Apart from enticing investors to invest, another main reason why IPP concession is structured in such an attractive way is to facilitate debt funding . Who dares to lend so much money for so Long time without strong visibility ?
If you read my explanation above, then you can understand why I never participate in all these discussions about thermal efficiency ， coal price etc. They all don’t matter。The concession agreement is structured to absorb all of their effect so as to deliver a certain pre determined return to investors (in this case、 Jaks and CEEPC)
It doesn’t really matter what is the thermal efficiency etc
Because the concession agreement is structured to accommodate them
Let’s say vin tahn thermal efficiency is 70% and Hai Duong 50%
Under that kind of circumstances, during negotiation , vin tahn will agree to electricity sale price of let’s say RM100 per unit. However, since hai Duong cost is 21% higher (50% divided by 70% is 79%), it will ask for sale price of RM121 so as to cost pass through (and allow it to achieve same return as vin tahn !) (hey, that guy next door get paid RM50 per hour, I am doing the same thing during the same time, why should I get less ?)
In other words, IPP concessions are structured based on internationally accepted return
No matter what the operating parameters , in order to attract investors to set up the power plant, the government will have to promise certain FIXED return
Meaning they will have to absorb the fluctuation or variation of operational costs caused by different technology and other parameters
You don’t absorb I don’t invest
In other words, you don’t give me the return I like , I don’t invest
I think probability does not yet have a proper understanding of the IPP model.
You don’t actually need to give too much weightage to thermal efficiency etc
As a banker that handles Malakoff when I was working, i have the chance to deeply understand their cash flow and profit (btw, Malakoff auditor and reporting accountant was KPMG). : )
(For your info, Malakoff has 5 IPPs under its wing and I have chance to know all of their details)
In Malakoff IPP case , 80% of the profit is capacity payment, the rest 20% is energy payment
Meaning 80% of the profit is independent of operational cost or electricity production . As Long as you provide the plant at let’s say 95% capacity availability , the customer (government) will pay you in full (that is why it is called Take or Pay). This is called capacity payment. And as mentioned above, it makes up 80% of the profitability
Then there is this thing called energy payment. You sell energy to the customer (in this case , Vietnam government). The more you sell, the more the customer pay you. That is of course the revenue level. As for cost, items beyond the operator’s control such as coal price etc, is cost passed through. The higher the coal price the higher the electricity selling price to the customer and vice versa . However，for items such as salary, chemical, maintenance etc, those are not allowed to be passed through . This is to ensure the operator maintain certain level of efficiency (be thrifty, lean and mean etc)
The energy payment makes up only 20% of profitability
As such, when come to modelling, you don’t really need to care too much about energy payment related profitability . The most important thing is to ensure the plant is able to deliver the capacity availability as stipulated in agreement then you can pocket 80% profitability already
somebody mentioned recently (I forgot who) that upon COD, Hai Duong will “gradually scale up dependent on usage”
If I am not wrong, under Take or Pay concept, there is no “gradual scaling up dependent on usage”. From day 1, it is payment based on full capacity already Because they have made full capacity available to its client (Vietnam government)
Does a project have to fully repay borrowings before it can generate profit ?
I find the statement weird
probability : If the project runs smoothly without any hitches, Vinh Tan 1 Power Co., Ltd. will be able to pay off all debts and start generating profits 18 years after the plant starts commercial operation.
yesterday I pulled out a spreadsheet and did earning and cashflow projection for Jaks over next 25 years. According to my model, Jaks will receive free cash flow of RM200 mil per annum over next 25 years. Added together that would be RM5 billion
and the free cash flow is not in some distant future, it will start right when Hai Duong starts operation in coming 3rd Quarter 2020
when I look at RM5 billion future cash and then whatever problems Jaks is facing now (RM350 mil Evolve Mall borrowings, some LADs etc), I shrug
the positive impact of Hai Duong is so so so huge that it can easily offset whatever legacy problems Jaks has
buy now, don't hesitate, this stock can potentially go to RM3.00
with a bit of good luck, September might not see the market tanking (despite cooling weather)
this is because Oxford University has said that they are targeting to produce Vaccine by September 2020. So if it really happens, stocks will take off like rocket again, because investors are forward looking and will interpret it as light at the end of the tunnel
and also, between now and September, there might be other positive developments at the medical front such as Remdesivir efficacy test is promising etc