Lao Hydropower: CK Power

One of the fastest growing countries in the world over the past ten years has been Laos. Laos’ recent growth rate has been a CAGR of 8.08% to attain a GDP of US$10 billion at the end of 2012. This country of 6.65 million people is classed as a “lower middle income economy” due to its GDP per capita of US$1,349, but it is well on track on achieve its long-term aim of middle-income status by 2020. They have been able to achieve this without an overreliance on debt with their debt burden modest compared to neighbouring Asian countries. Laos have so far managed to attract around US$450 million of FDI inflow yearly. In February 2013, Laos acceded to the World Trade Organization, an essential step in promoting its goods and services and attracting further FDI. Currently 75% of Laos’ workforce practices subsistence farming, which constitutes 30% of GDP. Other major contributors to growth are services, hydropower, construction, and food processing sectors. Mining contributes 11% of Laos’ GDP and 18% when support industries are considered. Natural resources - forestry, agricultural land, hydropower, and minerals - comprise more than half of the total wealth of Laos. In fact, the hydropower and mining sectors combined accounted for about one third of the country’s economic growth between 2005 and 2010. Furthermore, demand from its key trading partners - Thailand, China and Vietnam - is supposed to continue benefiting Laos’ continued economic growth.

An opportunity has therefore arisen to obtain exposure to Laos’ fast growing economy as well as to invest in its hydropower resource. The best part is that this investment can happen within the relative safety of a Thai holding company. Enter CK Power, which has just listed on the Thai SET stock exchange. It is the first Thai holding company with a core subsidiary abroad to list on the SET as well as the first listed company to generate most of its revenues from abroad. CK Power operates the newly-operational Nam Ngum 2 hydropower plant in Laos. Current assets include major stakes in hydropower plant Southeast Asia Energy Co in Laos, three solar power plants in the north of Thailand, and a cogeneration power plant in Bangpa. Last year the company made a net profit of THB112 million against revenues of THB2.5 billion.

Their listing on the SET managed to raise THB2.34 billion (US$75.29 million) with 220 million shares priced at THB13 each. On its first day of trading shares in CK Power hit THB15.9, a 30% increase due to its original THB13 share price being a 28% discount to its DCF value compared to peer Thai utilities companies’ discount of 10%. Major shareholders in CK Power after the listing are parent company Ch.Karnchang with 31.78%, Bangkok Expressway (23.22%), and Thai Tap Water (25%). Interestingly, foreign firms have so far shied away from this investment. On the back of the new listing and newly-operational Laotian hydroplant, its profit is targeted to rise to THB525 million by year-end. Therefore, a short-term move would be to wait until the share price is around THB14 and buy for a targeted year-end share price of THB18.

CK Power’s future investment projects that they already have in the pipeline make for a compelling case to invest long-term in CK Power to see their share price edge up around THB30 by 2019. CK Power plans to invest more than THB10 billion over the next few years in order to increase its power generation from 875 megawatts currently to 4,400 megawatts by 2022. CK Power has several investment projects in the pipeline, pointing to a potential 5-year growth of 69% CAGR. Plant BIC2 is scheduled to begin operations in June 2017 and plants NB1 and XPCL should be operational in 2019. CK Power also plans to acquire a 30% stake in Xayaburi Power in Laos from its parent company when the plant goes operational in 2019. The company is also planning to develop 8 small power plants in Thailand with a budget of THB5 billion per plant. In addition, they are looking at developing a hydropower plant in Myanmar along the Thanlwin River. Furthermore its parent company, Ch.Karnchang, has an excellent track record with hydropower project developments as well as having operated in Laos for 20 years. CK Power is also well leveraged to develop other hydropower projects in Laos. The Laos government has signed Memorandum of Understandings for 70 hydropower projects, of which only 30 are operational or being constructed. Therefore 70% of Laotian hydropower capacity is still available for development, perhaps by CK Power. On the debt front, the company’s total debts are THB2.2 billion, a debt-to-equity ratio of 0.98:1. They plan to fund future investment projects from its own retained earnings as well as further rights issues and borrowing from banks. However they are adamant that their debt-to-equity ratio will not exceed 2.5:1. Lastly, CK Power’s investments will undoubtedly have high demand due to Thailand’s increasing demand for electricity, with its current needs of 26,455 megawatts per year projected to rise to 54,256 megawatts per year in 2030.