Jaks Resources - The Matrix Behind The Vietnam PPA

https://klse.i3investor.com/blogs/Jaks%20resources/202341.jsp

For the benefit of those in this thread, I repost my response from Jaks forum.

Dear Sslee,

The base you used in your computation is wrong. You should use US$1.87b which is the project cost, not US$470m which is the equity capital.

There are terms in the shareholder agreement signed between CPECC and Jaks to address your concern on the dividend issue. Unless, you think Andy is less than normal.

The ownership of the power plant will be transferred to MOIT, vietnam after 25 years regardless. Coal power plant has an average lifespan of 40 years.

A deal is a deal, there is no such thing as "you earned too much" in business. Why is Apple able to sell a phone for more than RM5,000, fair price ?

In fact, I believe the margin is much more than US$1.5 cent per kwh.

However, as I have said, kenanga/management has given RM150m as the profit figure. For now, I m happy to work on this number.

Dear Sslee,

Could you explain the information you have gathered from AES account ?

i3value, finished ??

Thanks for sparing me, you made me nervous for a while :)

Just kidding

This part is incorrect. Should be first 4 year tax exempt, 5 years at 5%, and the rests 10%.

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5. Electricity tariff is adjusted depending on coal price to yield the fixed return to the power plant. It is tax free for first five years and then 5% for the remaining 20 years. PAT margin is estimated to be around 20%

welcome

Probability,

Accounting wise,
Profit has to net off interest and depreciation charges in income statement
In cash flow statement, it has to deduct all payments including interests and principal.

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probability take it as payment of US$ 120M then.....so then they have to fork out US$ 77M per annum for principal payment?
14/04/2019 11:16 PM

Lukey_Greek ,

Please provide more details on the followings;

4. Once the power plant reaches a full year of production, is estimated to be RM120m per year, equivalent to 3.5x FY18 core earnings
5. Electricity tariff is adjusted depending on coal price to yield the fixed return to the power plant. It is tax free for first five years and then 5% for the remaining 20 years. PAT margin is estimated to be around 20%

Thanks

Lukey_Greek, Thanks for sharing.

Can provide the full link ?

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Lukey_Greek You may find some of the answers from analyst report from Phillip Capital Management dated 12th April.

Here are some of the summaries:

1. Expected progress of completion is 46% - 50% vs 46% as at Dec 18.
2. Target to reach 90% completion by end of 2019
3. To recognize at least RM240m of construction profit from this power plant in FY19 and FY20.
4. Once the power plant reaches a full year of production, is estimated to be RM120m per year, equivalent to 3.5x FY18 core earnings
5. Electricity tariff is adjusted depending on coal price to yield the fixed return to the power plant. It is tax free for first five years and then 5% for the remaining 20 years. PAT margin is estimated to be around 20%.
6. Operation of first turbine (600MW) is expected to start in 2Q20 which is six months ahead of schedule and second turbine (600MW) in 2H20.

Probability,

The US$1.402b loan has a tenure of 18 years being maximum agreed by the government of Vietnam. In fact, the guarantee provided by the vietnam government only covers 18 years.

So, there will not be any outstanding loan after 18 years.

Anyway, to answer your question, JHDP is the borrower, so I guess the JV has to repay the outstanding loan, if any.

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probability DK66, at the end of 25 years who owns the Debt of US$ 1.4 Billion?

Dear Sslee, i hope i have answered all your queries.

Dear Sslee, after some modification, I managed to repost your 1st paragraph here.

A deal is a deal, there is no such thing as "you earned too much" in business. Why is Apple able to sell a phone for more than RM5,000, fair price ?

In fact, I believe the margin is much more than US$1.5 cent per kwh.

However, as I have said, kenanga/management has given RM150m as the profit figure. For now, I m happy to work on this number.

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You expect EVN Vietnam to guarantee a profit of USD 1.5 cents per Kwh (with Coal cost pass thro’ with certain specified efficiency) and with Capacity payment to take care of JV’s USD 1.4billion loan interest and fixed depreciation and fixed O&M expenses?
14/04/2019 10:19 PM

Dear Sslee,

The base you used in your computation is wrong. You should use US$1.87b which is the project cost, not US$470m which is the equity capital.

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With capital of USD 470 million and payment of USD 120 million for 25 year is equal to IRR of 25.4%.This is almost like AhLong rate.

There is a shareholder agreement between CPECC and Jaks to address your concern. Unless, you think Andy is less than normal. .....

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If China partner play out JAKS with excuse to accumulate cash reserve for new green energy investment in Vietnam and no dividend for the next 5 year what can JAKS do. None of JAK’s projects in Malaysia are profitable or generating positive cash flow.

we are hard working people :)
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Icon8888 LOL morning discuss until night
14/04/2019 8:00 PM

Hai Dong plant will employ about 700 people, half of them vietnamese, during operation.

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qqq3 probability S&A i meant as labour cost...coal power plants is labor intensive

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really meh? Not as many workers as Magnitech.....
14/04/2019 7:56 PM

Dear Sslee,

The ownership of the power plant will be transferred to MOIT, vietnam after 25 years regardless. Coal power plant has an average lifespan of 40 years.

I m indeed surprised that your concern can be so "indepth" and "far reached".

It is never too conservative ?

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P/S: For 25 years BOT; it mean after 25 years all the plant equipments and land return to Vietnam state. The EVN Vietnam will take over and run the plant if it is still efficient and economical to run it, otherwise JV will need to de-commission and dismantle all the plant equipments.

There is provision for adjustment of maintenance and operation costs based the CPI to take care of inflation.

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probability S&A i meant as labour cost...coal power plants is labor intensive
14/04/2019 7:42 PM

"Renting" is just an analogy.

Renting means supplier is responsible for the proper function of the equipment

Yes, JHDP is responsible to keep the plant in proper working order.

Sorry, what is S&A costs ?

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probability nicely worded there...'renting'

hope you are sure about no.3, breakdown should be supplier's responsibility right?

and what about the S&A costs - who cushions it if it goes up?

renting without any risk to the equipment supplier?

Dear Sslee,

If I may ask, what have i done to cause your anger ?

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Sslee Dear all,
Repost from other forum.

4. Grit or “Sailang”. DK66’s TP on one of his heavily promoted JAKS is RM7.00. So ask him dare to “Sailang” and margin finance into JAKS now.

The vietnam is paying to buy;

1. The coal power technology,
2. The capital costs for the plant
3. Maintenance and management of the plant

or put it simply,

To rent "electricity equipment" from china/Malaysia with an option to purchase at the end of 25 years at 0 cost.

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probability To summarize the below message of yours DK66.

Its like Vietnam Govn is giving you the 150M just to 'manage' properly these plants you had made isn't it?

If you dont manage it well..you bear the consequences.

You dont get anything extra......from market supply and demand.

What I meant was the tariff structure is clear;

Total tariff = Fixed payment based on dependable capacity + Output Payment based on electricity produced + Fuel costs pass thru

How could a fixed tariff (per Kwh) fit into the equation ?

The operator required an attractive return on its investment commensurate to the risks taken.

The vietnam government has to provide guarantee on minimum return so as to lower the risk of investment to come to a more agreeable terms acceptable to both parties.

The consumer tariff rate has no bearing in how much the operator will make from its investment.

Yes, from what i gather, the vietnam government is subsidising the electricity industry.

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probability DK66, with great respect on you...i really do not know what you had meant by the below...since i am not from accounting background familiar with IPP contract terms.

But, i could not identify..where is the meat for JAKS to obtain 150M profit if not purely from subsidy.

Earnings from subsidy does not sound attractive to me.

We should really investigate...how can this business be profitable?

I will give some clue to start the investigation..

..............

Posted by DK66 > Apr 13, 2019 6:07 PM | Report Abuse

Probability,

I regret to tell you that I believe your effort was not on the right track.

In simple term, the tariff payment = Capacity payment + Output Payment + Fuel costs

It doesn't work on tariff per KwH basis.

Is it acceptable to you that the vietnam government is subsidising the electricity to power economy growth ?


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probability lets see qqq3 or DK66 might have some logical explanation from where this subsidy amount will come....

Probability,

You have shared certain selected news from vietnam on coal power plant.

Could you share your opinion on what you have shared so far ?

Especially whether Hai duong power plant is going to be profitable at all

Thank You.

I have another interesting question. There's a lot of doubts on profit given by Jaks management, but no one doubted MFCB's profit projections ??

Thank you
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michaelwong I find in jaks share forum , there's a handful of quality and professionals sifus with in-depth knowledges giving and offering wide range of coverage for jaks share price not to mention especially DK66...... well done !!! I give you a thumbs up and for those who has keen interest in investing jaks share would have an insight of the company financials development aspects and same time to built up their confidence and share participation with any latest updates development if there's is any .

That's wonderful secret through sharing one thought and well received by others !!!
13/04/2019 11:56 PM

Actually, I m talking about project IRR. One evaluates the project's IRR to determine if the project is attractive for investment and weigh against, among others, cost of capital, opportunity costs etc.

To determine the project IRR, you need to first determine the future cash flow of the project.

IRR is the discount rate at which a project's net present value of outflows and inflows becomes equal to zero

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kcchongnz Posted by DK66 > Apr 13, 2019 11:25 PM | Report Abuse
IRR is all about FCF, without which you can't derive IRR

You must be talking about IRR if you invest in Jaks now at 85 sen. You are right then. I thought you were talking about IRR of the project.

However, IRR is not very good metric in this case, especially if IRR is very high as it is assumed that cash flows are reinvested in that high return.

Present value of the future cash flows, and compared with its price, is more relevant, in my opinion.

IRR is all about FCF, without which you can't derive IRR

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kcchongnz
I do not agree at this stage. IRR, NPV, payback period are all irrelevant now. What matters for investors is what is the FCF in the future, and with the shares outstanding, what is FCF per share, and compared to the share price. Then make a decision.
13/04/2019 11:21 PM

With "perfect" information, it won't be investing, it is insider trading :)

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Icon8888 For me, investing is about making decisions with imperfect information

That is why I said IRR and or payback periods are the only right way to evaluate the viability of the power project. Because these methods are based on real cash flows.

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kcchongnz In a power plant project like this, if one is really talking about investing, the theoretical and logical thing to look for is what is the present value of these free cash flows over the life of the project, discounted to the present, and compared with the price now.

That is the theory postulated by John Burr Williams many years ago and the investing professionals still use them.

That is also how the viability of a project like this is being appraised too.

But of course to make money, theory may not apply and one needs not follow it. That is the beauty of the capital market.
13/04/2019 11:13 PM

Thank you for your opinion. I suppose you mean it is a "buy" figure wise, but "no" if there is management issues.

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kcchongnz Posted by DK66 > Apr 13, 2019 10:38 PM | Report Abuse

Yes and no.

Yes if the RM150m increases according to inflation and the shareholders get the share of it proportionally. For the major shareholder is not a simple guy who has shown that he has been taken care of the minority shareholders. The diluted cash flow per share is about 20 sen, provided the major shareholders don't give themselves free shares any more.

No is discussed in above too. If the management is not credible, whatever the company earns minority shareholders seldom enjoy it.

My point is, if you are very positive about the stock in Jaks, go ahead and buy it but don't ever put everything there.

This is just my personal opinion.
13/04/2019 10:52 PM

They are selling the electricity to EVN not directly to consumer.

EVN still has its own costs.

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probability the fact that they have to politely request Government to raise selling price per kWh...

Kcchongnz, if RM150m is net cash flow to Jaks, in your opinion, is that attractive to buy Jaks at current price of RM0.85 ?

Isn't there any sifu in GCB forum that might be able to help you ?

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DK66 I m sorry that i won't be able to help. It takes me a long time to analyse a stock. It would be irresponsible for me to just read the cover and form an opinion.

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Cakes Moon Hi Icon8888/ DK66/ Probability, could you kindly advice me on GCB? Whether it is also a good buy?
13/04/2019 5:34 PM
13/04/2019 10:26 PM

I m sorry that i won't be able to help. It takes me a long time to analyse a stock. It would be irresponsible for me to just read the cover and form an opinion.

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Cakes Moon Hi Icon8888/ DK66/ Probability, could you kindly advice me on GCB? Whether it is also a good buy?
13/04/2019 5:34 PM

If it is net profit, it would have netted of depreciation.
If it is net cash flow, it would have netted of principal repayment.

Depreciation almost equals to principal repayment.


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kcchongnz For a development like that, what is important is what is the cash flows over the years the JV receives. Profit has not much relevance. So I presume that RM150m is Jaks share of cash it will receives every year for 25 years.

But the JV took a loan of USD1.4 billion. The JV will have to pay interest and loan repayment over the life of the project. Interest payment should have been deducted from the profit, or operating cash flows. But the JV still have to pay the loan repayment of USD1.4 billion, which will be about RM224m a year.

Has that been taken into consideration?

Fully diluted, the total number of shares will be about 686m

Kcchongnz,

Glad to hear from you again.

I got the figure from Kenanga report which many here presumed was directly from the management.

Kenanga has provide no details other than "net-of-tax profit".

From the word "profit" itself, I think it is not cash flow or dividend. Sounds more like net profit after tax.

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kcchongnz Posted by DK66 > Apr 13, 2019 6:10 PM | Report Abuse
For now, management is telling us that it is going to make RM150m from its vietnam IPP.
So work on the figure.

DK, I presume this is the cash Jaks will be receiving when the power plant is in operation. And that is the share of the RM500 "profit" the joint venture will receive. That "profit"is sort of like the cash flows, or cash dividend Jaks will receive.

Is that correct?

Dear Sslee,

Kenanga only gave a net-of-tax profit, and you came out with EBIA which no accountant has ever heard of. I don't think your argument is going to win much support.

Anyway, you have the right to say what you want.

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Thus facing with this two different payment most likely people just quote the USD 1.5 cents per KWh guarantee profit net of tax multiple by the total Kwh produce in a year as profit net of tax. It should be earning before interest and amortization. (EBIA)

This platform is for discussion only. Not to prove view of oneself. To each his own.

For now, management is telling us that it is going to make RM150m from its vietnam IPP.

So work on the figure.

Probability,

I regret to tell you that I believe your effort was not on the right track.

In simple term, the tariff payment = Capacity payment + Output Payment + Fuel costs

It doesn't work on tariff per KwH basis.

The only right way to look at it is using IRR and or Payback period.

I believe Vietnam is currently subsidising its electricity for the benefit of economic growth. It is working on a long term average tariffs rate to gradually reducing its subsidies.

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probability Question is from where are they getting this 150M..subsidized? The maths using available data shows there is no room for such margins

I agree

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qqq3 DK66 > Apr 13, 2019 5:48 PM | Report Abuse

forget Kenanga, they are not IPP experts .

They relay information passed to them.

If Kenanga has overestimated coal consumption, has it understated earnings ?

Anyway, like I said, at least we have RM150m profit to work on.

Just to explain why I think 15,000 mt coal consumption per day estimation by Kenanga is too high.

Hai Duong power plant is using subcritical technology.

It has 4 x 300MW circulating fluidized bed boilers using pulverised anthracite coal to power 2x 600MW turbines.

Currently subcritical technology has a plant net output efficiency of about 36 – 38% including ancillary power consumption.

Theoretically, 3412 btu is required to produce 1 Kwh of electricity

At 37% efficiency, it is expected to consume 9221 Btu for every Kwh of electricity produced.

Anthracite coal has a heating value of 28m to 33m BTU per mt.

Therefore, each mt of anthracite coal is expected to produce about 3000 KwH of electricity.

Thus, Hai Duong power plant will only require 2.5m mt (6,850mt per day) of coal to produce 7.5b Kwh of electricity

Dear Sslee,
If I may ask, on what basis you want to base your calculation on "Before interest charge"?
Isn't "net-of-tax profits" clearly means "profit after tax" ?
If you are an accountant, shouldn't you know that "profit after tax is the bottom line after all charges ?

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Sslee Dear all,
Using: USD 120 million/year of net-of-tax profits. (Before interest charge)
Assume: Capacity payment that covers projected fixed costs of the plant, including fixed depreciation and fixed O&M expenses. And Contract sales include a fuel pass-through with (Coal cost x MT/KWh+ USD 1.5 cents per KWh guarantee profit net of tax)
0.015 x 1,200,000x24 x 365 x 0.765= USD 120,000,000
Bank borrowings USD$ 1.4 billion
Equity USD$ 470 million
Interest and principal repayment for 25 year 6% interest USD 109.5 million/year
Depreciation per year for 25 year 1870/25 = USD 74.8 million
FCF=120+74.8-109.5= USD 85.3 million
Provision for reserve: USD 5.3 million
Net cash available for dividend distribution: USD = 80 million.
Dividend to JAKS 80x0.3 = USD 24 million.

Thank you
13/04/2019 2:33 PM

I had expected unit 1 to be commissioned earliest by March 2020

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GoHaiDuongGo DK66>>>
I just wonder why you are surprised.What is in your mind DK?

Anon, assuming 0 premium, warrant = 1.86. But I believe there will be some premium.

CPECC irrevocably grants to JPH non-transferable rights (option) to increase its effective economic interest in JPP to 40% at such price based on cost of investment plus holding cost. The option is exercisable by JPH up to expiry of 3rd year after the COD.

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Icon8888 DK66 how much does it cost for them to buy the additional 10% ?
12/04/2019 10:51 PM

Newbie8080 has an estimate of US$150m. You have to ask him for that.

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Icon8888 DK66 how much does it cost for them to buy the additional 10% ?