new debt raising (both project debts of new power assets and the recent debenture issuance), resulting in moderate growth in 2015‐19E NP at 6% CAGR vs. the pre‐acquisition projection at 2% CAGR. Its gearing ratio to be manageable; DSCR to be at a comfortable level In order to capture the growth opportunities from power assets spun off from EDL, huge capital expenditures will be required, causing its projected free cash flow to turn negative in 2015‐17E. However, we expect its gearing to be manageable with the projected D/E ratio to run up and likely peak at 0.94x in 2017E (vs. its threshold policy of 2x) before subsequently declining from 2018E onwards; meanwhile, its debt service coverage ratio (DSCR) will stand at a comfortable level of 1.9‐ 5.0x during 2015‐19E. Potential growth as the source of upside risk As it will seek to capture the escalating power demand growth in the Greater Mekong Sub‐region (GMS) and in Lao PDR, the company’s growth prospects are on the upside with capacity expansion opportunities lining up in the form of “Wish list” projects, i.e., a cluster of new power assets to be further spun off by EDL. This will be a source of upside risk should the company’s power capacity reach its long‐term target of 2,272MW within 2020E, which could challenge its D/E ratio. Financial and Valuation FY Ended 31 Dec Revenues (Kipmn) Net profit (Kipmn) EPS (Kip) EPS growth (%) Dividend (Kip) BV (Kip) FY Ended 31 Dec PER (x) EV/EBITDA (x) PBV (x) Dividend yield (%) ROE (%) Net gearing (%)
2012 913,103 602,469 590.08 (13.4) 450 4,561
2013 1,347,33
2014E 1,277,54
2015E 1,421,73
971,742 792.61 34.3 475 4,897
912,518 744.17 (6.1) 447 5,195
902,135 735.71 (1.1) 441 5,489
2016E 1,919,728 999,557 815.16 10.8 489 5,815
2012 14.1 11.4 1.5 6.5 12.7 15.8
2013 8.8 7.8 1.4 6.8 16.8 12.9
2014E 9.3 8.1 1.3 6.4 14.7 10.9
2015E 9.4 8.7 1.3 6.4 13.8 38.1
2016E 8.5 7.8 1.2 7.0 14.4 71.1
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 1 of 16
Roll over TP to 2015E, with incremental value from “To‐do list” projects We roll over EDL‐Gen’s SOTP‐based TP to 2015E at 11,676 kip/share (equivalent to US$1.4/share), a meaningful 29% increase from our earlier 2014E TP (9,028 kip/share). This has factored in 1) the company’s capacity growth with projected 392MW equity capacity additions (to 1,273MW in the next five years), including 292MW from the 100%‐ owned projects and 100MW from IPP projects under the “To‐do list” projects spun off by Electricity du Laos (EDL) in 2015‐19E with assumed 7‐12% project IRR; and 2) the company’s higher leverage with the newly‐issued Bt6.5bn debentures (approximately US$200mn) to fund the equity call of the new power assets. Given that the expected earnings contributions from new power assets will more than offset the larger interest expenses from new debt raising (both project debts and new debentures), we expect the company to deliver moderate earnings growth at 6% CAGR during 2015‐19E and sustained 14‐15% ROE in the period, vs. the pre‐acquisition growth of 2% CAGR and declining ROE. Meanwhile, its growth prospects look promising with capacity expansion opportunities lining up in the form of “Wish list” projects, i.e., a cluster of new power assets to be further spun off by EDL. This will be a source of upside risk should the company’s power capacity reach its long‐term target of 2,272MW within 2020E. Figure 1: Summary of EDL‐Gen’s 2015E SOTP‐based valuation Source: KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 2 of 16
Figure 2: EDL‐Gen’s capacity growth story A) Capacity growth through the “To‐do list” projects
B) Long‐term capacity target, with the “Wish list” projects to be a source of upside risk
Source: EDL‐Gen, KT ZMICO Research Note: We expect the target acquisition on these new power assets to be a year after the commercial operating date (COD) Figure 3: EDL‐Gen’s projected earnings growth and ROE A) Projected 2014‐19E NP – pre‐ & post‐acquisition
B) Projected 2014‐19E ROE – pre‐ & post‐acquisition
Source: KT ZMICO Research
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 3 of 16
Re‐rated PBV trading on the continuing growth story Our SOTP‐based 2015E TP of 11,676 kip/share (with DCF methodology applied for each power project towards the end of its concession period/power purchase agreement) consists of the value contribution from the existing projects of 8,928 kip/share (including the seven hydroelectric power plants and the four IPPs totaling 881MW) and the “To‐do list” projects of 2,748 kip/share (given the 392MW power capacity addition). The company’s share price is currently trading at undemanding valuation on most fronts (9.45x 2015E PER, 1.3x PBV, and 0.09x PBV/ROE) against regional peers (at the average of 13.3x 2015E PER, 1.8x PBV, and 0.12x PBV/ROE). Meanwhile, its EV/MW is competitive at US$1.37mn/MW in 2015E, even in the peak year of US$1.46mn/MW in 2016‐2017E on the growth cycle, compared with Thailand power operators in the same mode – GLOW at US$1.66mn/MW and CKP at US$3.95mn/MW. Moreover, EDL‐Gen’s profit/MW is quite high at Bt3.67mn/MW given the expected high margin of the hydroelectric power fleet, vs. Thai power operators of Bt1.2‐3.1mn/MW. Finally, its 2015E dividend yield of 6.4% is more appealing than regional peers at 3.8%. Given its upcoming capacity expansion and the continuation of moderate earnings growth through the acquisition of the “To‐do list” projects after the recent successful Bt6.5bn debentures issuance, we believe its current 1.3x 2015E PBV deserves to be re‐ rated to the higher band. This would be a repeat of the story in 2013‐14 when PBV was re‐rated to 1.2‐1.3 PBV (up to +0.5SD) on the larger profit contribution of the four acquired IPPs after a successful secondary equity offering in mid‐2012, vs. 1‐1.1x PBV in 2012. With the combination of its continuing growth phase and the expected increase of foreign trading activities following better infrastructure and the development of the Lao Securities Exchange (LSX), we expect the discount gap of its current share price to our 2015E TP to be narrowed. Thus, we reaffirm our “Buy” rating on EDL‐Gen. Figure 4: EDL‐Gen’s 2015E valuation comparison with Thailand power operators A) EDL‐Gen’s 2015E multiple valuation against peers
B)
EDL‐Gen’s EV/MW towards 2019E
CKP
EGCO
GLOW
RATCH
EDL‐Gen
2015E PER (x)
59.93
10.37
14.49
12.54
9.45
2015E PBV (x)
1.44
1.07
2.59
1.34
1.27
2015E PBV/ROE (x)
0.50
0.10
0.14
0.12
0.09
2015E ROE (%)
2.88
10.62
18.79
10.99
13.77
2015E Dividend yield (%)
0.67
3.75
3.45
4.05
6.35
2015E EV/MW (US$/MW)
3.95
0.99
1.66
0.50
1.37
2015E profit/MW (Btmn/MW)
1.23
2.07
3.13
1.16
3.67
2015E debt‐to‐equity (x)
1.39
0.64
1.02
0.42
0.60
Source: KT ZMICO Research Note: EDL‐Gen’s 2015E multiple valuation reflects a certain contribution of “To‐do list” projects based on our assumed year of asset transfer.
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 4 of 16
Figure 5: EDL-Gen’s valuation comparison with regional peers Name
Mkt Cap
CLP HOLDINGS LTD DATANG INTL POWER GEN CO-H HUANENG POWER INTL INC-H HUADIAN POWER INTL CORP-H CHINA POWER INTERNATIONAL CHINA RESOURCES POWER Hong Kong KOREA ELECTRIC POWER CORP S. Korea TENAGA NASIONAL BHD YTL POWER INTERNATIONAL BHD PETRONAS GAS BHD Malaysia NTPC LTD TATA POWER CO LTD POWER GRID CORP OF INDIA LTD RELIANCE POWER LTD LANCO INFRATECH LTD India MANILA ELECTRIC COMPANY Philippines ELECTRICITY GENERATING PCL RATCHABURI ELEC GEN HODG GLOW ENERGY PCL SPCG PCL CK POWER PCL Thailand EDL-GENERATION PCL Laos AVERAGE
(USDmn) 27,224 13,038 21,419 9,526 4,336 15,255 25,950 21,356 3,161 11,901 18,835 3,649 12,753 2,665 239 6,981 2,577 2,739 3,983 798 586 1,050
PER (x) 14E 16.05 9.84 8.50 7.56 7.55 7.90 9.57 3.73 3.73 11.69 12.00 25.01 16.23 12.58 28.95 14.77 16.44 na 18.18 17.13 17.13 10.80 12.31 14.25 17.40 55.62 22.07 9.34 9.34 13.75
15E 15.80 6.91 8.05 7.90 7.29 7.37 8.89 7.06 7.06 11.22 12.46 23.93 15.87 11.86 15.29 12.37 12.54 na 13.02 16.86 16.86 10.37 12.54 14.49 12.61 59.93 21.99 9.45 9.45 13.30
PBV (x) 14E 1.77 1.04 1.87 1.74 1.28 1.29 1.50 0.47 0.47 1.65 1.11 3.98 2.24 1.33 1.63 2.07 0.81 5.44 2.26 3.87 3.87 1.14 1.42 2.87 4.61 1.60 2.33 1.34 1.34 2.00
15E 1.70 1.01 1.70 1.56 1.18 1.15 1.38 0.44 0.44 1.51 1.05 3.76 2.10 1.28 1.52 1.84 0.76 2.86 1.65 3.56 3.56 1.07 1.34 2.59 3.58 1.44 2.00 1.27 1.27 1.77
EV/EBITDA (x) 14E 10.49 9.71 6.46 6.75 7.96 7.42 8.13 5.70 5.70 7.31 8.26 13.77 9.78 9.66 8.13 10.32 15.57 14.72 11.68 7.97 7.97 18.47 13.08 9.51 13.58 10.35 13.00 8.09 8.09 9.19
15E 10.32 9.43 6.10 6.44 7.52 6.60 7.73 5.45 5.45 7.10 8.61 13.20 9.64 8.64 7.43 8.66 8.86 10.75 8.87 7.97 7.97 19.62 12.78 8.60 10.65 11.39 12.61 8.71 8.71 8.71
YLD (%) 14E 3.96 3.10 4.80 4.03 4.53 4.07 4.08 3.02 3.02 2.54 2.59 2.72 2.62 3.42 1.43 2.39 0.00 na 1.81 4.09 4.09 3.75 3.81 3.51 2.15 0.72 2.79 6.42 6.42 3.55
15E 4.01 4.26 5.16 3.98 4.60 4.45 4.41 3.47 3.47 2.89 2.59 2.79 2.76 3.67 1.73 2.80 0.41 na 2.15 4.23 4.23 3.75 4.05 3.45 3.17 0.67 3.02 6.35 6.35 3.77
ROE (%) 14E 11.28 9.38 18.03 19.34 14.11 17.18 14.89 14.35 14.35 14.44 9.31 16.45 13.40 10.69 5.39 14.35 5.05 nm 8.87 23.37 23.37 10.88 11.98 21.28 32.14 2.93 15.84 14.75 14.75 15.07
15E 10.92 10.77 17.04 15.90 13.05 16.53 14.04 6.54 6.54 13.82 8.44 16.13 12.80 11.28 9.61 15.90 5.93 nm 10.68 21.95 21.95 10.62 10.99 18.79 30.46 2.88 14.75 13.77 13.77 13.50
Source: KT ZMICO Research, Bloomberg Note: EDL‐Gen’s 2015E multiple valuation reflects a certain contribution of “To‐do list” projects based on our assumed year of asset transfer. Figure 6: Multiple valuations of the regional power operators
A) Regional power valuation by PBV/ROE
B) Regional power valuation by dividend yield
Source: KT ZMICO Research, Bloomberg REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 5 of 16
Figure 7: EDL‐Gen’s PBV band and the development of its market capitalization
Source: KT ZMICO Research, Bloomberg “To‐do list” projects to strongly drive its power generation EDL‐Gen’s growth story is set to continue through the acquisition of new power assets (“To‐do list” projects) after the recent successful Bt6.5bn debentures issuance. These new power assets spun off by EDL are likely to drive EDL‐GEN’s capacity growth by 392MW (+44%), with wholly‐owned 292MW and equity‐owned 100MW IPP projects. This will boost the company’s power capacity from 881MW at current to 1,273MW over the next five years (~8% CAGR), bringing the proportion of 100%‐owned projects : IPPs to 53% : 47% (vs. the pre‐acquisition proportion 44% : 56%). According to the schedule, we expect these new power asset acquisitions to make full‐ year contributions a year after their commercial operating dates (COD); thus, EDL‐Gen’s power capacity is expected to see a big jump in 2015‐17E after the three 100%‐owned projects, namely Houay Lamphanh Ngai (88MW), Nam Khan 2 (130MW) and Nam Khan 3 (60MW), come into its power portfolio, followed by the IPP projects in 2018‐19E. Thus, its power generation is set to make a big jump by 39% to 6,217GWh (equity power generation) after the completion of the acquisitions of new power assets with their full‐ year contributions (vs. pre‐acquisition at 4,463GWh), with a 52% contribution from wholly‐owned power plants and the remaining 48% from IPPs. This implies an average 51% plant factor for its entire power portfolio. Note that its power generation is 61% sold domestically from electricity output generated from its 100%‐owned hydroelectric power plants and 39% exported, mainly from the IPPs, namely Theun Hinboun (THPC), Nam Ngum 2 and Houay Ho. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 6 of 16
Figure 8: EDL‐Gen’s capacity growth and breakdown between 100%‐owned projects and IPP projects Source: EDL‐Gen, KT ZMICO Research Figure 9: Expected equity power generation by project
Source: EDL‐Gen, KT ZMICO Research Note: Projected equity power generation based on full‐year contributions REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 7 of 16
Post‐acquisition NP calling for moderate growth at 6% CAGR during 2015‐19E We have slightly fine‐tuned our 2014E NP for EDL‐Gen by +1% to 912,518mn kip to factor in the larger profit contribution from affiliates, particularly in the case of Theun Hinboun due to the good performance of its power generation, along with the higher interest expenses from its recent Bt6.5bn debentures issuance in mid‐Dec 2014. We expect our 2014E NP estimate to be achievable (9M14 NP accounted for 77% of our full‐year forecast). Stripping out the forex impact, we expect the company to deliver 922,073mn kip core profit, with an expected half‐on‐half profit contribution from its seven wholly‐ owned hydroelectric power plants (due to achieving power generation of 1,893GWh vs. 9M14 of 1,532GWh) and from its four IPPs with THPC as the main driver. We make 2015‐19E earnings revisions by ‐2%/+8%/+12%/+15%/+22% given the expected earnings contributions from new power assets (“To‐do list” projects) following 1) the larger power generation with projected 11% CAGR after the consolidation of the 100%‐ owned projects; and 2) the higher profit contributions from IPPs. This will more than offset the larger interest expenses from new debt raising (both project debts of new power assets and recent debentures issuance), resulting in moderate growth in 2015‐19E NP at 6% CAGR vs. the pre‐acquisition projection at 2% CAGR. We expect the profit contributions between its 100%‐owned projects and IPPs to be at nearly 50% : 50% in the next five years, with Nam Ngum 1 and Houay Lamphan Ngai as the major contributors among the wholly‐owned projects, and THPC as the key contributor of the IPPs. Apart from the increasing power generation, the well‐established electricity tariff structure (mostly on a cost‐plus basis with 1% escalating growth per annum) and the sustained costs of the hydroelectric power plants (with depreciation expenses as the major costs accounting for 56‐68% in 2015‐19E, and the remainder being maintenance costs, SG&A expenses and others) will enable the company to enjoy a high gross margin of 71‐75% in 2015‐19E, and an EBITDA margin of 89‐91%. Figure 10: EdL-Gen’s earnings forecasts, energy generation and profit-making ability A)
Projected 2014‐19E core profit and NP and % growth
B) Projected equity power generation by 100%-owned projects (only consolidated projects) in 2014-19E
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 8 of 16
C) Projected profit contribution from its 100%-owned projects and IPPs
E)
Projected gross margin and EBITDA margin
D) % profit contribution from its 100%owned projects and IPPs
F)
Projected interest expenses – postand pre-acquisition
Source: KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 9 of 16
Its gearing ratio to be manageable; DSCR to stand at a comfortable level Given the expected average investment cost of US$2.0/MW and the approximate 22% equity injection, we expect the company to require US$167mn for the equity call (including US$110mn for the 100%‐owned power plants, US$47mn for the IPPs, and another US$10mn cash injection) to fund these “To‐do list” projects, trading off for the additional equity capacity of 392MW. Thus, the proceeds required for the new power asset acquisitions, with the planned refinancing of its existing high cost‐of‐fund US$30mn loan from ADB on top, amount to US$197mn, matching its recent debentures issuance. In order to capture the growth opportunities from the power assets spun off from EDL, huge capital expenditures will be required, particularly in 2015‐17E with the acquisition of major 100%‐owned projects, namely Houay Lamphanh Ngai, Nam Khan 2 and Nam Khan 3. Thus, its projected free cash flow will turn negative in 2015‐17E before reversing to positive from 2018E onwards. Given that new debt raising will be primarily used to fund both the equity call and project debt, its leverage will definitely be on a rising trend. However, we expect its gearing to be manageable with the projected D/E ratio to run up and likely peak at 0.94x in 2017E (vs. its threshold policy of 2x) before subsequently declining from 2018E onwards following the larger contribution from new power assets. Meanwhile, the favorable project debt with a 5‐7 year grace period and the new debentures with bullet maturity in the next 5‐10 years will result in its debt service coverage ratio (DSCR) standing at a comfortable level of 1.9‐5.0x during 2015‐19E. Figure 11: Details of “To‐do list” projects
Source: EDL‐Gen, KT ZMICO Research
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 10 of 16
Figure 12: EdL-Gen’s planned capital expenditures and financial position A) Projected capex and free cash flow during 2015-19E
B) Projected investment cost per MW of “To-do list” projects
C) Projected debt-to-equity ratio during 2014-19E
D) Projected debt service coverage ratio (DSCR) during 2014-19E
Source: EDL‐Gen, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 11 of 16
Potential growth as the source of upside risk As it will seek to capture the escalating power demand growth in the Greater Mekong Sub‐ region (GMS) and in Lao PDR, the company’s growth prospects are on the upside with capacity expansion opportunities lining up in the form of “Wish list” projects, i.e., a cluster of new power assets to be further spun off by EDL. This will be a source of upside risk should the company’s power capacity reach its long‐term target of 2,272MW within 2020E, which could challenge its D/E ratio. Figure 13: EDL‐Gen’s long‐term potential capacity growth
Source: The Company, KT ZMICO Research
Foreign exchange risk is manageable and will be further mitigated On the operational level, most of its electricity tariffs are charged in kip, particularly in the case of the 100%‐owned projects, against some expenses in US$ (i.e., maintenance costs, interest expenses, and principal repayments). Therefore, foreign exchange risk is possible given the expected depreciation of the kip against the US$ over the next few years. Nevertheless, a clause in the Power Purchase Agreement states that in the case of a fluctuation in the exchange rate of more than 10% (from the agreed‐upon rate of 8,000kip/US$), EdL‐Gen would be able to renegotiate with EDL. Meanwhile, its IPPs would be less impacted by currency fluctuations given that their tariff structure of 50% : 50% indexation to the US$ and baht provides a natural hedge to a certain degree, as in the case of THPC and Nam Ngum 2. Thus, the risk on currency fluctuation is manageable, with some mechanisms for further mitigation. These include the balancing of its US$‐denominated revenue with US$‐ denominated loans, with the dividend received from the existing four IPPs both in terms of baht and US$ as well as the dividend received from those IPPs on the “To‐do list” to be mostly in terms of US$ (90% at a maximum). However, in terms of the balance sheet line, there will inevitably be an unrealized foreign exchange impact given that most of its loan facilities are US$‐denominated loans. Note that its recent baht debentures issuance to acquire the “To‐do list” projects has already made a cross currency swap into US$ to protect against currency fluctuation risk. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 12 of 16
Why Laos? The Greater Mekong Sub‐region (GMS), with an area covering 2.6mn square kilometers and a combined population of around 326mn, is drawing investors’ interest as a new frontier for Asian economic growth. Six countries, including Cambodia, the People's Republic of China (specifically Yunnan Province and Guangxi Zhuang Autonomous Region), Lao PDR, Myanmar, Thailand, and Vietnam, have entered into a program of sub‐ regional economic cooperation. This will lead to more diversified economies and open market‐based systems, along with the growth of commercial relationships among the six Mekong countries in the form of cross‐border trade, investment, and labor mobility. Moreover, it will necessitate the development and utilization of hydroelectric power plants on a sub‐regional basis. We believe Lao PDR will play a major role in the development of hydroelectric power plants due to the country’s physical geography. The country has an abundance of mountainous areas, with the major tributaries of the Mekong River covering 35% of the total Mekong River basin, as well as relatively high annual rainfall. Lao PDR’s commitments for power supply to the GMS are sizable, including Thailand amounting to 7,000MW by 2020 and Vietnam totaling 5,000MW by 2020. To facilitate meeting the power requirements under these commitments as well as the power demand in the GMS (with projected peak demand to expand by 14% CAGR, more than doubling from 81,830MW in 2013 to 203,325MW by 2020E), Lao PDR’s installed capacity has the potential to reach 14,384MW in 2020E (vs. 3,245MW in 2013), implying 24% CAGR. Beyond the supply requirements of its grid‐connected domestic consumers, Lao PDR’s power generation is mainly for export at an 75% proportion. Note that EDL‐Gen aims for a 16% share of the pie, with its power capacity targeted to reach 2,272MW within 2020E. Figure 14: Greater Mekong Sub‐region and Lao PDR’s growing power industry A) Greater Mekong Sub‐region peak load demand profile (MW)
B) Lao PDR’s power demand and supply outlook
Source: Ministry of Energy and Mines, EDL‐Gen REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 13 of 16
Financial tables
Financial Summary
mnKips 2012
2013
2014E
2015E
2016E
779,887 (185,990) 593,897 105,605 0 4,613 22,998 913,103 727,113 (61,846) 665,267 (35,680) (27,118) 602,469 491.32
862,429 (205,084) 657,345 453,746 0 6,700 24,463 1,347,338 1,142,254 (113,489) 1,028,765 (30,845) (27,327) 971,742 792.47
824,086 (214,493) 609,593 459,479 2,492 1,045 (9,555) 1,277,548 1,063,055 (94,929) 968,126 (31,436) (24,172) 912,518 744.17
895,842 (239,603) 656,238 538,830 2,820 1,045 (16,807) 1,421,731 1,182,127 (103,982) 1,078,145 (124,830) (51,180) 902,135 735.71
1,412,702 (424,803) 987,899 512,411 3,050 1,045 (9,480) 1,919,728 1,494,925 (123,021) 1,371,904 (301,201) (71,146) 999,557 815.16
Consolidated Balance Sheets Cash and cash equivalents Current assets Property, plant and equipment-Net Investment in JV and interests in associates Non-current assets Total assets
164,511 623,077 3,944,900 1,722,049 384,198 6,674,224
159,914 708,194 4,011,109 1,869,992 477,876 7,067,171
1,892,954 2,549,105 3,620,343 2,084,745 778,944 9,033,138
1,443,910 2,151,361 5,477,569 2,412,313 778,944 10,820,188
1,187,001 2,290,593 7,799,868 2,635,342 778,944 13,504,748
Current liabilities Long term loans Non-current liabilities Total liabilities Paid up capital Retained earnings Total equities
207,289 874,603 0 1,081,892 4,904,867 436,292 5,592,332
256,989 805,295 0 1,062,284 4,904,867 744,348 6,004,887
216,664 2,446,580 0 2,663,244 4,904,867 1,109,355 6,369,894
220,998 3,868,442 0 4,089,440 4,904,867 1,432,921 6,730,748
267,799 6,106,378 0 6,374,177 4,904,867 1,788,744 7,130,571
602,469 158,579 (22,998)
971,742 167,060 (24,463)
912,518 171,423 9,555
902,135 194,004 16,807
999,557 361,566 9,480
49,404 (155,833) (1,713,633) (1,037,721) (210,843) (537,268) 1,557,131 0 (228,700) 342,795 164,511
1,736 (233,269) 191,516 641,185 (86,595) (582,453) 0 0 (27,863) 164,511 159,914
(156,173) 219,343 0 640,845 1,639,706 (547,511) 0 0 1,733,040 159,914 1,892,954
(46,310) (2,051,230) (92,527) (1,312,162) 1,404,399 (541,281) 0 0 (449,044) 1,892,954 1,443,910
(359,126) (2,683,865) 0 (1,895,418) 2,238,244 (599,734) 0 0 (256,908) 1,443,910 1,187,001
Consolidated Income Statement Electricity sales Cost of sales Gross profit Profit from associates and JV Dividend income Other income Currency exchange gains Total revenue Gain before expenses Administrative expenses Profit before financial costs and tax Finance costs Income tax Net profit EPS (FD)
Cash flow Net earnings DD&A Unrealized FX Gain (Loss) Other non-cash charges Cash earnings Change in working capital Capex Investments in affiliates Free cash flows Debt Financing Dividend paid Capital increase Others Net cash flows Cash equivalents -beginning Cash equivalents -ending
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 14 of 16
Financial Summary Per share data and financial ratio EV - fully diluted (kip) EPS - fully diluted (kip) EPS - weighted (kip) DPS (kip) BV (kip) PER (x) PBV (x) EV/EBITDA (x) Div. yield (%) Div. payout ratio (%) Percentage Growth (%) Sales Growth Normalized Profit Growth Net Profit Growth EPS growth (%) EBITDA Growth Profitability Ratio (%) Gross profit margin EBIT margin EBITDA margin Net profit margin ROE ROA ROCE S-T SOLVENCY OR LIQUIDITY RATIOS (x) Current ratio Quick ratio Cash ratio Net working capital to total assets
2012
2013
2014E
2015E
2016E
7,670.8 491.3 590.1 450.0 4,560.6 14.1 1.5 11.4 6.5 91.6
7,584.0 792.5 792.6 475.0 4,897.1 8.8 1.4 7.8 6.8 59.9
7,515.6 744.2 744.2 446.5 5,194.8 9.3 1.3 8.1 6.4 60.0
9,040.9 735.7 735.7 441.4 5,489.0 9.4 1.3 8.7 6.4 60.0
11,083.4 815.2 815.2 489.1 5,815.1 8.5 1.2 7.8 7.0 60.0
(11.6) 2.1 6.9 (24.3) 4.4
10.6 63.5 61.3 61.3 45.3
(4.4) (2.7) (6.1) (6.1) (4.8)
8.7 (0.3) (1.1) (1.1) 11.6
57.7 9.8 10.8 10.8 36.3
74.4 72.9 90.2 66.0 12.7 10.1 10.5
78.1 76.4 88.8 72.1 16.8 14.1 14.6
76.0 75.8 89.2 71.4 14.7 11.3 11.7
75.2 75.8 89.5 63.5 13.8 9.1 9.3
71.5 71.5 90.3 52.1 14.4 8.2 8.4
3.0 3.0 0.8 0.1
2.8 2.7 0.6 0.1
11.8 11.8 8.7 0.3
9.7 9.7 6.5 0.2
8.6 8.5 4.4 0.1
0.2 0.2 18.6 3.9 1.2 0.2 1.1
0.2 0.2 33.4 7.4 1.2 0.1 0.6
0.4 0.4 30.8 6.6 1.4 0.1 0.6
0.6 0.6 8.6 5.1 1.6 0.4 2.0
0.9 0.9 4.6 4.0 1.9 0.7 2.9
L-T SOLVENCY OR FINANCIA LEVERAGE (x) Total debt/Equity ratio Interest bearing debt/Equity ratio Interest coverage ratio Debt service coverage ratio Asset/Equity (Equity multiplier) Net debt/Equity Net debt/EBITDA
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 15 of 16
DISCLAIMER This document is produced using open sources believed to be reliable. However, their accuracy and completeness cannot be guaranteed. The statements and opinions herein were formed after due and careful consideration for use as information for the purposes of investment. The opinions 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. The use of any information contained in this document shall be at the sole discretion and risk of the user.
KT ZMICO RESEARCH – RECOMMENDATION DEFINITIONS STOCK RECOMMENDATIONS BUY: Expecting positive total returns of 15% or more over the next 12 months OUTPERFORM: Expecting total returns between ‐10% to +15%; returns expected to exceed market return over six months period because of specific catalysts UNDERPERFORM: Expecting total returns between ‐10% to +15%; returns expected to below market return over six months period because of specific catalysts SELL: Expecting negative total returns of 10% or more over the next 12 months
SECTOR RECOMMENDATIONS OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index by at least 10% over the next 12 months. NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index by 10% over the next 12 months.
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 16 of 16
