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DK66

Author: DK66   |   Latest post: Wed, 2 Oct 2019, 10:47 PM

 

Jaks Resources - An excellent joint venture deal with CPECC

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Detail of the BOT project

In June 2011, JHDP obtained the investment certificate from Vietnam government to build, operate and transfer (BOT) 2x600MW coal-fired thermal power plant in Hai Duong province. The BOT contract is for a period of 25 years after commercial operation.

In August 2011 JHDP signed the power purchase agreement (PPA) with Vietnam Electricity (EVN), and a coal supply agreement (CSA) with Vinacomin. Both for a period of 25 years.

 

 

The Joint Venture

In July 2015, Jaks Resources secured CPECC as partner for this project, and a joint venture was formed.

 

JRB – Jaks Resources

CPECC – China Power Engineering


Jaks’ shareholding in JPP was reduced from 100% to 50% whilst CPECC owns 50% in JPP and 186.85 million RCPS. The Effective Economic Interest of Jaks and CPECC in JPP became 30% and 70% respectively.

Jaks has an option to acquire from CPECC a portion of RCPS at carrying cost such that Jaks will increase its effective economic interest in JPP up to 40%.

In short, Jaks has 30% interest now and has an option to buy additional 10% at carrying costs within 3 years from the commercial operation date.

Jaks was awarded US$454.5m EPC contracts in the construction of the power plant which were subcontracted to CEEC. To-date, about 65% billings were done with average of 25% profit margin.

CPECC was solely responsible for securing financing for the project. In Oct 2015, US$1.4b bank financing was secured from 3 Chinese banks with corporate guarantee from CPECC.

Jaks’ capital commitment in the joint venture was approximately US$140m. At the onset, Jaks contributed US$30m initially leaving remaining US$110 as future capital commitment.

 

Mathematically

The profit from the EPC contract will sum up to US$454.5 x 25% = US$113.6m which is enough for the future capital commitment of US$110m.

Effectively, Jaks only has to pay US$30m for 30% interest in the power plant.

The option to acquire 10% will cost around US$60m (US$140m / 3 x 1.3 for 5-year interest costs)

 

Is it a good deal to JAKS ?

Jaks only paid US$30m (1.6%) of the total project cost of US$1.868b to get 30% interest in the Joint venture

Jaks does not need (unlikely capable) to secure bank financing for its share (US$420m) of the US$1.4b bank borrowings.

An option to acquire additional 10% interest at carrying costs means it can wait for the power plant to be safely operational before buying.

Jaks was given 3 years after operation to exercise the option means that it can use the distributions from the power plant to fund the acquisition. Based on distributions by Mong Duong II power plant of US$100m annually, Jaks will receive US$30m distribution annually. This is enough to exercise the option.

Therefore, 40% interest in the power plant for just US$30m !

Excellent deal !!

 

Why is CPECC giving Jaks an excellent deal in the joint venture?

None of the 16 BOT power contracts awarded around 2010 were initially won by Chinese firms as Vietnam government tried to reduce dependency on China.

As China was fighting coal pollution, power companies in china had to seek opportunities outside China.

China one belt one road initiatives provide Vietnam power projects access to capital financing from china.

The easiest way for Chinese firms to gain immediate project opportunities in Vietnam is to partner those already awarded investment certificates.

Better terms to induce Jaks to give up control of the power project.

Most important of all, the investment returns from the power plant remains attractive to CPECC even after 40% cut to Jaks.

 

Why CPECC not buying up Jaks for full ownership of the power plant?

Only after 3 years of operation.

The investment certificate does not allow change of control within 3 years of operation without the approval of the Vietnam government. That is why the joint venture is currently 50:50 between Jaks and CPECC with Jaks having greater board representation.

Having ownership in Jaks now will increase CPECC effective ownership in the joint venture to more than 50% which is a clear indication of change of control in the joint venture from Jaks to CPECC.

Eventually, Jaks would have invested US$200m (RM 840m) for 40% ownership in the joint venture.

Jaks’ current market capitalization is RM470m. Isn’t Jaks an attractive target to CPECC ??

 

Conclusion

Jaks took great risk in securing a huge power project in Vietnam. It took Jaks 4 years to finally secure CPECC as project partner while many other BOT projects are still hanging in the air.

Jaks deserved the excellent deal for its effort.

Now that the power plant is substantially completed and is just months away from operation, is waiting still a wise investment decision ?

 

The article below provides the latest development of the power plant

Jaks Resources - 1200MW power to fire up Soon ! - https://klse.i3investor.com/blogs/Jaks%20resources/225929.jsp

 

 

I hope this article is helpful.

Again, invest at your own risk. Happy investing !

 

DK66

 

Reference

http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=171520&name=EA_DS_ATTACHMENTS

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  5 people like this.
 
DK66 For those who wish to study the joint venture agreement in detail

http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=171520&name=EA_DS_ATTACHMENTS
23/09/2019 12:08 AM
Sslee Dear DK66,
Well done. Indeed JAKS is very lucky to have CPECC as JPP Joint Venture Partner. You can expect latest by 2021 JPP will contribute USD30 million to JAKS coffer JAKS still need to clean out the mess created in Malaysia operation and its balance sheet and hopefully ALP do not squander away his good fortune from JPP.

Thank you
23/09/2019 8:47 AM
DK66 Dear Sslee,

Thanks, I m glad that you like the article.
23/09/2019 8:50 AM
speakup Koon thought he can fark Jaks CEO Ang
but ultimately Ang farked Koon
23/09/2019 9:18 AM
newbie8080 Thumbs up for the writings.
By the way, do you know the currently outstanding orderbook for the vietnam power plant.
23/09/2019 11:13 AM
DK66 Based on the billings, should be around US$160m as at june 2019
23/09/2019 11:25 AM
newbie8080 So it's true.
Thanks for the info.
23/09/2019 3:44 PM
DK66 On point to note here is CPECC guaranteed the entire bank financing and undertook to completed the project. This means that if the power plant project failed entirely, CPECC will have to bear the entire losses.

The potential investment returns from its eventual 60% economic interest in the power plant must be high enough so as to commensurate the risk of entire losses.

Of course, the risk of loss dependent very much on CPECC's confidence in completing the project successfully on time.
23/09/2019 9:18 PM
Nikmon Should the power plant complete by mid of 2012, 40 million contribute for each quarter.
23/09/2019 11:26 PM
WiseEye wad do u mean by 2012? going back to the past?
24/09/2019 12:51 AM
Nikmon Haha, should be 2020
24/09/2019 1:04 AM


 

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