Vietnam Power Sector

April 2, 2014

THIS REPORT IS PREPARED IN ASSOCIATION WITH VNDIRECT SECURITIES CORPORATION. PLEASE SEE DISCLAIMER AND IMPORTANT NOTICES APPEARING AT THE END OF THIS DOCUMENT. IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE ALSO PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA

VIETNAM POWER

Hungry for power investments Electricity demand is growing at about 15% per year in Vietnam. Industry-wide reforms should lead to more favourable power purchase agreements (PPAs) for the independent power producers (IPPs) in Vietnam who are currently paid only 5¢/kwh vs. 8¢/kwh in Thailand.

Figure 1: Electricity prices in Vietnam (2008=100)

80

90

100

110

120

130

140

150

160

170

2008 2009 2010 2011 2012 2013

SOURCES: CIMB, EVN

We are Overweight the power sector because growing demand and deregulation should lead to more favourable PPAs for the IPPs. VSH is our top pick. Its low costs make it one of the biggest winners from deregulation.

Robust energy demand prompts reforms Vietnam’s electricity usage will increase from 120Twh in 2014 to 695Twh in 2030, but the government needs US$123bn to build this new generating capacity, so it plans to rely on private sector and foreign investment. The industry's lack of transparency had discouraged those investors in the past, so industry-wide reforms, including electricity price liberalisation, are being implemented.

Power price liberalisation Vietnam’s complex system of subsidies in its power industry resulted in losses of US$1bn for Electricity Vietnam (EVN), the SOE electricity distribution monopoly,

dampened profits at the SOE coal and gas companies (that sell to generators at below-market prices), and retail electricity prices more than 60% below those in other Asean countries in 2009. Subsidies are now being eliminated. Retail electricity prices have risen by about 10%/year since 2009 (so EVN is no longer loss making), and are set to rise another 22% by 2015, the prices IPPs are paid for electricity are being liberalised – we expect fair market pricing within five years while subsidies on gas and coal input prices are set to evaporate because Vietnam will soon need to import both of these commodities.

Hydropower generators benefit most from reforms Hydropower generators have the lowest costs, so they are coerced to sell their electricity at the lowest prices in order to cross-subsidise the coal- and gas-fired generators. Hydropower generators will benefit the most when prices are liberalised.

Notes from the Field

—————————————————————————————————————————

NGUYEN Xuan Huy T (84) 90 912 3880 E [email protected]

‘‘‘‘ Vietnam is selling electricity at a low price, compared with the production cost.”

– Bui Van Thach, Vice chairman of Economic Centre

Highlighted Companies

VSH: Vinh Son Song Hinh Hydro Power VSH has the lowest production costs of any listed power company in Vietnam. About half its competitive advantage stems from its low depreciation costs. That low cost structure makes VSH one of the companies set to benefit the most from the deregulation of Vietnam’s electricity industry.

PPC: Pha Lai Thermal Power PPC is a coal-fired generator which currently enjoys a 10% subsidy on the coal it purchases from Vietnam’s coal mining SOE (Vinacomin). The company has a 1x D/E ratio, and all of its debt is yen-denominated so PPC’s earnings and share price performance are closely linked to movements in the JPY exchange rate.

REE: Refrigeration Electrical Engineering REE is a conglomerate whose core business is air conditioning manufacture (for home and industrial users) and installation (for industrial users). The company also owns several office buildings it leases and has been investing heavily in the utility sector recently. Currently about half of REE’s assets are comprised of investments in 14 utility and coal mining companies, including a 22% stake in PPC.

POWER April 2, 2014

2

Figure 2: Electricity generators' FY12 ratios

Market Cap (US$mn) ASP Production cost Gross margin Net margin ROE ROA P/E P/B Debt/equity (%)

Hydro power producers

VSH VN Equity 167 351 203 53 70 10 7 16 1 33

TMP VN Equity 63 474 307 54 28 17 10 7 1 48

TBC VN Equity 56 522 343 56 50 15 15 8 1 1

SJD VN Equity 46 780 322 59 45 26 15 5 1 41

GHC VN Equity 15 923 248 73 52 49 18 4 2 137

DRL VN Equity 14 814 290 64 59 31 28 9 3 0

Average 60 51 25 16 8 2 43

Coal power producers

PPC VN Equity 359 832 764 11 12 14 4 5 1 167

BTP VN Equity 45 1,411 1,060 14 9 15 6 7 1 85

NBP VN Equity 12 1,083 1,034 12 5 14 8 8 1 0

Average 12 9 14 6 7 1 84

Gas power producer

NT2 VN Equity 89 1,172 1,037 12 0 0 0 253 1 336 SOURCES: CIMB, COMPANY REPORTS

We prefer hydropower to coal- and gas-fired generators for the following reasons:

1) Hydropower companies have lower production costs than the coal and gas power companies. Furthermore, depreciation makes up 50% of their costs, versus about 18% for the gas- and coal-fired generators.

2) Gas- and coal-based producers currently enjoy subsidies for their input natural gas and coal, but those subsidies will eventually be phased out as a by-product of the on-going liberalisation of Vietnam’s power industry.

3) In the run-up to full electricity price liberalisation, EVN is likely to continue paying very low prices to hydropower companies for the electricity they generate. One consequence of this is less-than-optimal utilisation rates for some coal-fired generators, further exacerbating their high costs per unit of electricity generated.

4) Hydropower companies should benefit the most from electricity price liberalisation because the prices they are currently being paid for the electricity they generate are the furthest below fair market prices (EVN’s rationale is that hydro generators’ marginal costs are low).

Power April 2, 2014

3

1. BACKGROUND

1.1 Soaring demand leads to brownouts in the dry season Vietnam‘s electricity demand grew 14% CAGR over 2000-13, and is expected to continue growing at a slightly higher pace over 2014-20.

Figure 3: Vietnam's electricity demand

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Mwh

SOURCES: CIMB, EVN

This growing electricity demand is closely tied to its GDP growth, as one would expect. From 2000 to 2013, electricity demand grew at about two times the GDP growth, on average.

Figure 4: Electricity and GDP growth

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

GDP growth Electricity demand growth

SOURCES: CIMB, WORLD BANK, EVN

Industrial demand accounts for half of Vietnam’s electricity usage, and grew 17% CAGR over 2000-2010. This is followed by residential usage, which accounts for nearly 40% of the demand, with a CAGR of 11% over 2000-2010. Going forward industrial usage will continue to be driven by the on-going build-out of Vietnam’s industrial base and the continued flood of FDI into the country, while residential demand will be driven by urbanisation (only 30% of Vietnam’s citizens live in its major cities), and by the emerging middle classes’ hunger for a wide variety of white goods such as air conditioners, electric cookers and microwaves (LPG cooking is still widespread in Vietnam).

Table of Contents

1. BACKGROUND p.3

2. OUTLOOK p.9

3. RISKS p.12

4. VALUATION & RECOMMENDATION p.13

5. APPENDIX p.14

‘‘‘‘ Vietnam cannot sell electricity [priced this low] forever.” – Bui Van Thach, Vice chairman of Economic Centre

Power April 2, 2014

4

Figure 5: Consumption breakdown

0

10

20

30

40

50

60

70

80

90

2000 2010

Twh

Industry & construction Residence & administration Commerce, hotels & others Agriculture, forestry & aquaculture

SOURCES: CIMB, EVN

The robust demand growth described above has caused brownouts during Vietnam’s dry season (which lasts for half of the year), because nearly half of the country’s electricity is generated from hydropower.

These brownouts primarily affect the country's domestic manufacturers, whose production costs are inflated by the need to increase working hours and to use costly backup generators. Vietnam is at risk of losing its competitive advantage as a low-cost production base if this situation worsens.

Finally, we note that Vietnam imports about 2% of its electricity from China, but this is not due to the lack of domestic generating capacity discussed above. It is because the cost of building an electricity grid in certain remote areas of the country is uneconomical compared to the cost of importing electricity from China to those regions.

Figure 6: Power production break down

43.9%

34.5%

18.9%

2.2% 0.1% 0.4%

Hydro power Gas turbin Coal fired Import FO oil fired Others

SOURCES: CIMB, EVNNLDC

1.2 Two-thirds of Vietnam’s electricity is generated by EVN EVN and its subsidiaries generate 67% of Vietnam’s electricity, followed by PetroVietnam (12%), and Vinacomin (5%). With over 80% of Vietnam’s electricity generated by these three SOEs, the private sector only accounts for a small proportion of capacity. Foreign operators generate 9% of Vietnam’s electricity and the domestic private sector generates just 6% because the lack of price transparency for electricity discourages private and foreign investors from participating in the industry.

Power April 2, 2014

5

To make matters worse, EVN also does not want to build more generating capacity because it only makes about a 1% ROE on its power projects – so the company has been preoccupied with non-core businesses in recent years including banking, insurance and telecommunications.

Figure 7: Breakdown of power suppliers

50.7%

17.0%

12.3%

4.7%

9.0%

6.2%

EVN EVN Jsc Petro Vietnam Vinacomin Foreign developer Local developer

SOURCES: CIMB, EVN

1.3 Massive investments required Vietnam’s government plans to increase the country’s electricity generation capacity from 22,000MW to 75,000MW by 2020 (CAGR of 13%) and to 146,000MW by 2030 (CAGR of 7% for 2020-30). It also plans to reduce Vietnam’s dependence on hydropower, which is a cheap but unstable source of electricity, and to increase the proportion of electricity generated from gas and coal, which are stable sources of electricity, but this means average production costs will increase over time.

According to Vietnam’s master development plan, hydropower capacity will increase from 10,000MW in 2011 to 19,000MW in 2020, and 23,000MW in 2030, but the proportion of Vietnam’s electricity generated from hydropower will drop from 44% to 26% and finally to 16% by 2030. Coal-fired generating capacity will increase from 3,000MW at present to 36,000MW in 2020, and 75,000MW in 2030, so the proportion of Vietnam’s electricity generated using coal will increase from 19% at present, to about 50% from 2020 onwards. Vietnam also aims to operate its first nuclear power plant in 2020, with a capacity of 975MW, and plans increase its nuclear generating capacity to 9,689MW by 2030.

To achieve its targeted capacity, Vietnam needs to invest US$123bn over 2011-30, but EVN does not have sufficient capital nor is it sufficiently focused on its core business. EVN needs to increase retail electricity prices, to attract more private sector investment (both domestic and foreign), and to increase transparency. Lack of transparency has been a key concern for prospective investors in the power sector. For example, the PPAs of certain foreign generators (like America’s AES) have been shrouded in secrecy.

Power April 2, 2014

6

Figure 8: Capacity breakdown (MW) Figure 9: Output breakdown by generator (twh)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2011 2020 2030

Gas fire Hydro power Coal fire Others Nuclear Renewable Import

0

100

200

300

400

500

600

700

800

2012 2020 2030

Gas fire Hydro power Coal fire Import Others Nuclear Renewable

SOURCES: CIMB, EVN SOURCES: CIMB, EVN

1.4 An elaborate system of subsidised prices Vietnam's electricity prices are subsidised by EVN, and are the lowest in the region. Retail electricity prices had been more than 60% below those in the rest of the region in 2009. Seven electricity price increases since 2009 have closed the gap somewhat, as can be seen in figure 11 below, but prices in Vietnam are still about 50% below those in the rest of Asean (we calculated the ‘50%’ figure by weighting the electricity prices in the table below with the GDP of each Asean country).

Figure 10: Vietnam retail electricity price vs region

Average price (Cent/kwh)

Vietnam 7.6

China 7.5-10.7

Thailand 5-9.8

Cambodia 36.1

Philippines 36.1

Malaysia 7.09-14.75

Singapore 20.88

Indonesia 8.75

India 8-12

Japan 20-24 SOURCES: CIMB, WIKIPEDIA, EVN

Vietnam’s price subsidies to end-consumers have generated VND20tr (~$US1bn) of accumulated losses for EVN. The seven electricity price hikes since 2009 described above increased retail prices 63% (or 10% CAGR over 2008-2013), which stopped the flow of red ink at EVN, but the company is far from being reasonably profitable. In 2012, EVN’s all-in costs including generating/ purchasing electricity and the cost of maintaining the grid came to VND1,322/kwh, while its average selling price to retail customers was VND1,364/kwh. For 2014, EVN targets an ROE of only 1%.

To help EVN bolster its profitability, the government approved a further 21% of price hikes, in 3 increments, which will raise retail electricity prices to VND1,835/kwh (8.7¢) by 2015, but part of these price hikes will go towards defraying another dysfunctional aspect of the power industry in Vietnam - the subsidy system extends beyond retail electricity prices.

Natural gas is currently sold to the gas-fired electricity generators at US$5.19/MMBTU, vs. US$8.5-11.6/MMBTU for industrial users, and coal is sold to power generators at about 10% discount to market prices, dampening the profits of Vietnam’s natural gas and coal SOE’s (PetroVietnam and Vinacomin).

Power April 2, 2014

7

Figure 11: Gas prices

User US$/MMBTU

Power plant 5.19

Fertiliser plant 6.56

Industrial 8.5-11.6 SOURCES: CIMB, GAS

The hydropower companies also subsidise the coal- and gas-fired power companies, albeit indirectly. In 2012 the average price EVN paid all electricity generators was VND1,016/kwh, which is double the price that EVN paid the hydropower generators (Figure 2), but below the price it paid the coal and gas power generators.

This dysfunctional system of cross-subsidies needs to be resolved fairly quickly because Vietnam is set to become a net importer of natural gas and coal in the next few years. The reforms to the utility sector that these imminent imports will necessitate are going to significantly increase costs for the gas- and coal-fired power generators.

1.5 EVN is the sole buyer of electricity, sets purchase prices Electricity Vietnam (EVN) is the SOE which currently owns all of Vietnam’s power grids so it is the only buyer of the electricity in the country. Electricity is sold to end users via five EVN subsidiaries that distribute electricity to different parts of the country.

Generator Generator Generator

EVN - Sole buyer

Distributor (EVN 100% ownership)



End user End user End user

Power April 2, 2014

8

Since EVN is currently the only buyer of electricity in Vietnam it is able to set the price it pays generators for their electricity. In theory, EVN sets the prices it pays different power producers for their electricity to give the SOE power generators a 10% ROE (SOE power generators include EVN’s own subsidiaries, as well as power generators owned by PVN, the national oil company, and Vinacomin the national coal company).

For private sector power generators, our understanding is that the unofficial ROE target is the five-year Vietnam Government Bond yield plus 300bp (the current VGB 5-year yield is 7%). Under this scheme, the power producers with lower costs receive lower payment for their electricity so the hydropower producers are paid the least for their electricity. In 2012, the last year for which data is publicly available, the average price EVN paid electricity generators was VND1,016/kwh, while the prices it paid hydropower generators was an average of VND644/kwh (EVN’s total costs were VND1,322/kwh that year and the average selling price was VND1,364/kwh).

The reality however is that even though EVN determines the prices stipulated in the power purchase agreements (PPAs) it signs with power generators in Vietnam using the equitable system just described, it does not always adhere to the prices in those contracts. In the past, EVN had used its monopoly status to pay arbitrarily lower prices for the electricity it purchases from generators.

The most famous case is of the on-going EVN-VSH dispute which is described in detail in the company note below. In short, VSH and EVN had a PPA which expired at the end of 2008. EVN wanted to roll over that contract with a new purchase price 10% below the then prevailing price, even though EVN had actually begun raising the retail electricity prices it charges its end-customers. When the two parties could not reach an agreement, EVN unilaterally began paying VSH a price that was 10% below the price stipulated in the expired PPA, and later lowered the price it pays VSH even further.

1.6 How electricity selling prices are determined Under the current regulatory framework, EVN proposes the retail electricity price to the Ministry of Industry and Trade (MOIT). Within 10 working days, the MOIT will respond to EVN’s proposal. If the MOIT agrees with EVN’s proposal, the former will submit the proposal to the Prime Minister for final approval. The Prime Minister will have 10 working days to reply to the proposal.

Under the current pricing regime, EVN needs to justify price increases, and it does so by delineating the four components of its own costs: generation, transmission, distribution and management. In FY12, the latest year for which data is publically available, EVN’s total costs were VND1,322/kwh, of which electricity generation accounted for 77% (VND1,016/kwh), followed by distribution (16%, VND217/kwh), transmission (6.3%, VND83/kwh) and management (0.4%, VND5/kwh).

Power April 2, 2014

9

Figure 12: 2012’s electricity production cost (VND/kwh)

1,016.4

83.2

217.7

5.3

Generation cost Transmission cost Distribution cost Management cost

SOURCES: CIMB, ERAV

Electricity prices are differentiated by the type of user, the amount of usage (on an graduated pricing schedule), and proximity to major electric transmission lines (factories tapping into trunk lines get a 2% discount for their electricity). Currently, the agriculture users pay the lowest electricity prices as do the poor and low-income earners.

Figure 13: Electricity retail price below 6kV

Manufacturing Business Agriculture

Hospital,

school

Public

lighting

Administrative

office

Regular hour 1,406 2,285 1,259

Low hour 897 1,410 656

High hour 2,542 3,900 1,803

1,471 1,590 1,590

SOURCES: CIMB, MOIT

For residential users, the retail price is charged on a graduated pricing schedule. The following tables show the retail prices for different users and by usage.

Figure 14: Residential retail price

Electricity consumed in a month Price (VND/kwh)

50 kwh (for poor and low income) 993

0-100kwh (regular household) 1,418

For kwh from 101-150 1,622

For kwh from 151-200 2,044

For kwh from 201-300 2,210

For kwh from 301-400 2,361

Fro kwh above 401 2,420 SOURCES: CIMB, COMPANY REPORTS

Finally, we note that under current regulations (introduced in 2013), the minimum time between any two successive price increases is six months, and the price ceiling for every adjustment is 7%.

2. OUTLOOK

2.1 Electricity price liberalisation In July 2013, Vietnam’s 2004 electricity law was amended to reaffirm a long- standing (but sluggishly implemented) plan to create a competitive electricity market in Vietnam.

Electricity prices are being liberalised in Vietnam for two reasons:

1) The increase in Vietnam’s electricity capacity has not kept pace with increasing demand, thanks partly to EVN’s lack of focus on its core electricity business in recent years, and because the dysfunctions outlined above discouraged private sector investment.

Power April 2, 2014

10

2) Vietnam’s SOE coal and gas monopolies are coerced to sell to coal- and gas-based electricity generators at below-market prices, but these subsidies will need to be eliminated within the next few years because Vietnam is set to become an importer of gas and coal – necessitating the application of market prices.

These two exogenous factors give us confidence in the continued reforms to Vietnam’s power industry – the government simply cannot put off reforming the system much longer. Also, EVN’s stature in Vietnam has declined, which is discussed in the next section – we do not believe EVN has the ability to block market reforms any longer.

Before moving on to a discussion about EVN, we would firstly like to delve into the two factors above as these are the main catalysts for the current, on-going reforms.

Reform needed to meet Vietnam’s power needs

Vietnam’s electricity demand is growing at about 14-15% a year. The system requires about US$5bn of investment a year just to keep pace with demand, which means about another 5,000MW of capacity a year, lest the problem of brownouts become worse, which would reduce Vietnam’s competitiveness as a low cost production base. For example, one reason cited for Vietnam’s fall from the 90th position to the 99th position in the World Bank’s most recent ‘Doing Business’ survey is the availability of electricity.

Figure 15: World Bank’s “Doing Business” survey for Vietnam

SOURCES: CIMB, DOING BUSINESS INDICATORS, WORLD BANK

Vietnam’s government does not have US$5bn a year to spend on electricity, especially at a time when physical infrastructure spending is being ramped up (roads, bridges, ports, etc.), and Vietnam’s banking system is being cleaned up (the government has repeatedly said it does not want to spend public money to bail out the banks but we think some public money will be needed to re-capitalise some of the banks).

Growing foreign involvement

So far, the government has resolved its conundrum by starting to allow some foreign investment into the power generation business on advantageous terms. AES from the US and POSCO from Korea are developing a US$2bn, 1,200MW plant scheduled to go on-line in 2015 and a variety of other operators (including Sumitomo, Sembcorp, Samsung and Enercon) are said to be in discussions to build US$1bn-2bn plants, with capacities of 1,200-2,600MW.

Power April 2, 2014

11

The US$-denominated PPA between the AES & POSCO consortium and the Vietnamese government was shrouded in secrecy, but it is widely rumoured that the long-term deal has AES selling electricity to the government at 8-9¢/kwh. We do not believe the government will be able to keep such deals secret forever, especially as more foreign operators become involved in the Vietnam’s power sector. Furthermore, we believe this situation will create widespread resentment (some local hydropower companies are only being paid 1.5-3 cents/kwh for their electricity), which will further prompt the deregulation of the market and more transparency in electricity pricing.

Reform needed to eliminated cross-subsidy system

We mentioned above that Vietnam will need to start importing natural gas and coal within the next 2-3 years. We think it is very unlikely that the government will be able to compel the SOE gas and coal companies to sell to the gas and coal based generators at below-market prices once they are importing those commodities at world prices. Also, it should be noted that for whatever reason, those two SOE’s have relatively more political power in Vietnam than EVN has, making it even less likely the current cross-subsidy system can survive.

We also believe that the government will not be able to eliminate the cross-subsidies from the natural gas and coal SOEs to the power generators without also reducing the cross-subsidisation of coal and gas electricity generators by the hydropower generators. This means PPAs for hydropower companies look set to rise going forward.

2.2 The tide of public opinion has turned against EVN In January 2014, a scathing article in Vietnam’s state-owned press titled, “The lessons of EVN’s incompetence” summed up the prevailing sentiment towards the SOE electricity giant. The article was written by a former vice chairman of the SCIC (the entity that holds the government’s ownership stakes in all non-bank SOE’s) who now works at the Ministry of Planning and Investment.

Among other things, the author cites the government’s inspectorate’s findings that EVN invested US$5.8bn in non-core businesses, while its paid-in capital was only US$3.7bn. The author also cited the company’s “past negligence and incompetence” which led it build $30m worth of villas, tennis courts and swimming pools on 355,000 sqm of land designated for the construction of power plants.

2.3 Timetable of industry reforms The transformation of Vietnam’s electricity market into a transparent, competitive market is set to take place in three phases:

1) Phase 1: Competitive generation market (2011-2014)

Competition happens in the generation of electricity, but there is only a single wholesaler (i.e. EVN is still the single buyer from the power generators). A portion of the electricity the generators produce is sold to the single buyer at the price stipulated in the PPA between EVN and the individual generator, but a fraction of those generators’ output (~20%) is sold via a type of bidding system described below.

2) Phase 2: Competitive wholesale market (2015-2021)

Competition happens in electricity generation and in electricity wholesaling. There will be multiple wholesalers (multiple buyers) that will bid for electricity from the generators. The wholesaler will also compete to supply the electricity distributors/transporters.

2015-2016: pilot wholesale market

2017-2021: wholesale competitive market

Power April 2, 2014

12

3) Phase 3: Competitive retail market (2020 onwards)

Competition happens in electricity generation, wholesaling, and retailing, meaning that end-users will be able to select their electricity provider. The retailers will compete for the electricity offered by the wholesalers by paying market prices.

2022-2023: pilot retail market

2024 onwards: competitive retail market

Figure 16: Vietnam’s electricity reform horizon

SOURCES: CIMB, EVN

At first glance, the roadmap identified above seems straightforward, but on closer investigation several questions arise, which are discussed in the next section.

3. RISKS

3.1 The opaque road to transparency While the government’s transformation plan outlined above sounds good in theory, it leaves several open questions about how deregulation will be implemented in reality.

When Phase I, which is current being implemented, is discussed in the press, words like “market prices” and “open bidding” are routinely misused, making us a little concerned about how the future phases of the liberalisation will be implemented. The ‘nuts and bolts’ of how the current phase of liberalisation functions follows:

Phase 1 of deregulation

In the current phase of deregulation, the generators sell the majority of the electricity to EVN at previously-agreed PPA prices (which are generally far too low). However, EVN now allows generators to sell up to 40% of the electricity they generate at what it terms “market price” in an “open bidding” process.

The “market price” EVN is referring to is actually an arbitrary price set by EVN themselves moment-to-moment, which tends to be about 10% higher than the previously-stipulated PPA prices for both the gas & coal generators and the hydro generators (to be clear, that means EVN has two “market prices” at any time: one for electricity produced by gas/coal based generators, and one for electricity produced by hydro-based generators).

Those “market prices” fluctuate according to EVN’s load demand, but on average they are about 10% above the fixed PPA prices, so all of the generators would, in theory, like to sell their entire 40% quota production at those higher

Power April 2, 2014

13

prices. At any moment, different electricity generators will have different abilities to meet the current load demand so the amount of electricity they actually offer to sell will vary – hence the “open bidding” process referred to above. At present EVN arbitrarily decides how much electricity it buys from each generator at its higher “market prices” when a surplus is offered by the generators (as is often the case). In 2012, the generators sold about 10% of their output at these higher “market prices” and in 2013 that number was 20%.

We are not enthusiastic about the opaque and arbitrary nature of the current system, but we must concede its genius – it encourages additional electricity production by the generators, especially at times of peak load, thus ensuring the efficient utilisation of the current system. And it also is an incremental step in the direction of deregulation.

Phase 2 of deregulation

Things will become a bit clearer in Phase 2 of the industry deregulation. The government will restructure the industry’s wholesaling mechanism by introducing 1-2 additional electricity wholesalers. Those wholesalers will be created by splitting EVN’s current wholesaling function into more than one company - note that there is a precedent for something similar to this in Vietnam when the post office’s mobile phone operations were split into two competitors, VNPT and Mobiphone.

It is not exactly clear how the introduction of additional wholesalers will improve the generators’ situation, but since there will be competitive forces at work bidding up the price of electricity, presumably this should help things further along towards fair market pricing. We expect electricity prices in Vietnam to be transparent and at market prices well before the end of Phase 2 of deregulation (around 2019-2020).

3.2 Resistance from consumers The electricity price hikes of the last few years have inflated the monthly electricity bills of many households to the point that electricity expenses now represent 10-15% of those households’ incomes. Naturally, this has created some unhappiness among Vietnam’s citizens, especially when coupled with the widely publicised problems of EVN which were described above.

Our fear is that if the pushback becomes too intense, the government could postpone or derail the on-going liberalisation of the electricity market, although at the present time, we see little risk of that happening given the strong forces prompting deregulation (i.e. increasing demand and Vietnam’s imminent need to import gas and coal).

4. Valuation and Recommendation We’ve initiating coverage on Vietnam’s power generating sector and ‘Add’ rating based on the on-going deregulation in the market, Vietnam’s growing electricity demand and also due to valuation. The trailing PE of Vietnam’s power sector is more than 50% below the Asean average valuation (8x for Vietnam versus ~18x for Asian, excluding certain outliers in Asian with very high PE’s).

Within the sector we see real value in some of the smaller companies in the sector but the market caps of those companies are too small for most investors so we’ve focused out attention on the three stocks most investors will find easiest to buy: VSH, PPC and REE. Investors who are interested in those smaller power companies would be well advised to take a close look at REE, which has been increasing its investments in those small companies (as well as its holdings of PPC shares). Our top pick in the sector is VSH because it has the lowest costs, so we believe it will benefit the most from deregulation.

Power April 2, 2014

14

5. APPENDIX: VIETNAM’S COAL INDUSTRY

5.1 Vinacomin is Vietnam’s coal SOE Vinacomin is the coal industry’s analogy to EVN in the electricity industry. Vinacomin and its 8 listed subsidiaries are responsible for 95% of Vietnam’s coal production. About 60% of Vinacomin’s production is sold to EVN to produce electricity and the industry employs 120,000 people in Vietnam, mostly as coal miners.

Unfortunately, Vinacomin like most SOEs in Vietnam is actively invested in non-core businesses including banking, insurance and real estate. Finally, until 2012, the price which Vinacomin sold its coal to EVN was heavily subsidised and only covered about half the cost of digging the coal out of the ground. Coal prices have been rising rapidly since 2012, in tandem with electricity prices to final users. The Ministry of Industry and Trade wanted electricity producers to pay market prices for coal from 2013, but the prices they pay are still about 10% below free market prices at present.

5.2 Vinacomin’s listed subsidiaries In another analogy between Vinacomin and EVN, Vinacomin also has listed subsidiaries, which are all still 51%-owned by Vinacomin. The market capitalisations of these subsidiaries are tiny, especially when compared to their coal reserves, mainly because Vinacomin pays the listed coal companies below-market prices for their coal production.

Figure 17: Coal producers' reserve

Market cap

($ m) Total Above ground Under ground

TDN 62.1 4.7 63 36 27 2.6

NBC 19.0 4.5 60 15 45 5.2

TVD 17.8 7.3 97 8 89 3.5

HLC 13.2 13.5 180 80 100 2.4

TC6 11.3 2.5 33 33 0 2

TCS 9.9 3 40 40 0 3.9

THT 9.6 1.5 20 20 0 3

MDC 8.8 0.8 10 10 0 1.8

TkrValue of reserves

($b)

Reserves (m tons) Annual Prod.

(m)

SOURCES: CIMB, COMPANY REPORTS

Vinacomin pays below-market prices to its subsidiaries, but aims to give them reasonable profit margins on the coal they mine (ie. vis-à-vis their cost of doing the actual mining), which is also analogous to the EVN case, but the analogy breaks down after that because Vinacomin technically still owns the coal mines associated with each listed company, while companies like PPC and VSH own their electricity production facilities outright.

5.3 Vietnam’s listed coal companies are contract miners The economic profile of Vietnam’s listed coal companies is as if they were contract miners with perpetual contracts to mine their own coal reserves.

In a typical contract mining arrangement, several bidders would be invited to tender on a contract to extract coal from a particular mine, which ensures competitive pricing for the mine owner and reasonable profit margins for the contract miners.

In Vietnam’s case, the listed coal company is acting as a contract miner of its own coal reserves at contract rates that are set by Vinacomin. Since Vinacomin does its own coal mining as well as purchase coal from the listed coal companies it believes it has ability to set the correct purchase prices which are sufficient for the listed coal companies to turn a profit.

The reality however, as can be seen below is that the operating margins Vinacomin allows the listed coal companies to earn are well below those of

Power April 2, 2014

15

contract coal miners in other countries. In Indonesia, for example, contract miners typically earn a 14-18% operating margin.

Figure 18: Listed coal producers

Ticker MCap ($ m) P/E P/B ROE (%) Div Yld (%) Net Mrg (%) Op Mrg (%)

TDN 62.1 8.1 1.1 13 17 1.1 1.0

NBC 19 4.3 1.3 26 15 3.4 5.1

TVD 17.8 4.2 1 26 - 3.2 4.3

HLC 13.2 7.9 1 13 14 1.6 1.8

TC6 11.3 4 0.7 27 - 6.7 2.6

TCS 9.9 2.7 1.3 20 17 1.3 2.1

THT 9.6 6 0.7 13 14 1.6 1.9

MDC 8.8 5.2 1 14 20 1.9 1.9 SOURCES: CIMB, COMPANY REPORTS

Finally, we note that recent developments with the deregulation of electricity (described above) and increased prices on the coal sold to EVN (described below) have led to an increased interest in these small listed subsidiaries of Vinacomin. The most notable development is the increased interest in the sector by one savvy investor, the REE conglomerate, which is described in the brief company report about REE below. One appeal of these stocks are their high ROEs, but that is partially a function of the high leverage that being under the umbrella of their powerful parent affords them.

5.4 Subsidised prices – a dysfunctional equilibrium In 2012, Vinacomin lost well over US$300m mainly due to the losses it incurred when it sold coal to power producers at below-market costs. The company loses money from selling coal to EVN at below-market prices, but those losses are partially compensated by the fact that it also buys some of its coal from the listed coal companies at below-market prices. One problem with this cross-subsidisation situation is that there is a lack of transparency about the exact prices that are being paid to the listed coal companies, the prices that are charged to the electricity generators, and the exact amount of losses that this arrangement generates.

This transparency issue has come to the fore recently because some members of the government have called for the company to present its cost and revenue structure in an open and precise way, at the time the coal prices to electricity producers were raised (see next section).

Also, Vinacomin has found it difficult to sustain its coal exporting business because falling world coal prices coupled with high export tariffs have made the business unviable. Vinacomin asked the government to lower export tariffs because of its mounting coal inventory and losses from selling coal at below-market prices to the electricity generators, but Vinacomin’s request to lower export tariffs again prompted some in the government to call for the company to give an open and precise accounting of its costs and revenues.

Realistically, this lack of transparency is unlikely to go away any time soon. Our understanding is that the listed coal companies acquiesce to Vinacomin’s requirement to sell coal at below-market prices without a fight because the current arrangement is in the personal interests of the individual managers working in those companies.

There are widespread suspicions in the market that the real production of the listed coal companies is higher than the companies themselves report, and that the additional coal finds its way over the border into China - with the revenue from these off-the-book sales staying rather questionable. That is why we titled this section of the report “a dysfunctional equilibrium”. We have outlined the situation in the diagram below, as best we can, based on our conversations with industry insiders.

Power April 2, 2014

16

5.5 Reform of the coal industry means rising prices Vinacomin is in the midst of restructuring, which is set to run until 2015. The three main thrusts of that restructuring are: an elimination of price subsidies, the disposal of non-core investments, and an increase in industry-wide productivity by increasing mechanisation.

The first leg of the programme is well underway – coal prices to EVN and its subsidiaries have been raised steadily, in tandem with electricity prices.

Figure 19: Coal price hikes

Date Price increase

Jan-14 4-10%

Aug-13 14%

Apr-13 27%

Oct-12 28-42%

Jul-12 10-11.5%

Apr-11 5%

Mar-10 28% SOURCES: CIMB, VINACOMIN, PV POWER COAL

Also, note that coal export tariffs were lowered from 20% to 10% in 2012. The tariff cut was somewhat controversial because the government derives a significant portion of its revenues from export tariffs and the budget deficit is already 6% of GDP YTD. However, Vinacomin was able to convince the government to reduce tariffs by citing the lower tariff rates of other coal exporting countries, including 0% in Indonesia and Australia, 5% in Russia, 7% in Mongolia, and 10% in China.

Not just raising prices – productivity enhancements

In addition to eliminating subsidies and reducing non-core investments, Vinacomin’s restructuring also aims to increase private sector investment, especially in the infrastructure and equipment required to efficiently extract and transport coal (such as conveyer belts, etc). According to a Vinacomin spokesman, the company’s opencast mining operation uses modern technology but it has limited mechanisation in its underground coal mines, which severely impedes productivity.

The first project which will be opened up to private sector bidding is a set of two 10-km conveyor belts to carry coal out of the Cao Son coal mine. The project is worth about VND2tr (US$96m) and it is anticipated that the investor in the conveyor belts will be compensated by sharing in the profits from the mine. If the Cao Son conveyor belt project is successful then the company anticipates opening up several other projects to private tender including other conveyor belt projects which would transport coal from the mine to an adjacent power station. The company is hoping to share VND10tr (US$480m) of its circa VND35tr (US$1.7bn) annual investment expenditure with foreign investors.

Overall, the industry targets to extract 55m tons of coal a year by 2015, versus 47m tons in 2010, but that increase in productivity will require about US$2bn of investment in new machinery and equipment.

NBS

. Smuggling to China

HLC

TCS

Vinacomin

(SOE) EVN

Limited output

Subsidy

Subsidized electricity prices

.

Power April 2, 2014

17

5.6 An overview of Vietnam’s coal deposits The Quang Ninh province in the north east of the country, close to the border of China, is abundant in anthracite coal.

Open cast mines represent just over half of coal production in the country. That is partially due to insufficient technology and mechanisation at Vietnam’s underground mines and also because there are substantial coal deposits close to the surface. It is estimated that there are 3.5 billion tons of anthracite coal in Vietnam at depths of no more than 300 meters, with estimated reserves at greater depths of a higher order.

Because of the close proximity of the mines to the Chinese border, exports to China are about 80% of Vietnam’s anthracite exports. Vietnam is the world’s largest exporter of anthracite, but the country is unlikely to remain a coal exporter in the future. Energy demand is growing rapidly which is driving an 11% a year increase in coal demand for the foreseeable future.

Power April 2, 2014

18

Vietnam is likely to turn into a coal importer within the next few years (possibly by 2015), and a coal importing terminal is currently in the planning stages, to be located in the south of the country.

Anthracite Coal

Anthracite coal is a unique type of coal which has the highest density and energy content among all grades of coal, so its price is 2-3 times higher than ordinary coal. Only 1% of the world’s coal is anthracite, with most originating from China, while other producers include Vietnam, North Korea, Russia and Australia.

Both Vietnam and China use anthracite coal to generate electricity but our understanding is that this is not the case in other parts of the world because of the high value of anthracite coal. About 60% of the coal used for power generation in Vietnam is anthracite, and China’s vociferous demand for electricity has made it an importer of a Vietnamese anthracite coal for use in power generation, but in other parts of the world anthracite is used in higher value-added applications (including for home use in the US where it is referred to as ‘hard coal’)

Power│Vietnam

April 2, 2014

THIS REPORT IS PREPARED IN ASSOCIATION WITH CIMB/VNDIRECT SECURITIES CORPORATION. PLEASE SEE DISCLAIMER AND IMPORTANT NOTICES APPEARING AT THE END OF THIS DOCUMENT. IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE ALSO PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA

The industry’s low-cost producer VSH’s production costs are about a third lower than those of its closest competitors, and half of its costs are in non-cash depreciation expenses. The company is thriving in the nascent competitive electricity market and will increase its capacity by 160% by 2017.

Vinh Son Hydro’s low-cost structure and planned capacity expansion make it ideally positioned to take advantage of the two big trends in Vietnam’s power industry: deregulation and growing demand. We initiate coverage with an Add rating and a target price of VND19,725, based on 12x FY14 P/E (70% higher than the industry average).

Expanding capacity to meet growing demand VSH will increase its generating capacity from 136MW to 356MW by 2017. The company, which currently sells about 20% of its output in the nascent ‘competitive market’, should be the industry’s biggest gainer from deregulation given its low costs. Also, VSH has ample room to gear up its balance sheet as its net gearing currently sits at just 9% and its cashflow is strong.

CB issuance is a catalyst VSH plans to issue VND500bn worth of 3-year convertible bonds that carry very attractive terms: a 13.5% coupon and a conversion price which is 40% below the current share price. Only

existing shareholders will be offered the CBs so the share price is likely to jump ahead of the ex-date, around the middle of this year. Something similar happened when CII:VN, an infrastructure developer, issued an attractive CB to its existing shareholders.

Resolution of dispute with EVN to boost earnings, BV VSH has been embroiled in a protracted dispute with EVN over its power purchase agreement (PPA). That dispute looks set to be resolved soon, which is why the stock price is up 50% over the last year. We expect the resolution of the dispute to: 1) boost its earnings by 70% this year, 2) trigger a restatement of earnings over FY10-13 which will boost the company’s book value (BV) by 14%, and 3) result in a new 4-year PPA between EVN and VSH which will improve earnings visibility going forward. The details of the dispute are described later in the note, but the short story is that EVN and VSH could not agree on a purchase price after their earlier PPA expired at the end of 2008.

Vinh Son-Song Hinh Hydropower COMPANY NOTEVSH VN / VSH.HM Current VND17,000

Market Cap Avg Daily Turnover Free Float Target VND19,725

US$166.2m US$0.84m 45.5% Prev. Target VND

VND3,506,101m VND17,536m 206.2 m shares Up/Downside 16.0% Conviction| |


————————————————————————————————————————


T E

Company Visit Expert Opinion

Channel Check Customer Views ————————————————————————————————————————

95.0

105.0

115.0

125.0

135.0

11,000

13,000

15,000

17,000

19,000

Price Close Relative to VNINDEX (RHS)

Source: Bloomberg

1

2

3

4

5

Apr-13 Jul-13 Oct-13 Jan-14

Vo

l m

Financial Summary Dec-12A Dec-13A Dec-14F Dec-15F Dec-16F

Revenue (VNDb) 332.2 283.3 488.8 492.5 488.4

Operating EBITDA (VNDb) 223.2 212.2 377.8 377.0 368.4

Net Profit (VNDb) 234.0 198.9 337.4 354.0 343.1

Core EPS (VND) 1,157 969 1,644 1,725 1,672

Core EPS Growth (28.9%) (16.3%) 69.6% 4.9% (3.1%)

FD Core P/E (x) 14.69 17.42 10.34 9.86 10.17

DPS (VND) 412.6 3.8 500.0 500.0 500.0

Dividend Yield 2.43% 0.02% 2.94% 2.94% 2.94%

EV/EBITDA (x) 15.26 17.53 11.23 12.58 14.25

P/FCFE (x) 14.27 NA 6.70 55.20 66.28

Net Gearing (0.8%) 9.4% 26.9% 40.9% 53.3%

P/BV (x) 1.40 1.34 1.23 1.13 1.05

ROE 9.8% 7.9% 12.4% 11.9% 10.7%

% Change In Core EPS Estimates

CIMB/consensus EPS (x) 1.06

17,000

19,725

11,700 18,000

Target

52-week share price range

Current

SOURCE: CIMB, COMPANY REPORTS

Vinh Son-Song Hinh Hydropower April 2, 2014

20

PEER COMPARISON

Research CoverageBloomberg Code Market Recommendation Mkt Cap US$m Price Target Price Upside

Cypark Resources Bhd CYP MK MY ADD 151 2.72 3.09 13.4%

Pha Lai Thermal Power PPC VN VN REDUCE 339 22,500 17,869 -20.6%

Tenaga Nasional TNB MK MY ADD 20,314 11.74 14.14 20.4%

Vinh Son-Song Hinh Hydropower VSH VN VN ADD 166 17,000 19,725 16.0%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Rolling P/BV (x)

Cypark Resources Bhd Pha Lai Thermal Power

Tenaga Nasional Vinh Son-Song Hinh Hydropower

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0


Rolling FD P/E (x)



0.0%

1.6%

3.2%

4.8%

6.4%

8.0%

9.6%

11.2%

12.8%

14.4%

16.0%

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Peer Aggregate: P/BV vs ROE

Rolling P/BV (x) (lhs) ROE (See Footnote) (rhs)

-100%

-72%

-44%

-17%

11%

39%

67%

94%

122%

150%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0


Peer Aggregate: FD P/E vs FD EPS Growth

FD P/E (x) (See Footnote) (lhs) FD EPS Growth (See Footnote) (rhs)

ValuationFD P/E (x) (See Footnote) P/BV (x) EV/EBITDA (x)

Dec-13 Dec-14 Dec-15 Dec-13 Dec-14 Dec-15 Dec-13 Dec-14 Dec-15

Cypark Resources Bhd 11.70 9.62 8.67 1.74 1.73 1.55 8.19 7.97 6.93

Pha Lai Thermal Power 4.19 7.94 7.60 1.33 1.18 1.06 3.73 3.38 2.58

Tenaga Nasional 14.56 13.33 11.68 1.81 1.74 1.74 7.02 6.36 5.82

Vinh Son-Song Hinh Hydropower 17.42 10.34 9.86 1.34 1.23 1.13 17.53 11.23 12.58

Growth and ReturnsFD EPS Growth (See Footnote) ROE (See Footnote) Dividend Yield


Cypark Resources Bhd 37.7% 21.6% 11.0% 18.9% 19.2% 20.0% 3.43% 4.13% 4.62%

Pha Lai Thermal Power 202.8% -47.3% 4.4% 35.8% 15.8% 14.7% 4.44% 2.28% 2.28%

Tenaga Nasional 29.3% 9.3% 14.2% 12.8% 13.3% 14.9% 3.33% 3.90% 4.35%

Vinh Son-Song Hinh Hydropower -15.6% 68.4% 4.9% 7.9% 12.4% 11.9% 0.02% 2.94% 2.94%


Calculations are performed using EFA™ Monthly Interpolated Annualisation and Aggregation algorithms to December year ends. NPAT/EPS values for calculations and valuations are based on recurring and normalised values for GAAP and IFRS accounting standard companies respectively.


21

We expect VSH to sign a new PPA with EVN which will increase the price it gets paid for its electricity by 60% per kwh.

Investments in new hydropower projects.

Share price info

Share px perf. (%) 1M 3M 12M

Relative 7.7 -0.4 28.7

Absolute 6.9 14.9 42.9

Major shareholders % held

EVN Genco 3 30.5

State Capital Investment Corporation 24.0

VIAC 8.1

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60


P/BV vs ROE


-40%-27%-13%0%13%27%40%53%67%80%

0.02.04.06.08.0

10.012.014.016.018.0


FD Core P/E vs FD Core EPS Growth

Rolling FD Core P/E (x) (lhs) FD Core EPS Growth (rhs)

Profit & Loss

(VNDb) Dec-12A Dec-13A Dec-14F Dec-15F Dec-16F

Total Net Revenues 332.2 283.3 488.8 492.5 488.4

Gross Profit 240.3 227.6 404.3 403.7 394.9

Operating EBITDA 223.2 212.2 377.8 377.0 368.4

Depreciation And Amortisation (85.8) (75.4) (85.9) (85.9) (85.9)

Operating EBIT 137.5 136.8 291.9 291.1 282.5

Total Financial Income/(Expense) 93.5 44.2 90.2 109.8 106.0

Total Pretax Income/(Loss) from Assoc. 1.7 0.6 0.7 0.8 0.9

Total Non-Operating Income/(Expense) 32.8 45.8 0.0 0.0 0.0

Profit Before Tax (pre-EI) 265.5 227.4 382.9 401.7 389.4

Exceptional Items

Pre-tax Profit 265.5 227.4 382.9 401.7 389.4

Taxation (31.5) (28.6) (45.5) (47.7) (46.2)

Exceptional Income - post-tax

Profit After Tax 234.0 198.9 337.4 354.0 343.1

Minority Interests

Preferred Dividends

FX Gain/(Loss) - post tax

Other Adjustments - post-tax

Net Profit 234.0 198.9 337.4 354.0 343.1

Recurring Net Profit 234.0 198.9 337.4 354.0 343.1

Fully Diluted Recurring Net Profit 234.0 198.9 337.4 354.0 343.1

Cash Flow


EBITDA 223.2 212.2 377.8 377.0 368.4

Cash Flow from Invt. & Assoc.

Change In Working Capital 50.8 (308.2) (9.2) (0.2) 0.2

(Incr)/Decr in Total Provisions (9.6)

Other Non-Cash (Income)/Expense

Other Operating Cashflow 32.7 398.5

Net Interest (Paid)/Received 94.8 34.0 90.2 109.8 106.0

Tax Paid (35.8) (48.6) (45.5) (47.7) (46.2)

Cashflow From Operations 356.2 288.1 413.4 438.9 428.4

Capex (547.7) (369.6) (833.0) (836.6) (836.6)

Disposals Of FAs/subsidiaries 402.1 0.0 0.0 0.0 0.0

Acq. Of Subsidiaries/investments

Other Investing Cashflow 7.0

Cash Flow From Investing (138.6) (369.6) (833.0) (836.6) (836.6)

Debt Raised/(repaid) 23.4 15.4 940.6 460.8 460.8

Proceeds From Issue Of Shares

Shares Repurchased

Dividends Paid (83.4) (0.8) (102.6) (102.6) (102.6)

Preferred Dividends

Other Financing Cashflow

Cash Flow From Financing (60.0) 14.7 838.0 358.2 358.2

Total Cash Generated 157.5 (66.9) 418.4 (39.4) (50.0)

Free Cashflow To Equity 241.0 (66.1) 521.0 63.2 52.6

Free Cashflow To Firm 222.3 (80.4) (416.5) (395.2) (406.4)

BY THE NUMBERS



22

More leverage to fund the new hydropower plant.

Balance Sheet


Total Cash And Equivalents 821 573 992 952 902

Total Debtors 575 624 759 761 758

Inventories 31 36 62 63 62

Total Other Current Assets 40 25 43 43 43

Total Current Assets 1,468 1,258 1,856 1,820 1,766

Fixed Assets 1,899 2,390 3,137 3,888 4,639

Total Investments 14 14 14 15 16

Intangible Assets 0 0 0 0 0

Total Other Non-Current Assets 3 3 3 3 3

Total Non-current Assets 1,915 2,406 3,154 3,906 4,657

Short-term Debt 591 665 441 341 241

Current Portion of Long-Term Debt

Total Creditors 38 37 63 64 63

Other Current Liabilities 91 198 341 344 341

Total Current Liabilities 720 899 845 748 645

Total Long-term Debt 212 154 1,318 1,879 2,440

Hybrid Debt - Debt Component

Total Other Non-Current Liabilities 0 0 0 0 0

Total Non-current Liabilities 212 154 1,318 1,879 2,440

Total Provisions 0 0 0 0 0

Total Liabilities 932 1,053 2,163 2,627 3,085

Shareholders' Equity 2,450 2,612 2,847 3,098 3,339

Minority Interests

Total Equity 2,450 2,612 2,847 3,098 3,339

Key Drivers

Dec-12A Dec-13A Dec-14F Dec-15F Dec-16F

Power Despatched (GWh) 847.5 879.9 868.2 874.7 867.6

Capacity (MW) 136.0 136.0 136.0 136.0 356.0

Average Capacity Utilisation (%) 118.5% 123.1% 121.4% 122.3% 121.3%

Avg tariff/ASP per kwh (% chg) N/A N/A N/A N/A N/A

Fuel Cost Per Kwh (% Change) N/A N/A N/A N/A N/A

Industry Reserve Margin (%) N/A N/A N/A N/A N/A

BY THE NUMBERS

Key Ratios


Revenue Growth (27.7%) (14.7%) 72.5% 0.8% (0.8%)

Operating EBITDA Growth (40.0%) (4.9%) 78.0% (0.2%) (2.3%)

Operating EBITDA Margin 67.2% 74.9% 77.3% 76.6% 75.4%

Net Cash Per Share (VND) 92 (1,193) (3,737) (6,174) (8,663)

BVPS (VND) 12,116 12,725 13,869 15,093 16,265

Gross Interest Cover 32.6 37.1 94.4 119.5 158.8

Effective Tax Rate 11.9% 12.6% 11.9% 11.9% 11.9%

Net Dividend Payout Ratio 35.7% 0.4% 30.4% 29.0% 29.9%

Accounts Receivables Days 199.3 212.2 189.3 238.8 241.4

Inventory Days 112.3 219.7 213.0 257.5 245.0

Accounts Payables Days 328.7 245.2 215.5 260.5 247.9

ROIC (%) 7.2% 5.7% 10.3% 8.1% 6.5%

ROCE (%) 7.38% 5.53% 9.59% 8.13% 6.89%



23

1. BACKGROUND

1.1 Company history Vinh Son Hydro was established in 1994, privatised in 2004 and listed on the stock exchange in 2005. It was the first stock to be floated on the Hanoi Exchange, and transferred its listing to the Ho Chi Minh Stock Exchange one year later.

VSH owns two hydropower facilities – Vinh Son (66MW) and Song Hinh (70MW). EVN owns 30.5% of VSH and the State Capital Investment Corporation (SCIC) owns 24% (the SCIC is the government’s holding vehicle for its ownership stakes in non-bank SOE’s). Although VSH is majority owned by the state, we believe it functions as a private sector company.

1.2 Straight forward business Nearly 100% of VSH’s revenues are derived from the electricity it sells to EVN. That means its revenues are dependent on: 1) rainfall, which varies from year-to-year (2013 was a particularly bad year), and 2) the price it gets from EVN, which is also fickle.

Figure 1: VSH's revenue break-down (VNDbn) Figure 2: VSH's sale volume (Gwh)

0

100

200

300

400

500

600

2008 2009 2010 2011 2012 2013

Electricity revenue Other revenue

600

650

700

750

800

850

900

950

2008 2009 2010 2011 2012 2013

Sale volume 6 year average

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

1.3 The industry’s low-cost producer VSH’s FY12 production cost was VND203/kwh, which is the lowest among the listed power companies. In general, hydropower is cheaper than coal and gas, which can be seen in the table below. However, VSH’s costs are also significantly below those of other hydropower generators because its depreciation costs are lower. The lower depreciation costs are due to the fact that VSH has already depreciated a higher proportion of its fixed assets.

Figure 3: FY12 production cost

Hydro power producers VND/kwh

VSH VN Equity 203

TMP VN Equity 307

TBC VN Equity 343

SJD VN Equity 322

GHC VN Equity 248

DRL VN Equity 290


PPC VN Equity 764

BTP VN Equity 1,060

NBP VN Equity 1,034

Gas power producer

NT2 VN Equity 1,037 SOURCES: CIMB, Bloomberg

Table of Contents

1. BACKGROUND p.5

2. OUTLOOK p.6

3. RISKS p.9

4. FINANCIALS p.10

5. VALUATION AND RECOMMENDATION p.11


24

Going forward, the liberalisation of the power market will lead to higher production costs for coal- and gas-fired power producers since no subsidies will be given for feedstock prices. Deregulation should also lead to higher selling prices for all the generators as electricity prices will be determined by the market. Both of these developments should benefit VSH the most because of its low production costs.

1.4 Low cash expenses Half of VSH’s production costs stem from depreciation expenses. In FY12, its production cost was VND203/kwh, but excluding the depreciation, its cash cost of generating electricity was only VND102/kwh. For this reason, VSH’s cashflow-to-earnings ratio has been around 1.4x over the last few years. Its high free cashflow is also probably one of the reasons why EVN has arbitrarily lowered the price it pays for the electricity in recent years (discussed in the next section).

Figure 4: Production cost breakdown

50%

15%

3%

2%

30%

Depreciation Labor Purchasing Material Others


2. OUTLOOK

2.1 Dispute with EVN The previous PPA between Vinh Son Hydro and EVN expired at the end of 2008 and the companies have not been able to sign another PPA as they could not agree on a purchase price. VSH wants to keep the PPA prices unchanged at VND476/kwh in the rainy season (Jul-Sep), and VND580/kwh in the dry season (Oct-Jun), while EVN wants much lower contracted purchase prices.

As can be seen in the table below, EVN unilaterally dropped the price it paid to VSH by 10% in 2010-11, despite the fact that it was actually raising the electricity prices it charged to the end-users at the time (in 2009 EVN continued to pay VSH the contracted prices on the then-expired PPA contract). In 2012-13, EVN dramatically lowered the price, presumably to pressure the company into signing a new four-year PPA at the 10% discounted tariff it paid VSH in 2010-11.


25

Figure 5: VSH's PPA (VND/kwh)

ASP Note

2009 563 Wet/dry season price of VND476/580

2010 504 90% of FY09 PPA

2011 509 First 11 months was set at 90% of FY09 PPA, and December was set at 76% FY09 PPA

2012 382 67% of FY09 PPA

2013 351 62% of FY 09 PPA SOURCES: CIMB, COMPANY REPORTS

EVN’s tactic does not seem to have worked though, partly because VSH has strong support from the powerful State Capital Investment Corporation (SCIC) which owns 24% of the company, and partly because the public sentiment towards EVN has turned negative. Also, to put the matter in context, VSH is currently being paid just 1.6 US¢/ kwh for the electricity it generates versus the 8 US¢ that IPPs are paid in Thailand and that the foreign producers such as AES are widely rumoured to be contracted to receive in Vietnam.

EVN’s justification:

EVN said that it lowered the price it pays to VSH because VSH’s cost of production turned out to be lower than it had expected. Note that, EVN’s stated target is to give the private sector generators an ROE of the 5-year VGB yield plus 300bp. However, this argument seems disingenuous for a few reasons: 1) while VSH’s production costs per unit of electricity generated did fall in the mid 2000’s, it was primarily due to an increase in capacity utilisation from about 100% to about 120% by 2008. It does not make sense to penalise the company for the increased productivity, in our view; 2) it is widely understood in the industry that the reason why EVN requested for lower PPA prices is because of its own financial problems, but part of those difficulties were a result of mismanagement (in addition to the subsidised prices to the end-users); and 3) it is widely rumoured that one reason EVN unilaterally lowered the price was because VSH had previously lent money to its cash-strapped parent, but it subsequently cut off that line-of-credit in response to pressure from its other shareholders.

2.2 Imminent resolution of EVH dispute should boost earnings by 70%, book value by 14%

As a result of the dispute with EVN, VSH only reported preliminary revenues for FY10, FY11, FY12 and FY13, using the electricity purchase prices in Figure 21. We believe that a resolution to the dispute is imminent (most likely during the expected Apr 14 AGM of VSH) as: 1) The SCIC has started some ‘housecleaning’ in advance of the next change in the government (expected in about 2 years); 2) EVN’s political power has diminished while this dispute has dragged on (many in the market expected a resolution to this last year); and 3) VSH’s stock price has risen by 15% this year on rampant market talk that a new PPA is imminent.

We expect the new PPA price to be similar to the on that expired at the end of 2008 (VND476/580kwh), and we expect the PPA will be back dated to 2010. If that happens, then under the Vietnam Accounting Standards (VAS 29), VSH would need to restate its earnings, resulting in FY10 net profit to be higher by 14%, FY11 by 12%, FY12 by 53%, and FY13 by 73% than the previously reported numbers.


26

Figure 6: VSH's report and pro-forma key figures

Unit 2010 2011 2012 2013

Reported ASP VND/kwh 504 509 392 351

Reported revenue VNDbn 425 459 332 283

Reported net profit VNDbn 302 329 234 199

Report EPS VND 1,470 1,627 1,157 969

Reported PE x 10.4 9.4 13.2 15.8

Reported PB x 1.3 1.3 1.3 1.2

Rerated revenue VNDbn 470 504 473 451

Rerated net profit VNDbn 345 369 358 345

Rerated EPS VND 1,677 1,827 1,771 1,682

Rerated PE x 9.1 8.4 8.6 9.1

Rerated PB x 1.3 1.3 1.2 1.1 SOURCES: CIMB, COMPANY REPORTS

Under VAS 29, the company will need to publish a new set of financial statements which will need to include a comparison between the old and the new figures. The table above shows our estimates of the pro-forma restated financial figures if VSH is able to clinch the FY09 price for FY10, FY11 and FY12.

2.3 Increasing capacity by 160% VSH is investing in a new hydropower facility – Thuong Kon Tum, located in upper Kontum with a capacity of 220MW (1.6x VSH's current capacity) and an investment cost of VND5,744bn (1.6x VSH's current total assets). The company expects to sell electricity generated by the dam at VND931/kwh (~1.6x the FY09 purchase price).

We do not see much risk of EVN raising similar objections to the new plant as the investment cost will be considerably higher than that of VSH’s two existing dams, both of which were built in early 1990’s. In theory, the contract prices are based on an equitable system which targets a fair ROE for the generators. So VSH will need to be paid considerably more for the electricity generated at the third plant just for the plant to break even.

Figure 7: Investment cost breakdown (VNDbn)

Fixed asset 3,869

Land clearnace 301

Provision 626

Capitalised interest 720

Others 228

Total 5,744 SOURCES: CIMB, COMPANY REPORTS

As at end-FY13, VSH had spent a total of VND1,468bn (US$70m?) on the project. The company expects the plant to start operations in FY16, but we think that the plant will come onstream about a year later.

2.4 CB to fund the new plant should also boost sentiment To fund the cost of the new hydro plant, VSH will issue VND500bn worth of convertible bonds with a maturity of three years, coupon of 13.5% and a conversion price of VND10,000/share – a 40% discount to the current share price, and a mandatory conversion into shares at maturity.

The CBs will only be offered to existing shareholders, so given the attractive terms of the bond we view this as a kind of a rights issue which is likely to boost sentiment for the stock in the lead-up to the ex-date (something similar happened when CII:VN, an infrastructure company, issued CBs with highly attractive terms in 2014).

We forecast that the company’s debt-to-equity will peak at 80% in FY16, before falling to 67% in FY17 when the Thuong Kon Tum project comes online. Given


27

the strong cashflow, we are not concerned about the company’s debt ratio, especially as those gearing figures are quite reasonable in this industry.

Figure 8: Solvency ratios

2013 2014 2015 2016 2017

Net gearing 9.4% 26.9% 40.9% 53.3% 28.3%

Total debt to equity 31.3% 61.8% 71.7% 80.3% 67.2%

Net debt to asset 6.7% 15.3% 22.1% 27.7% 14.1% SOURCES: CIMB, COMPANY REPORTS

Finally, we note that the issuance of this new CB is contingent on VSH signing a new PPA with EVN, but as mentioned previously we believe that is imminent.

3. RISKS

3.1 Two key risks: EVN and rainfall

The two keys risks facing VSH are the price it gets paid for its electricity from EVN and the amount of electricity it is able to generate due to the variable rainfall every year.

To reiterate, EVN may hold out from paying VSH a reasonable price for its electricity for a longer period of time (while the market expects this issue to be resolved in the next month or so), and the other possibility is that the new PPA could resume the payment of reasonable prices to VSH but not be backdated for FY10-13. There is also the possibility that EVN will not pay VSH a fair price on electricity generated at its new hydropower project scheduled to go online in 2017.

The second key risk is the amount of rainfall which can vary significantly every year, and has a major impact on the amount of electricity each dam is able to generate. The physical characteristics of each of VSH’s two dams (and their reservoirs) are quite different. The Vinh Son plant’s electricity output is more volatile in the rainy season, and has ranged from 20Gwh to 93Gwh in the past, while the Song Hinh plant’s output varies more in the dry season and has ranged between 122 Gwh and 172Gwh.

Figure 9: VSH's seasonal production (Gwh)

Rainy season Dry season

Lowest 20 146

Highest 93 178

Lowest 80 122

Highest 81 172

Vinh Son Generator

Song Hinh Generator


3.2 Dilution risk

The final key risk that the company faces is the dilution risk that arises from the VND500bn convertible bonds which will be converted in three years' time. The bonds will be converted into 50m shares, equivalent to 24% of its current outstanding shares. However, the convertible bond issuance is effectively a rights issues for its existing shareholders. As such, if the existing investors buy the convertible bonds, their ownership will not be diluted.


28

4. FINANCIALS

4.1 Review of FY13 results

VSH’s FY13 revenue and net profit fell 15% yoy. Revenue declined due to a 20% drop in the electricity output during the year and an 8% drop in the average price of electricity it received from EVN. Also, VSH is sitting on a moderate cash balance because of its strong positive cashflow, so the falling interest rates in Vietnam caused the company’s interest income to decline by 53% yoy, but this was offset by a gain of VND44bn realised from the disposal of VSH’s investment in PPC, the thermal power generator (which is discussed below).

Also, we estimate that EVN paid VSH about VND48bn to compensate for a similar amount of resource and royalty fees that VSH had paid to the government over the last three years. EVN is responsible to pay those resource usage fees to the government (as per its PPAs with the hydropower producers), but there is a timing mismatch of when the fees are paid – VSH pays the fees to the government annually but EVN typically reimburses VSH about once every three years.

Regarding the drop in electricity output, according to our understanding, the dry season was particularly long last year, with rainfall about 20-25% below the typical levels. The 8% drop in the ASP in FY13 was due to the fact that EVN unilaterally dropped the prices further in FY13, but this drop was partially offset by an increase in the proportion of VSH’s electricity sold in the nascent “free market” from 10% in FY12 to 20% in FY13.

To review how this nascent “free market” mechanism works, EVN started allowing the generators to sell a portion of their output at a spot market price which EVN determines based on supply and demand on the grid at any moment. The spot market price EVN offers the generators varies over time, but currently averages out to be about 10% above the PPA prices. Since VSH has low production costs, it is usually enthusiastic to sell in the spot market. In contrast, generators with higher production costs may not be willing to sell additional electricity when the spread between the spot price and the PPA price is not sufficiently attractive.

4.2 Forecast for FY14 and beyond

VSH’s electricity output is heavily dependent on nature, so we have used a 4-year moving average of VSH’s past production to forecast the future output. Also, VSH is confident that it can sign a new PPA this year with the prices similar to the PPA that expired at the end of 2008. Therefore, we have assumed the company will be paid an average of VND563/kwh (which is based on the weighted average of output in the rainy and dry seasons).

Figure 10: Sales volume forecast

2014 2015 2016 2017

Sale volume Gwh 868 875 868 873

ASP VND/kwh 563 563 563 563 SOURCES: CIMB, COMPANY REPORTS

The expected increase in ASP during FY14 due to the resolution of the PPA dispute with EVN should prompt a 58% increase in its revenue yoy and 73% increase in its net profit (with the difference between profit growth and revenue growth due to the company’s degree-of-operating-leverage due to its fixed costs).

For FY15 and FY16, we expect the company’s profits to be flat, unless the rainfall is better than expected. We expect the company to see significant revenue and profit growth in FY17, when the Thuong Kon Tum project comes online – which we expect to happen one year later than the company’s target


29

date of 2016. We forecast FY17 revenue to increase by 210% yoy and net profit to increase by 50% yoy.

Figure 4: P&L forecast

2013 2014 2015 2016 2017

Revenue 283 489 492 488 1,510

Cost of sales (56) (84) (89) (94) (400)

Gross profit 228 404 404 395 1,110

Operating cost (15) (26) (27) (26) (82)

Operating EBITDA 212 378 377 368 1,028

Depreciation cost (75) (86) (86) (86) (285)

Operating EBIT 137 292 291 283 743

Associates' profit 1 1 1 1 1

Net interest income 44 90 110 106 (101)

Pretax profit 227 383 402 389 643

Taxation (29) (45) (48) (46) (76)

Profit after tax 199 337 354 343 566 SOURCES: CIMB, COMPANY REPORTS

4.3 Strong cashflow

VSH has strong cashflows, given that 50% of its cost comes from depreciation expenses. The company’s cashflow-to-net profit ratio has ranged from 1.1-1.5x. This robust cashflow allows the company to fund its investments internally and pay decent dividends (with yields of around 3%).

Figure 12: Net profit & cashflow

2009 2010 2011 2012 2013

Net profit (VNDbn) 375 302 329 234 199

CFO (VNDbn) 414 377 424 379 288

CFO/Net profit 1.1 1.2 1.3 1.6 1.4 SOURCES: CIMB, COMPANY REPORTS

4.4 Clean balance sheet

VSH has a strong balance sheet with a net debt-to-equity of 9%, and no investments – except for nominal investments in one associate with an investment value of VND13bn (0.3% of its total assets). Some 65% of the company’s total assets are fixed assets, with the in-progress Thuong Kon Tum project accounting for 40% of the total assets.

5. VALUATION AND RECOMMENDATION

5.1 VSH is the lowest cost producer, deserves a higher P/E We initiate coverage on VSH with an Add rating and a target price of VND19,725, based on a forward P/E of 12x, which is 70% higher than the industry average. We believe that VSH’s premium valuation is justified by its competitive advantage, which stems from its low costs, and because VSH is one of only two listed companies in the sector (together with PPC) to have a reasonable market capitalisation and liquidity. The other names in the sector are simply too small for most investors.

VSH is trading at a trailing P/E of 16x, based on reported EPS, but we believe that VSH’s EPS figures for the last few years will soon be revised upwards as the new PPA, which is likely to be signed soon, should be backdated to 2010, resulting in a restatement of past earnings.

We believe that investors who want exposure to Vietnam’s growing and deregulating electricity sector, should buy VSH in view of its low production costs, imminent capacity expansion, and reasonable valuation (assuming the new PPA is signed at 2009 electricity purchase prices).


30

Finally, while all of the listed IPPs, hydropower generators in particular, should benefit from the industry-wide reforms, VSH has the second-largest market capitalisation and liquidity among the electricity stocks in Vietnam.

Figure 13: Electricity generators' FY12 valuation and performance ratios

ASP

Production

cost

Gross

margin

Net

margin ROE ROA P/E P/B

Debt/equity

(%)


VSH VN Equity 351 203 53 70 10 7 16 1.2 33

TMP VN Equity 474 307 54 28 17 10 7 1.4 48

TBC VN Equity 522 343 56 50 15 15 8 1.3 1

SJD VN Equity 780 322 59 45 26 15 5 1.1 41

GHC VN Equity 923 248 73 52 49 18 4 2.1 137

DRL VN Equity 814 290 64 59 31 28 9 2.5 0

Average 60 51 25 16 8 1.6 43


PPC VN Equity 832 764 11 12 14 4 5 1.5 167

BTP VN Equity 1,411 1,060 14 9 15 6 7 1.0 85

NBP VN Equity 1,083 1,034 12 5 14 8 8 1.0 0

Average 12 9 14 6 7 1.1 84

Gas power producer

NT2 VN Equity 1,172 1,037 12 0 0 0 253 0.7 336 SOURCES: CIMB, COMPANY REPORTS

Power│Vietnam

April 2, 2014


Lights out for forex gains PPC’s share price soared 118% in 2013, thanks to the 17% depreciation of the yen vs. the VND which helped net profit jump 110% in FY13 due to forex gains on US$256m yen-based debt at end-2013 (1x D/E). Profits are likely to halve this year as we do not expect another big drop for yen.

We do not expect a repeat of PPC’s windfall forex gains in FY14 or of the windfall gains stemming from reduced output by the hydropower producers in 2013. We initiate coverage with a Reduce call and a target price based on 7x CY14 P/E, on par with the sector average.

2/3 of PPC’s assets trapped in non-core investments PPC generates ample cash but is restricted in how much it can pay out to shareholders under Vietnamese regulations because of the earnings volatility caused by the company’s yen-denominated debt (in FY11, the depreciation of the VND caused a large unrealised loss, in contrast to the unrealised gain in FY13). Currently, 42% of PPC’s assets are in the form of cash and money-market instruments, which generate less than 20% of its pretax profit while 23% of its assets are shareholdings in other utilities. Only 16% of PPC’s assets are proper fixed assets that generate electricity but these assets are the source of almost half the company’s pretax profits.

Earnings depend on yen PPC’s yen-based debts equate to 45% of the company's assets so any depreciation/appreciation of the yen materially affects the company’s bottomline. A 13% firming of the yen against the VND would wipe out the company’s net profits while a 10% depreciation of the yen would, ceteris paribus, lead to a 72% jump in PPC’s net profits.

Suboptimal output, ageing generators, no growth EVN prefers to buy electricity from hydropower producers because of their low production costs. This means that thermal power producers often run at very low utilisation rates. PPC is sometimes only able to operate one of its six turbines because EVN’s demand for thermal generated electricity is so low. Also, maintenance expenses for the company’s ageing generators are increasing and PPC does not have any plans to increase capacity to benefit from Vietnam’s growing electricity demand.

Pha Lai Thermal Power COMPANY NOTEPPC VN / PPC.HM Current VND22,500


US$339.3m US$1.45m 47.7% Prev. Target VND

VND7,158,479m VND30,478m 326.2 m shares Up/Downside -20.6% Conviction| |


————————————————————————————————————————


T E



94.0

104.0

114.0

124.0

134.0

144.0

154.0

17,000

19,000

21,000

23,000

25,000

27,000

29,000


Source: Bloomberg

2

4

6

8

10


Vo

l m


Revenue (VNDb) 4,131 6,583 5,986 6,285 6,600

Operating EBITDA (VNDb) 1,060 1,596 1,379 1,355 1,173

Net Profit (VNDb) 505 1,632 812 848 994

Core EPS (VND) 1,788 5,374 2,833 2,959 3,434

Core EPS Growth 708% 201% (47%) 4% 16%

FD Core P/E (x) 12.68 4.19 7.94 7.60 6.55

DPS (VND) 8.6 999.3 512.7 512.7 512.7

Dividend Yield 0.04% 4.44% 2.28% 2.28% 2.28%

EV/EBITDA (x) 7.32 3.73 3.38 2.58 2.08

P/FCFE (x) NA 14.41 6.20 7.06 8.18

Net Gearing 58.7% 8.0% (15.2%) (31.8%) (42.6%)

P/BV (x) 1.72 1.33 1.18 1.06 0.95

ROE 16.0% 35.8% 15.8% 14.7% 15.3%


CIMB/consensus EPS (x) 0.82 0.92 1.26

22,500

17,869

18,500 27,700

Target


Current


Pha Lai Thermal Power April 2, 2014

32

PEER COMPARISON


Cypark Resources Bhd CYP MK MY ADD 151 2.72 3.09 13.4%

Pha Lai Thermal Power PPC VN VN REDUCE 339 22,500 17,869 -20.6%

Tenaga Nasional TNB MK MY ADD 20,314 11.74 14.14 20.4%

Vinh Son-Song Hinh Hydropower VSH VN VN ADD 166 17,000 19,725 16.0%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00


Rolling P/BV (x)



0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0


Rolling FD P/E (x)



0.0%

1.6%

3.2%

4.8%

6.4%

8.0%

9.6%

11.2%

12.8%

14.4%

16.0%

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00




-100%

-72%

-44%

-17%

11%

39%

67%

94%

122%

150%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0






Cypark Resources Bhd 11.70 9.62 8.67 1.74 1.73 1.55 8.19 7.97 6.93

Pha Lai Thermal Power 4.19 7.94 7.60 1.33 1.18 1.06 3.73 3.38 2.58

Tenaga Nasional 14.56 13.33 11.68 1.81 1.74 1.74 7.02 6.36 5.82

Vinh Son-Song Hinh Hydropower 17.42 10.34 9.86 1.34 1.23 1.13 17.53 11.23 12.58



Cypark Resources Bhd 37.7% 21.6% 11.0% 18.9% 19.2% 20.0% 3.43% 4.13% 4.62%

Pha Lai Thermal Power 202.8% -47.3% 4.4% 35.8% 15.8% 14.7% 4.44% 2.28% 2.28%

Tenaga Nasional 29.3% 9.3% 14.2% 12.8% 13.3% 14.9% 3.33% 3.90% 4.35%

Vinh Son-Song Hinh Hydropower -15.6% 68.4% 4.9% 7.9% 12.4% 11.9% 0.02% 2.94% 2.94%




33

Forex gains from the revaluation of yen debt

Nominal capex planned

Share price info


Relative -9.2 -26.7 7.4

Absolute -10 -11.4 21.6


Genco 2 52.3

REE 22.4

Market Vector ETF 3.9

0.0%4.0%8.0%12.0%16.0%20.0%24.0%28.0%32.0%36.0%40.0%

0.000.200.400.600.801.001.201.401.601.802.00


P/BV vs ROE


-100%0%100%200%300%400%500%600%700%800%

0.010.020.030.040.050.060.070.080.090.0




Profit & Loss


Total Net Revenues 4,131 6,583 5,986 6,285 6,600

Gross Profit 1,157 1,702 1,475 1,456 1,280

Operating EBITDA 1,060 1,596 1,379 1,355 1,173

Depreciation And Amortisation (693) (694) (697) (702) (422)

Operating EBIT 367 902 682 652 752

Total Financial Income/(Expense) 271 228 198 263 320

Total Pretax Income/(Loss) from Assoc. (16) (70) 4 7 10

Total Non-Operating Income/(Expense) 158 1,168 0 0 0

Profit Before Tax (pre-EI) 877 2,334 980 1,023 1,187

Exceptional Items

Pre-tax Profit 780 2,228 883 922 1,081

Taxation (267) (587) (66) (69) (81)


Profit After Tax 513 1,641 817 853 1,000

Minority Interests (8) (10) (5) (5) (6)

Preferred Dividends



Net Profit 505 1,632 812 848 994

Recurring Net Profit 569 1,710 901 941 1,093

Fully Diluted Recurring Net Profit 569 1,710 901 941 1,093

Cash Flow


EBITDA 1,060 1,596 1,379 1,355 1,173


Change In Working Capital (99) 354 115 (58) (61)

(Incr)/Decr in Total Provisions 16

Other Non-Cash (Income)/Expense (657) (1,356)

Other Operating Cashflow 608 1,269

Net Interest (Paid)/Received 261 216 198 263 320

Tax Paid 0 (279) (66) (69) (81)

Cashflow From Operations 1,190 1,800 1,626 1,490 1,351

Capex (383) (515) (100) (100) (100)

Disposals Of FAs/subsidiaries 0 0 0 0 0

Acq. Of Subsidiaries/investments (40) 0 0 0 0

Other Investing Cashflow (532) (368) 0 0 0

Cash Flow From Investing (955) (883) (100) (100) (100)

Debt Raised/(repaid) (407) (421) (371) (376) (376)

Proceeds From Issue Of Shares

Shares Repurchased

Dividends Paid (3) (318) (163) (163) (163)

Preferred Dividends

Other Financing Cashflow

Cash Flow From Financing (410) (739) (534) (539) (539)

Total Cash Generated (176) 179 992 851 712

Free Cashflow To Equity (173) 497 1,155 1,015 875

Free Cashflow To Firm 450 1,084 1,654 1,509 1,360

BY THE NUMBERS



34

PPC’s fixed assets are already 80% depreciated.

Balance Sheet


Total Cash And Equivalents 4,473 4,939 5,931 6,782 7,494

Total Debtors 1,365 1,408 1,280 1,344 1,411

Inventories 785 939 854 896 941



Fixed Assets 2,560 1,871 1,274 671 350

Total Investments 2,691 2,721 2,725 2,731 2,741




Short-term Debt 447 371 376 376 376



Other Current Liabilities 746 804 731 768 806

Total Current Liabilities 1,396 1,452 1,359 1,408 1,460

Total Long-term Debt 6,485 5,004 4,628 4,252 3,876



Total Non-current Liabilities 6,485 5,004 4,628 4,252 3,876


Total Liabilities 7,881 6,456 5,987 5,661 5,336


Minority Interests 35 39 43 48 54

Total Equity 4,191 5,435 6,088 6,778 7,615

Key Drivers


Power Despatched (GWh) 5,427.3 6,200.0 5,427.3 5,698.7 5,983.6

Capacity (MW) 1,040.0 1,040.0 1,040.0 1,040.0 1,040.0

Average Capacity Utilisation (%) 90.5% 103.3% 90.5% 95.0% 99.7%

Avg tariff/ASP per kwh (% chg) N/A N/A N/A N/A N/A

Fuel Cost Per Kwh (% Change) N/A N/A N/A N/A N/A

Industry Reserve Margin (%) N/A N/A N/A N/A N/A

BY THE NUMBERS

Key Ratios


Revenue Growth 10.5% 59.4% (9.1%) 5.0% 5.0%

Operating EBITDA Growth (1.2%) 47.1% (13.3%) (1.3%) (12.1%)


Net Cash Per Share (VND) (7,730) (1,371) 2,912 6,769 10,189

BVPS (VND) 13,063 16,960 19,000 21,152 23,764

Gross Interest Cover 2.25 6.50 6.05 6.35 7.89




Inventory Days 90.75 64.46 72.51 66.12 63.20


ROIC (%) 10.4% 25.5% 24.7% 30.9% 45.3%

ROCE (%) 9.1% 12.7% 10.1% 10.1% 11.1%



35

A play on the JPY 1. BACKGROUND

1.1 Company overview PPC is a coal-fired power generator located in the north of Vietnam. Established in 1982, it was listed on the Hanoi stock exchange in 2006 but moved its listing to the HCMC stock exchange in 2007.

PPC owns two coal-fired plants - Plant 1 (440MW) which has been operating since 1986 and Plant 2 (600MW) which has been operational since 2002. It also has a 50%-owned subsidiary which maintains power plants. PPC owns 21% of Hai Phong Thermal Power, which has 1,200MW of generating capacity.

EVN owns 52% of PPC while REE (a listed conglomerate described below) owns 22%. The Market Vectors ETF currently owns 3% of the outstanding shares.

1.2 Simple business, complicated PPA Nearly 100% of PPC’s revenues are derived from the sale of electricity to EVN. PPC has two PPA contracts with EVN for each of its plants due to the differences in the production costs and efficiency of its two plants resulting from their different ages.

EVN’s contracted purchase price for the electricity that PPC generates has two components – a fixed price component which covers depreciation and other fixed overheads, and a variable price component which varies largely in line with the price of coal. Plant 1 is quite old so the fixed price that EVN pays per kwh of electricity generated by Plant 1 is lower than that for Plant 2. But Plant 1’s age also makes it less efficient than Plant 2, leading to a higher variable price per kwh than Plant 2.

Figure 1: PPC's factory

Unit Plant 1 Plant 2

No of turbines 4 2

Capacity MW 440 600

Fixed price VND/kwh 291 429

Variable price VND/kwh 733 541 SOURCES: CIMB, COMPANY REPORTS

Although the variable price component fluctuates with the price of coal, the PPA also incorporates the fact that PPC purchases its coal at a price which is about 10% below the market price in determining the price PPC is paid (recall from the industry overview that EVN targets an ROE of the 5-year VGB yield plus 300bp for the IPP’s).

1.3 PPC’s share price is a play on yen

PPC’s share price is closely correlated with the yen, as can be seen in the chart below.

Table of Contents

1. BACKGROUND p.5

2. OUTLOOK p.7

3. RISKS p.8

4. FINANCIALS p.9

5. VALUATION AND RECOMMENDATION p.12


36

Figure 2: PPC vs. yen

65

70

75

80

85

90

95

100

105

110

0

5,000

10,000

15,000

20,000

25,000

30,000

PPC JPY

SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG

This correlation stems from PPC’s exposure to yen via its yen-denominated debt. At end-FY13, PPC had total debt of 26.9bn yen (VND5,374bn or 45% of PPC’s total assets). The debt arose from the assistance programme by the Japanese government. The Japan Bank for International Cooperation, a Japanese ODA agency, lent the money to EVN which, in turn, extended the loan on a back-to-back basis to PPC. The loan has an average interest rate of 2.45% p.a.

Profits linked to yen

Given the magnitude of the yen-denominated debt, movements in the value of the yen have a strong impact on PPC’s profit. In recent years, PPC booked large unrealised forex losses due to the firming of the yen against the VND. These forex losses reduced the company’s profits to nearly zero in FY10 and FY11.

However, the VND stabilised in 2012-2013 due to Vietnam’s ‘Resolution 11’ programme to cool inflation and boost FX reserves while the yen depreciated because of dramatic loosening of monetary policy in Japan as part of the ‘Abenomics’ programme. PPC’s forex losses turned to a nominal profit in FY12 and a material profit in FY13, which resulted in a significant increase in the company’s net profit from VND7bn in FY11 to VND513bn in FY12 and VND1,641bn in FY13.

Figure 3: PPC's forex profit/loss

2009 2010 2011 2012 2013

Total debt (VNDbn) 6,893 7,329 8,172 6,932 5,374

Net forex loss/profit from revaluation of debt (VNDbn) -528 -836 -603 38 1,160

Net profit (VNDbn) 892 4 7 513 1,641 SOURCES: CIMB, COMPANY REPORTS

The company’s experience of 2009-2013 illustrates that forex profit is now the key driver of the company’s profit from year to year because PPC is largely insulated from changes in the coal price, its PPA with EVN is stable and it does not have any major expansion plans.


37

2. OUTLOOK

2.1 Uncertain future under deregulation One big uncertainty for PPC is what will happen to its PPA with EVN when its 10% coal price subsidies from Vinacomin are eventually eliminated. As Vietnam is set to become an importer of thermal coal within the next few years, it is very likely that Vinacomin, the SOE coal company, will begin charging the power generators market prices for coal within the next few years.

It is not clear if PPC would be profitable if it had to pay market prices for coal. Management had no answer when we pressed it on this issue, saying that it would wait for instructions from EVN.

2.2 Ageing assets PPC’s assets have been in use for almost 30 years and are already 80% depreciated. At the current rate of depreciation, the company’s assets will be fully depreciated in three years’ time, i.e. by FY16. Depreciation costs account for 18% of the company’s cost of goods sold. As such, we forecast that the company’s production cost will be lower by FY16.

Figure 4: PPC's fixed assets

2010 2011 2012 2013

Gross fixed asset (VNDbn) 13,521 13,702 13,811 13,806

Accumulated depreciation (VNDbn) (9,864) (10,574) (11,250) (11,935)

Net fixed asset (VNDbn) 3,656 3,128 2,560 1,871

Annual depreciation (VNDbn) (811) (695) (693) (694)

Depreciation/gross fixed asset 6% 5% 5% 5%

Accumulated depreciation/gross fixed asset 73% 77% 81% 86% SOURCES: CIMB, COMPANY REPORTS

Although lower depreciation expense will boost accounting earnings, the company’s ageing assets will also result in increased maintenance expenses and reduced revenues. For example, in 2013 when the level of rainfall in Vietnam was abnormally low, PPC had the opportunity to ramp up its output and boost its revenues. The company operated at full utilisation for much of the year, which is unusual given EVN’s preference for cheaper hydro-generated electricity. However, PPC’s windfall revenues were dampened in 3Q when one-third of PPC’s generating capacity was offline due to maintenance issues.

Figure 5: Maintenance costs (VND bn)

0

100

200

300

400

500

600

700

2009 2010 2011 2012



38

3. RISK

3.1 JPY/VND exchange rate

The company's main risk is obviously its exposure to the yen:VND exchange rate. Our sensitivity analysis below assumes an average gross margin of 30% and uses 6Twh of production as the base case. In this scenario, a 10% yen depreciation would translate into a net profit of VND1,348bn while a 10% firming of the yen would cause the company’s net profit to fall to VND211bn.

Figure 6: PPC's profit sensitivity analysis

Net profit (VNDbn)

-10% -5% 0% 5% 10%

7.0 419 703 988 1,272 1,556

6.5 315 599 884 1,168 1,452

6.0 211 496 780 1,064 1,348

5.5 107 392 676 960 1,244

5.0 4 288 572 856 1,140

Net profit growth (%)

-10% -5% 0% 5% 10%

7.0 -46% -10% 27% 63% 100%

6.5 -60% -23% 13% 50% 86%

6.0 -73% -36% 0% 36% 73%

5.5 -86% -50% -13% 23% 60%

5.0 -100% -63% -27% 10% 46%

Depreciation of JPY against VND

Production (Twh)

Depreciation of JPY against VND

Production (Twh)


3.2 EVN’s preference for cheap hydropower The company's second key risk is EVN's preference for hydro-generated power, which means that PPC sometimes operates its two plants at very low utilisation rates.

PPC’s production depends on EVN's needs but EVN sources power from the hydropower companies whenever it can due to the lower cost of electricity generated via hydropower. EVN reflects the intrinsically lower costs of hydro-generated electricity in the prices it pays the hydropower producers; in the case of VSH discussed above, EVN went as far as to renege on the PPA it signed with the hydropower producer and is currently paying VSH an arbitrarily low price for the electricity it generates.

The net result of this is that PPC’s production will only be mobilised if production from the hydropower companies cannot meet the needs of the grid at any moment. PPC indicated that sometimes, only one of its six turbines would be operating as a result of good production from the hydropower companies.

Figure 7: Production


39

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2007 2008 2009 2010 2011 2012 2013

Production Capacity


This situation strikes us as somewhat ironic. Thermal power producers usually face higher production costs but their output is stable because they are not subject to the vagaries of nature. In PPC’s case, it is indirectly (and inversely) affected by the amount of rainfall in Vietnam because an increase in the flow of water to the hydropower generators results in a drop in demand for their electricity.

4. FINANCIALS

4.1 Review of 2013 In FY13, PPC’s revenues rose 59% and earnings leapt 223%, which explains why PPC’s share price shot up 118% during the year.

Two factors boosted revenues 1) PPC’s output increased 14% in FY13. Vietnam experienced unusually dry weather with rainfall 20-25% below its typical levels, forcing EVN to rely more heavily on thermal power producers, 2) the price PPC sells its electricity to EVN increased about 38% in FY13. This is because input coal prices increased 50% in 2013. Recall from the above discussion on PPC’s PPA that EVN includes a built-in offset against fluctuating input costs in the contract so that part of the coal price hikes flowed through to EVN.

Note: recall from the industry overview that Vietnam is unwinding its elaborate system of subsidies and cross-subsidies. The price of coal that Vinacomin charges the thermal generators was hiked 27% in April and 14% in August as part of a process to bring coal prices in line to world market prices – because Vietnam will become an importer of coal within the next few years.

Next, earnings leapt because of the 17% depreciation of the yen versus the VND. Note that this depreciation triggered a VND1,136bn net currency gain but a 10% depreciation of the yen during FY12 resulted in only VND105bn currency gains (and earnings did not soar in FY12) because the majority of the profits generated from FY12’s 10% yen depreciation were offset against unrealised FX losses from the appreciation of the yen against VND in prior years.

Finally, we estimate that earnings would have fallen by 2% in 2013 had the exchange rate been stable during the year.


40

4.2 Forecast of 2014 and beyond

We expect PPC’s revenues to fall 9% in FY14 and profits to fall 60%. FY13 revenues were abnormally high, partly due to the low production from the hydropower companies. As we do not expect a repeat of the dry conditions seen in FY13, we expect PPC’s electricity output to fall 12% in 2014, i.e. back to its more typical level in recent years.

Also, we forecast that the selling price of PPC’s electricity will increase 5% annually for the next few years to compensate for rising coal prices. We do not expect more coal price hikes in the short term after the series of aggressive hikes over 2012-13. Also, while the coal prices that power generators in Vietnam pay are not yet up to the level of world prices, they have over the past few years increased to the extent that coal miners are near breakeven levels compared to the costs of digging the coal out of the ground. This has reduced somewhat the urgency to raise coal prices.

Finally, the company does not have plans to expand its generating capacity so we only expect nominal revenue growth for the next few years. As mentioned above, PPC seems to be employing a strategy of raising capacity indirectly by investing in other power generators, rather than building its own capacity.

On the subject of PPC’s profits, we do not expect the yen to depreciate significantly in FY14, which means that there should not be a repeat of FY13’s windfall forex gain. As a result, we forecast FY14’s net profit to fall by 50%. This is the profit from the company’s core business. Any depreciation/appreciation of the yen would affect our forecast. We expect PPC’s earnings to be fairly stable given the company’s lack of expansion plans. While we are not experts on exchange rates, we expect more stability for the yen:VND exchange rate going forward, compared to the last two years.

Figure 8: P&L forecast (VNDbn)

2014 2015 2016

Revenue 5,986 6,285 6,600

Cost of sales (4,511) (4,829) (5,320)

Gross profit 1,475 1,456 1,280

Operating cost (96) (101) (106)

Operating EBITDA 1,379 1,355 1,173

Depreciation (697) (702) (422)

Operating EBIT 682 652 752

Associates profit 4 7 10

Net interest income 198 263 320

Forex gain/loss 0 0 0

Others non-operating income 0 0 0

Pretax profit 980 1,023 1,187

Tax (66) (69) (81)

Profit after tax 817 853 1,000 SOURCES: CIMB, COMPANY REPORTS

4.3 Lending to EVN

PPC has lent VND2,350bn to EVN. This cross-lending is common among EVN and its subsidiaries and has raised concern among investors that EVN’s subsidiaries (including PPC) are coerced to lend to their cash-strapped parent. In the case of VSH, as discussed at length above, one of the reasons for the dispute between EVN and VSH is thought to be the fact that VSH cut off its loans to its parent.

4.4 Two-thirds of PPC’s assets are trapped in investments

At end-FY13, PPC had VND2,724bn (23% of its total assets) worth of long-term investments and VND4,938bn (~42% of total assets) in cash, trust investments


41

(i.e. money market instruments) and in a loan to EVN.

Figure 9: PPC's investment (VND bn)

2010 2011 2012 2013

Short term investment

Short term deposit 1,730 60 1,446

Trust investment at BVFMC and loan to EVN 28 2,771 2,020 3,753

Long term investment

Loan to EVN 350 350 350 350

BIDV Corporate bond 118 118 118 0

Quang Ninh Thermal Power JSC 817 817 817 817

EVN International JSC 71 71 71 71

Vietnam Power Development JSC 0 60 100 100

Buon Don Hydro Power JSC 0 50 50 50

Other investments 54 49 49 2

EVN Finance 300 0 0 0

HBB Bank bond 100 0 0 0

Ba Ria Hydro Power JSC 0 0 0 46

Hai Phong Thermal Power JSC 843 1,193 1,178 1,288

Subtotal 4,410 5,540 6,199 6,477

Provision for long term investment -40 -45 -42 NA

Total investment 4,370 5,495 6,157 6,477 SOURCES: CIMB, COMPANY REPORTS

These investments made miserly returns of 0-4% over 2010-13 even though bank deposit rates ranged from c.7% to 14% during that period. Only the cash deposits and the loan to EVN yielded significant investment profits.

Figure 10: Investment yield

2010 2011 2012 2013

Net investment gain/long term investment 4% 4% 3% 0% SOURCES: CIMB, COMPANY REPORTS

In FY13, PPC reported interest income of VND383bn, equal to 17% of its pretax profit. The company has increased its investments over time due to its strong cash flow and Vietnamese regulations that restrict it from increasing its cash payouts to investors. This restriction is related to the large swings in the company’s unrealised gains/losses in recent years due to yen movements. The increase in the company’s investments has also led to a rise in interest income over the years, as can be seen in the table below.

Figure 11: Financial income (VND bn)

2010 2011 2012 2013

Interest income 293 350 477 383

Net investment gain 114 107 79 -1

Profit from associates 0 0 -16 -70

Total financial gain 407 457 541 313 SOURCES: CIMB, COMPANY REPORTS

Finally, we note that the company’s core profit is only being generated by 18% of its total assets but PPC does not have any plans to build new generating capacity with its cash surplus. This obviously is a cause for concern.

4.5 Increased investment in Hai Phong Thermal Power In FY13, PPC increased its stake in its largest investment, Hai Phong Thermal Power, from 21% to 25%. The other major shareholders are EVN, Vinacomin and Bao Viet insurance company (BVH:VN).

Hai Phong Thermal has two plants with a total capacity of 1,200MW. The first plant went online at the end of 2011 while the second plant went online at the end of last year. Hai Phong’s first plant has so far operated at only 70% utilisation due to various technical issues. Also, the company faces the same


42

issues with EVN that PPC and VSH face – EVN prefers hydropower-generated electricity because of its low cost (an issue faced by PPC) and Hai Phong Thermal is currently operating without a proper PPA and EVN is paying discounted prices (circa 10% below the fair price) to coerce the company into accepting unfavourable terms for its PPA.

Although PPC only made a small increase in its investment in Hai Phong Thermal during FY13, we do not view it as a good use of PPC’s cash hoard. Given the above, it seems unlikely that this unlisted power company, with its c.US$1bn electricity generating facility, is going to make high profits anytime soon. Instead of indirectly increasing capacity by investing in other power generating companies, we would prefer that PPC invests directly in new generating facilities or simply puts its excess cash in the bank.

5. VALUATION AND RECOMMENDATION

We initiate coverage on PPC with a Reduce recommendation and a target price of VND17,869, based on a target P/E of 7x, on par with the industry average and the FY14 EPS of VND2,552.

Figure 12: Electricity generators' FY12 ratios

ASP

Production

cost

Gross

margin

Net

margin ROE ROA P/E P/B

Debt/equity

(%)


VSH VN Equity 351 203 53 70 10 7 16 1.2 33

TMP VN Equity 474 307 54 28 17 10 7 1.4 48

TBC VN Equity 522 343 56 50 15 15 8 1.3 1

SJD VN Equity 780 322 59 45 26 15 5 1.1 41

GHC VN Equity 923 248 73 52 49 18 4 2.1 137

DRL VN Equity 814 290 64 59 31 28 9 2.5 0

Average 60 51 25 16 8 1.6 43


PPC VN Equity 832 764 11 12 14 4 5 1.5 167

BTP VN Equity 1,411 1,060 14 9 15 6 7 1.0 85

NBP VN Equity 1,083 1,034 12 5 14 8 8 1.0 0

Average 12 9 14 6 7 1.1 84

Gas power producer

NT2 VN Equity 1,172 1,037 12 0 0 0 253 0.7 336 SOURCES: CIMB, COMPANY REPORTS

Our recommendation reflects our belief that FY14 profit is likely to fall about 50% in the absence of windfall currency gains from further yen weakening. It also reflects PPC’s risk of operating at suboptimal capacity due to EVN’s preference for hydropower, its ageing fixed assets, lack of cost advantage vis-à-vis the hydropower generators, absence of expansion plans and the high proportion of its assets that are in the form of financial investments, rather than physical plant and equipment that can generate electricity

Conglomerate│Vietnam

April 2, 2014


Increasing utility investments Nearly half of REE’s assets are comprised of investments in 14 utility and coal mining companies. Over 80% of its revenues are derived from its air conditioning and M&E businesses, but REE’s increased investment in utilities should boost their contribution towards profits.

REE’s core air conditioning business and the six grade ‘B’ and ‘C’ fully occupied office buildings it owns generate about VND250bn of cash a year. The company invests some of that cash in listed and unlisted companies, typically favoring high yielding stocks, which in turn supports REE’s high dividend yield (current 5%). We have a high regard for Madam Thanh, the CEO’s investing instincts, but rate REE a Hold because of valuation – the stock is currently trading nearly in line with our SOP-estimated NAV.

Utility investments REE started buying utility and coal shares in 2011 after it sold its large holding of STB shares, a listed bank on which it made a 67% return. About half of REE’s assets are currently comprised of listed and unlisted shares in five water companies, four coal mining companies and five electricity generation companies. The move out of bank shares and into utilities was well timed. In 2012, REE made a savvy investment in PPC, a listed electricity generator whose share price doubled in 2013. REE bought its

PPC shares at a price which was below book value. This generated a one-off gain that represents about a third of the company’s 2013 earnings and helped REE’s share price soar 92% last year. This year the company has continued gradually increasing its holdings in utility stocks, albeit at a slower pace as the prices of those stock have already gone up (thanks in part to REE themselves).

Tepid core business Earnings growth in REE’s air conditioning and M&E businesses, which comprise nearly 20% of its overall profits, should be flat in 2014. The company already has a two-year order book of M&E work (which includes installing REE’s brand of industrial air conditioners) so the prospects for revenue growth in the industrial segment are neutral. The consumer segment is being hurt by the weak real estate market, but real estate prices are stabilising. The outlook for revenue growth in this segment is healthy for 2015 because consumer air conditioner sales typically lag sentiment in the real estate market by about one year.

REE Corp COMPANY NOTEREE VN / REE.HM Current VND31,300


US$391.2m US$2.63m 88.7% Prev. Target VND29,952

VND8,253,298m VND55,335m 263.7 m shares Up/Downside 6.5% Conviction| |


————————————————————————————————————————




93

113

133

153

173

17,000

22,000

27,000

32,000

37,000


Source: Bloomberg

123456


Vo

l m


Revenue (VNDb) 2,396 2,413 2,508 2,607 2,711

Operating EBITDA (VNDb) 459.3 448.5 532.5 554.2 576.9

Net Profit (VNDb) 656.8 975.8 677.3 733.2 819.0

Core EPS (VND) 2,703 3,700 2,568 2,781 3,106

Core EPS Growth 9.4% 36.9% (30.6%) 8.3% 11.7%

FD Core P/E (x) 10.90 8.33 12.48 11.53 10.32

DPS (VND) 1,546 1,467 1,600 1,600 1,600

Dividend Yield 4.94% 4.69% 5.11% 5.11% 5.11%

EV/EBITDA (x) 11.79 11.10 8.85 7.92 6.91

P/FCFE (x) 10.22 97.30 16.98 15.93 14.31

Net Gearing (22.4%) (8.3%) (10.2%) (12.4%) (15.1%)

P/BV (x) 1.80 1.59 1.51 1.43 1.34

ROE 16.3% 20.7% 12.7% 13.1% 13.7%


CIMB/consensus EPS (x) 0.72 0.77 0.82

31,300

33,350

18,800 34,800

Target


Current


REE Corp April 2, 2014

44

PEER COMPARISON


Alliance Global Group AGI PM PH OUTPERFORM 6,771 29.50 30.40 3.1%

Oriental Holdings ORH MK MY HOLD 1,362 7.16 7.60 6.1%

REE Corp REE VN VN HOLD 391 31,300 33,350 6.5%

Sembcorp Industries SCI SP SG ADD 7,603 5.36 6.24 16.4%

SM Investments Corp SM PM PH OUTPERFORM 12,840 722 840 16.4%

Yoma Strategic Holdings YOMA SP SG HOLD 689 0.75 0.75 0.0%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50


Rolling P/BV (x)

Alliance Global Group Oriental HoldingsREE Corp Sembcorp Industries

SM Investments Corp Yoma Strategic Holdings

0

5

10

15

20

25

30

35

40

45

50


Rolling FD P/E (x)

Alliance Global Group Oriental HoldingsREE Corp Sembcorp Industries

SM Investments Corp Yoma Strategic Holdings

0.0%

5.8%

11.7%

17.5%

23.3%

29.2%

35.0%

0.00

0.50

1.00

1.50

2.00

2.50

3.00




0%

12%

24%

36%

48%

60%

72%

84%

96%

108%

120%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0






Alliance Global Group 19.93 17.55 15.32 3.18 2.77 2.41 11.71 9.88 9.27

Oriental Holdings 23.69 20.66 18.27 1.00 0.96 0.94 8.93 6.68 5.66

REE Corp 8.33 12.48 11.53 1.59 1.51 1.43 11.10 8.85 7.92

Sembcorp Industries 12.55 11.18 10.58 1.82 1.65 1.50 6.25 5.35 4.79

SM Investments Corp 14.67 12.54 NA 2.28 2.04 NA NA NA NA

Yoma Strategic Holdings 76.40 62.92 38.67 2.43 2.36 2.24 47.52 43.05 25.19



Alliance Global Group 9.5% 13.6% 14.6% 17.0% 16.9% 16.8% 1.38% 1.00% 1.14%

Oriental Holdings -6.5% 14.7% 13.1% 4.1% 4.7% 5.2% 0.49% 0.56% 0.56%

REE Corp 30.8% -33.2% 8.3% 20.7% 12.7% 13.1% 4.69% 5.11% 5.11%

Sembcorp Industries 0.9% 12.2% 5.7% 15.6% 15.5% 14.8% 3.20% 3.66% 3.87%

SM Investments Corp 16.4% 17.0% -100.0% 16.5% 17.3% 1.58% 1.81% 0.00%

Yoma Strategic Holdings -16.8% 21.4% 62.7% 3.4% 3.9% 6.1% 0.67% 0.67% 0.67%




45

Profit from associates jumped due to the recognition of the negative goodwill from PPC investment (see title page for details)

Stable dividends, supported by the REE’s high cash flow

Share price info


Relative -1.7 -9.6 42.3

Absolute -2.5 5.7 56.5


Platinum Victory 17.7

Dragon Capital 11.0

Nguyen Thi Mai Thanh 10.5

0.0%2.5%5.0%7.5%10.0%12.5%15.0%17.5%20.0%22.5%25.0%

0.000.200.400.600.801.001.201.401.601.802.00


P/BV vs ROE


-40%-32%-24%-16%-8%0%8%16%24%32%40%

0.01.02.03.04.05.06.07.08.09.0

10.0




Profit & Loss


Total Net Revenues 2,396 2,413 2,508 2,607 2,711

Gross Profit 646 664 757 787 819

Operating EBITDA 459 449 532 554 577

Depreciation And Amortisation (61) (61) (54) (54) (54)

Operating EBIT 398 387 478 500 523

Total Financial Income/(Expense) 62 25 18 28 64

Total Pretax Income/(Loss) from Assoc. 45 429 287 315 347

Total Non-Operating Income/(Expense) 292 247 0 0 0

Profit Before Tax (pre-EI) 797 1,088 783 843 934

Exceptional Items

Pre-tax Profit 797 1,088 783 843 934

Taxation (140) (112) (105) (110) (115)


Profit After Tax 657 976 677 733 819

Minority Interests (0)

Preferred Dividends



Net Profit 657 976 677 733 819

Recurring Net Profit 657 976 677 733 819

Fully Diluted Recurring Net Profit 657 976 677 733 819

Cash Flow


EBITDA 459.3 448.5 532.5 554.2 576.9


Change In Working Capital (241.5) (357.9) (41.5) (43.6) (45.7)

(Incr)/Decr in Total Provisions

Other Non-Cash (Income)/Expense (17.4)

Other Operating Cashflow 598.5 51.7

Net Interest (Paid)/Received 62.0 22.3 17.5 27.9 64.4

Tax Paid (186.6) (105.6) (105.2) (110.0) (115.0)

Cashflow From Operations 691.7 41.6 403.3 428.5 480.6

Capex (28.8) (10.3) 0.0 0.0 0.0

Disposals Of FAs/subsidiaries

Acq. Of Subsidiaries/investments (485.7) (355.4)

Other Investing Cashflow 239.2 144.5 152.0 160.2

Cash Flow From Investing (514.5) (126.5) 144.5 152.0 160.2

Debt Raised/(repaid) 522.8 168.4 (50.0) (50.0) (50.0)

Proceeds From Issue Of Shares 83.5

Shares Repurchased

Dividends Paid (375.8) (386.7) (421.9) (421.9) (421.9)

Preferred Dividends

Other Financing Cashflow (0.4) 5.2

Cash Flow From Financing 230.2 (213.2) (471.9) (471.9) (471.9)

Total Cash Generated 407.4 (298.0) 75.9 108.6 168.8

Free Cashflow To Equity 700.0 83.5 497.8 530.5 590.7

Free Cashflow To Firm 215.0 (25.5) 576.2 605.9 640.7

BY THE NUMBERS



46

More than half of REE’s assets are investments, including investment property

Balance Sheet


Total Cash And Equivalents 1,718 952 1,028 1,137 1,306

Total Debtors 424 685 712 740 770

Inventories 790 544 566 588 611



Fixed Assets 42 42 42 42 42

Total Investments 3,387 4,317 4,405 4,514 4,646




Short-term Debt 83 285 265 245 225



Other Current Liabilities 1,318 967 967 967 967

Total Current Liabilities 1,572 1,421 1,407 1,394 1,381

Total Long-term Debt 690 238 208 178 148



Total Non-current Liabilities 787 333 303 273 243


Total Liabilities 2,358 1,753 1,710 1,667 1,624


Minority Interests 0 5 5 5 5

Total Equity 4,216 5,201 5,457 5,768 6,165

Key Drivers


Rev. growth (%, main biz.) 32.3% -14.4% 4.3% 4.3% 4.0%

EBITDA mgns (%, main biz.) 16.6% 19.0% 19.1% 19.2% 19.3%

Rev. as % of total (main biz.) N/A N/A N/A N/A N/A

EBITDA as % of total (main biz.) N/A N/A N/A N/A N/A

Rev. growth (%, 2ndary biz.) N/A N/A N/A N/A N/A

EBITDA mgns (%, 2ndary biz.) N/A N/A N/A N/A N/A

Rev. as % of total (2ndary biz.) N/A N/A N/A N/A N/A

EBITDA as % of total (2ndary biz.) N/A N/A N/A N/A N/A

Rev. growth (%, tertiary biz.) N/A N/A N/A N/A N/A

EBITDA mgns (%, tertiary biz.) N/A N/A N/A N/A N/A

Rev.as % of total (tertiary biz.) N/A N/A N/A N/A N/A

EBITDA as % of total (tertiary biz.) N/A N/A N/A N/A N/A

BY THE NUMBERS

Key Ratios


Revenue Growth 32.3% 0.7% 3.9% 4.0% 4.0%

Operating EBITDA Growth 8.0% (2.3%) 18.7% 4.1% 4.1%


Net Cash Per Share (VND) 3,887 1,629 2,107 2,708 3,538

BVPS (VND) 17,346 19,708 20,676 21,857 23,363

Gross Interest Cover 10.53 6.78 16.86 19.71 N/A




Inventory Days 152.5 139.3 115.7 115.7 116.0


ROIC (%) 174% (1940%) 87% 85% 82%

ROCE (%) 10.9% 8.8% 9.0% 9.1% 9.2%



47

An overview of REE’s utility investments:

Figure 1: REE's investment

Value (VNDbn) Stake

Coal investments

Vang Danh Coal JSC 14 5%

Nui Beo Coal JSC 86 24%

Deo Nai Coal JSC 74 24%

Ha Tu Coal JSC NA 16%

Electricity investments

Pha Lai Thermal Power 1,207 22%

Thac Mo Hydro Power 334 35%

Thac Ba Hydro Power 218 24%

Srok Phu Mieng Hydro Power 153 34%

Ninh Binh Thermal Power 67 29%

Quang Ninh Thermal Power 471 NA

Other investment in associates

Saigon Real Estate 63 29%

BOO Water Thu Duc 350 42%

Thu Duc Water Supply 57 43%

Saigon Clean Water Business & Investment 46 30%

Doan Nhat M&E 25 35%

Chat Luong M&E 3 36%

Hop Phat M&E 2 35%

Vietnam Infra Investment & Development 164 46%

Stock investments

Utxico 60 NA

Khanh Hoa Water 53 NA

Saigon Postel 48 NA

Cuu Long Petro 11 NA

REE Power JSC 8 NA

Mang Canh JSC 5 NA

Others

Sonadezi Chau Duc 184 NA

Others 294 NA

Subtotal 3,996

Provision -165

Net investment 3,831 SOURCES: CIMB, COMPANY REPORTS

POWER February March 14, 201411, 2014

48

DISCLAIMER

This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

By accepting this report, the recipient hereof represents and warrants that he is entitled to receive such report in accordance with the restrictions set forth below and agrees to be bound by the limitations contained herein (including the “Restrictions on Distributions” set out below). Any failure to comply with these limitations may constitute a violation of law. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this report may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB.

Unless otherwise specified, this report is based upon sources which CIMB considers to be reasonable. Such sources will, unless otherwise specified, for market data, be market data and prices available from the main stock exchange or market where the relevant security is listed, or, where appropriate, any other market. Information on the accounts and business of company(ies) will generally be based on published statements of the company(ies), information disseminated by regulatory information services, other publicly available information and information resulting from our research.

Whilst every effort is made to ensure that statements of facts made in this report are accurate, all estimates, projections, forecasts, expressions of opinion and other subjective judgments contained in this report are based on assumptions considered to be reasonable as of the date of the document in which they are contained and must not be construed as a representation that the matters referred to therein will occur. Past performance is not a reliable indicator of future performance. The value of investments may go down as well as up and those investing may, depending on the investments in question, lose more than the initial investment. No report shall constitute an offer or an invitation by or on behalf of CIMB or its affiliates to any person to buy or sell any investments.

CIMB, its affiliates and related companies, their directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto and may from time to time add to or dispose of, or may be materially interested in, any such securities. Further, CIMB, its affiliates and its related companies do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory, underwriting or placement services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report.

CIMB or its affiliates may enter into an agreement with the company(ies) covered in this report relating to the production of research reports. CIMB may disclose the contents of this report to the company(ies) covered by it and may have amended the contents of this report following such disclosure.

The analyst responsible for the production of this report hereby certifies that the views expressed herein accurately and exclusively reflect his or her personal views and opinions about any and all of the issuers or securities analysed in this report and were prepared independently and autonomously. No part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations(s) or view(s) in this report. CIMB prohibits the analyst(s) who prepared this research report from receiving any compensation, incentive or bonus based on specific investment banking transactions or for providing a specific recommendation for, or view of, a particular company. Information barriers and other arrangements may be established where necessary to prevent conflicts of interests arising. However, the analyst(s) may receive compensation that is based on his/their coverage of company(ies) in the performance of his/their duties or the performance of his/their recommendations and the research personnel involved in the preparation of this report may also participate in the solicitation of the businesses as described above. In reviewing this research report, an investor should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request.

Reports relating to a specific geographical area are produced by the corresponding CIMB entity as listed in the table below. The term “CIMB” shall denote, where appropriate, the relevant entity distributing or disseminating the report in the particular jurisdiction referenced below, or, in every other case, CIMB Group Holdings Berhad ("CIMBGH") and its affiliates, subsidiaries and related companies.

Country CIMB Entity Regulated by Australia CIMB Securities (Australia) Limited Australian Securities & Investments Commission Hong Kong CIMB Securities Limited Securities and Futures Commission Hong Kong Indonesia PT CIMB Securities Indonesia Financial Services Authority of Indonesia India CIMB Securities (India) Private Limited Securities and Exchange Board of India (SEBI) Malaysia CIMB Investment Bank Berhad Securities Commission Malaysia Singapore CIMB Research Pte. Ltd. Monetary Authority of Singapore South Korea CIMB Securities Limited, Korea Branch Financial Services Commission and Financial Supervisory Service Taiwan CIMB Securities Limited, Taiwan Branch Financial Supervisory Commission Thailand CIMB Securities (Thailand) Co. Ltd. Securities and Exchange Commission Thailand

(i) As of February 10, 2014, CIMB has a proprietary position in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report:

(a) Oriental Holdings, Sembcorp Industries, Tenaga Nasional|

(ii) As of February March 14, 201411, 2014, the analyst(s) who prepared this report, has / have an interest in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report:

(a) - |

The information contained in this research report is prepared from data believed to be correct and reliable at the time of issue of this report. CIMB may or may not issue regular reports on the subject matter of this report at any frequency and may cease to do so or change the periodicity of reports at any time. CIMB is under no obligation to update this report in the event of a material change to the information contained in this report. This report does not purport to contain all the information that a prospective investor may require. CIMB or any of its affiliates does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information and opinion contained in this report. Neither CIMB nor any of its affiliates nor its related persons shall be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

This report is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CIMB and its affiliates’ clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. The information and opinions in this report are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, related investments or other financial instruments thereof.

Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction in respect of the securities of company(ies) covered in this research report. The securities of such company(ies) may not be eligible for sale in all jurisdictions or to all categories of investors.

Australia: Despite anything in this report to the contrary, this research is provided in Australia by CIMB Securities (Australia) Limited (“CSAL”) (ABN 84 002 768 701, AFS Licence number 240 530). CSAL is a Market Participant of ASX Ltd, a Clearing Participant of ASX Clear Pty Ltd, a Settlement Participant of ASX Settlement Pty Ltd, and, a participant of Chi X Australia Pty Ltd. This research is only available in Australia to persons who are “wholesale clients” (within the meaning of the Corporations Act 2001 (Cth)) and is supplied solely for the use of such wholesale clients and shall not be distributed or passed on to any other person. This research has been prepared without taking into account the objectives, financial situation or needs of the individual recipient.

France: Only qualified investors within the meaning of French law shall have access to this report. This report shall not be considered as an offer to subscribe to, or used in connection with, any offer for subscription or sale or marketing or direct or indirect distribution of financial instruments and it is not intended as a solicitation for the purchase of any financial instrument.


49

Hong Kong: This report is issued and distributed in Hong Kong by CIMB Securities Limited (“CHK”) which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) activities. Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact the Head of Sales at CIMB Securities Limited. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CHK has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CHK. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CHK. Unless permitted to do so by the securities laws of Hong Kong, no person may issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the securities covered in this report, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong).

India: This report is issued and distributed in India by CIMB Securities (India) Private Limited (“CIMB India”) which is registered with SEBI as a stock-broker under the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 and in accordance with the provisions of Regulation 4 (g) of the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013, CIMB India is not required to seek registration with SEBI as an Investment Adviser.

The research analysts, strategists or economists principally responsible for the preparation of this research report are segregated from the other activities of CIMB India and they have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues, client feedback and competitive factors. Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed or proposed to be performed by CIMB India or its affiliates.

Indonesia: This report is issued and distributed by PT CIMB Securities Indonesia (“CIMBI”). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBI has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CIMBI. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBI. Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens wherever they are domiciled or to Indonesia residents except in compliance with applicable Indonesian capital market laws and regulations.

Malaysia: This report is issued and distributed by CIMB Investment Bank Berhad (“CIMB”). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMB has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CIMB. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB.

New Zealand: In New Zealand, this report is for distribution only to persons whose principal business is the investment of money or who, in the course of, and for the purposes of their business, habitually invest money pursuant to Section 3(2)(a)(ii) of the Securities Act 1978.

Singapore: This report is issued and distributed by CIMB Research Pte Ltd (“CIMBR”). Recipients of this report are to contact CIMBR in Singapore in respect of any matters arising from, or in connection with, this report. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBR has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only. If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CIMBR accepts legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBR..

As of February 10, 2014, CIMBR does not have a proprietary position in the recommended securities in this report.

South Korea: This report is issued and distributed in South Korea by CIMB Securities Limited, Korea Branch ("CIMB Korea") which is licensed as a cash equity broker, and regulated by the Financial Services Commission and Financial Supervisory Service of Korea.

The views and opinions in this research report are our own as of the date hereof and are subject to change, and this report shall not be considered as an offer to subscribe to, or used in connection with, any offer for subscription or sale or marketing or direct or indirect distribution of financial investment instruments and it is not intended as a solicitation for the purchase of any financial investment instrument.

This publication is strictly confidential and is for private circulation only, and no part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB Korea.

Sweden: This report contains only marketing information and has not been approved by the Swedish Financial Supervisory Authority. The distribution of this report is not an offer to sell to any person in Sweden or a solicitation to any person in Sweden to buy any instruments described herein and may not be forwarded to the public in Sweden.

Taiwan: This research report is not an offer or marketing of foreign securities in Taiwan. The securities as referred to in this research report have not been and will not be registered with the Financial Supervisory Commission of the Republic of China pursuant to relevant securities laws and regulations and may not be offered or sold within the Republic of China through a public offering or in circumstances which constitutes an offer or a placement within the meaning of the Securities and Exchange Law of the Republic of China that requires a registration or approval of the Financial Supervisory Commission of the Republic of China.

Thailand: This report is issued and distributed by CIMB Securities (Thailand) Company Limited (CIMBS). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBS has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CIMBS. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBS.

Corporate Governance Report:

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.

The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.

Score Range: 90 – 100 80 – 89 70 – 79 Below 70 or No Survey Result Description: Excellent Very Good Good N/A

United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates.

United Kingdom and Europe: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited (“CIMB UK”). CIMB UK is


50

authorised and regulated by the Financial Services Authority and its registered office is at 27 Knightsbridge, London, SW1X 7YB. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are persons that are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”); (c) are persons falling within Article 49 (2) (a) to (d) (“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the United Kingdom; or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.

Only where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent "investment research" under the applicable rules of the Financial Services Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research.

United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S.-registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, CIMB Securities (Australia) Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as "U.S. Institutional Investors" as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc.

Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Rating Distribution (%) Investment Banking clients (%)

Outperform/Buy/Trading Buy/Add 51.1% 6.9%

Neutral/Hold 32.7% 6.0%

Underperform/Sell/Trading Sell/Reduce 16.2% 5.5%

Distribution of stock ratings and investment banking clients for quarter ended on 31 January 2014

1337 companies under coverage for quarter ended on 31 January 2014

As at the time of publishing this report CIMB is phasing in an absolute recommendation structure for stocks (Framework #1). Please refer to all frameworks for a definition of any recommendations stated in this report.

CIMB Recommendation Framework #1 Stock Ratings Definition Add The stock’s total return is expected to exceed 10% over the next 12 months. Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months. Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months. The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months. Sector Ratings Definition Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation. Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation. Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation. Country Ratings Definition Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark. Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark. Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

CIMB Stock Recommendation Framework #2 * Outperform The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 12 months. Neutral The stock's total return is expected to be within +/-5% of a relevant benchmark's total return. Underperform The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 12 months. Trading Buy The stock's total return is expected to exceed a relevant benchmark's total return by 3% or more over the next 3 months. Trading Sell The stock's total return is expected to be below a relevant benchmark's total return by 3% or more over the next 3 months. * This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. CIMB Research Pte Ltd (Co. Reg. No. 198701620M)

CIMB Stock Recommendation Framework #3 ** Outperform Expected positive total returns of 10% or more over the next 12 months. Neutral Expected total returns of between -10% and +10% over the next 12 months. Underperform Expected negative total returns of 10% or more over the next 12 months. Trading Buy Expected positive total returns of 10% or more over the next 3 months. Trading Sell Expected negative total returns of 10% or more over the next 3 months. ** This framework only applies to stocks listed on the Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.


51

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (IOD) in 2013. AAV – Good, ADVANC - Excellent, AMATA - Very Good, ANAN – Good, AOT - Excellent, AP - Very Good, BANPU - Excellent , BAY - Excellent , BBL - Excellent, BCH – Good, BCP - Excellent, BEC - Very Good, BGH - not available, BJC – Very Good, BH - Very Good, BIGC - Very Good, BTS - Excellent, CCET – Very Good, CENTEL – Very Good, CK - Excellent, CPALL - Very Good, CPF – Excellent, CPN - Excellent, DELTA - Very Good, DTAC - Excellent, EGCO – Excellent, GLOBAL - Good, GLOW - Very Good, GRAMMY – Excellent, HANA - Excellent, HEMRAJ - Excellent, HMPRO - Very Good, INTUCH – Excellent, ITD – Very Good, IVL - Excellent, JAS – Very Good, KAMART – not available, KBANK - Excellent, KKP – Excellent, KTB - Excellent, LH - Very Good, LPN - Excellent, MAJOR – Very Good, MAKRO – Very Good, MCOT - Excellent, MINT - Excellent, PS - Excellent, PSL - Excellent, PTT - Excellent, PTTGC - Excellent, PTTEP - Excellent, QH - Excellent, RATCH - Excellent, ROBINS - Excellent, RS – Excellent, SAMART – Excellent, SC – Excellent, SCB - Excellent, SCC - Excellent, SCCC - Very Good, SIRI – Very Good, SPALI - Excellent, STA - Good, STEC - Very Good, TCAP - Excellent, THAI - Excellent, THCOM – Excellent, TICON – Very Good, TISCO - Excellent, TMB - Excellent, TOP - Excellent, TRUE - Excellent, TTW – Excellent, TUF - Very Good, VGI – Excellent, WORK – Good.

Vietnam Power Sector

Documents

electricity vietnam

retail electricity prices

power industry

power sector

lowest prices

prices ipps

coal input prices

market prices