Earnings Report /
Vietnam

Pha Lai Thermal Power: Higher contract quantity and declining profitability do not guarantee growth

  • PPC achieved a 8.2% increase in electricity output, driven by a 55% growth in Qm (market quantity).

  • 2019 gross margin stabilized at 15.7% compared to 2018’s 16.1% despite the local coal shortage. It managed to stab

  • PPC paid off Yen debts and has gradually become nearly debt-free.

Rong Viet
16 March 2020
Published byRong Viet

FY2020 outlook – Unclear growth potential because a higher Qc (contract quantity) may cause opposing effects on business results

On the one hand, we think a high 2020 Qc for Pha Lai 1 plant (1.7 billion kWh, +15.1% yoy) will benefit the company due to its inferior efficiency. On the other hand, the fact that Pha Lai 2 plant Qc could increase by 10.2% for 2020 leaves less room for profit-optimizing opportunities on the CGM.

PPC’s gross margin is forecasted to decline in 2020, as the coal change is likely to impact PPC to a greater extent. We predict that its gross margin will be reduced to 12.8%.

Our 2020 forecast includes VND 9,138 billion (~USD 393.9 Mn, +11.7% yoy) in revenue and VND 1,103 billion (~USD 47.5 Mn, -13.0% yoy) in NPAT, higher than the previous update due to re-estimating the coal price impact and financial activities.

Even though PPC has improved its financials and offered annual cash dividends, we believe the potential has been fully reflected in its market price. We think that 2019 was the peak in PPC’s earnings as there will be less opportunities for the company to generate profit this year. PPC is going to face a coal shortage which will impact profitability. A lower PPA price for Pha Lai 1 plant and a more difficult CGM are the risks to PPC’s growth potential in the intermediate term. 

The share price performance during the latter part of 2019 resulted in overpriced valuations at the beginning of 2020. We adjusted P/E and EV/EBITDA multiples downward to reflect the rising risks in the stock market recently. Consequently, the FCFE, P/E and EV/EBITDA methods put PPC’s value at VND22,500 (revised down 4% from our TP in our 2020 strategy report), implying that the current market price is around the “fair” level as the total expected return is 8% at the closing price on March 13th 2020. Therefore, we rate this stock as NEUTRAL.