The prospect of JAKS’ Vietnamese power plant business is alluring.
Many people have been asking me my reasons for buying so much JAKS Resources Bhd shares especially when its 2016 annual account showed a loss. Here’s why I’m attracted to the company.
About six years ago, the Vietnamese Government awarded a few concessions to private firms to produce electricity in view of the country’s rapid economic expansion.
JAKS Resources Bhd was awarded the contract to construct two units of 600 megawatts (MW) coal-fired power plant to sell electricity to the Vietnamese Government for a 25-year period in August 2011.
Since the total cost of US$1.87 bil (RM7.76 bil) (based on US$1=RM4.15) is so huge that JAKS could not find any bank to finance the project, the construction of the power plant was postponed several times until JAKS found China Power Engineering Consulting Group Co Ltd (CPECC) to be its joint venture partner in March 2016.
The construction is scheduled to complete in 2020. CPECC is very experienced in conducting survey and designing of power generation and transmission plants. Moreover, CPECC has been playing a leading role in China’s power survey and design industry with about 90% of such work in the country undertaken and completed by the group.
After careful study of the viability of the concession, a consortium of three banks, namely Industrial and Commercial Bank of China, China Construction Bank Corporation and Export-Import Bank of China have expressed preparedness to finance US$1.4 bil (RM5.81 bil) for the entire scheme.
Assurance of project completion
The three Chinese banks accepted the power purchase agreement (PPA) duly signed by the Vietnamese Government as collateral to finance the project. The banks will provide 75% of the funding for the project cost totaling of RM7.76 bil with the balance (25%) to be borne by JAKS and CPECC.
To protect the banks’ interest, the financiers must make sure that the PPA is water-tight and that JAKS and its JV partner must be able to complete the project on time. Both JAKS and CPECC must also be financially sound, otherwise they will not be capable of paying up the remaining 25% of the project cost of RM7.76 bil which amounts to RM1.94 bil.
To ensure that the whole project can be completed satisfactorily, the Chinese JV partner undertakes the full responsibility to complete the construction and operate the power plant for 25 years. JAKS will receive US454.5 mil (RM1.89 bil) during the construction period and 30% share of the independent power producer (IPP) business.
The profit of about RM400 mil for JAKS will flow back into the JV company to fund JAKS’ equity portion. In other words, JAKS only needs to fork out RM203mil to own a 30% stake in the power plant. JAKS is also given an option to buy up another 10% of the JV company.
In essence, JAKS is sure to make RM400 mil during the construction period. Upon completion of the power plant project, both JAKS and its partner will enjoy profit every year for 25 years from the sale of electricity to the Vietnamese government.
There are many criteria for share selection but the most important catalyst to move share price is profit growth prospect.
Many people also ask me when will I sell my holdings. Since I know JAKS will be making a lot of profit in the next 3 years during the construction and 40% of the profit from the sales of electricity for 25 years, I intend to keep all my shares for many years. With this experience, JAKS is in a very good position to secure another IPP in Vietnam or Myanmar where electricity is desperately needed. If you go to Yangon, you can see almost every shop has a diesel standby generator.
In a way, JAKS’ IPP reminds me of the YTL Group’s success story.
Malaysia’s first IPP
The YTL Group was just like any other ordinary contractor before the company was awarded its maiden IPP in Malaysia. From a humble beginning, YTL Corporation Bhd’s market cap today stands at RM1.65 bil, that of YTL Power International Bhd at RM12.8 bil and YTL Land and Development Bhd (RM578 mil).
Additionally, the YTL Group also owns YTL Cement Bhd, YTL Hospitality REIT, among others.
Investors would recall that on Sept 29, 1992, a total power blackout engulfed the nation for several days. This landmark incident sparked a privatisation of the power generation sector that broke the dawn for IPPs in Malaysia.
In the process, Tenaga Nasional Bhd’s monopoly of the power generation sector was dismantled by then-Prime Minister Tun Dr Mahathir Mohamad as YTL Power was awarded the nation’s first IPP licence in 1993.
As a result, the YTL Group has been making unprecedented amount of profit every year. Before it secured the IPP, the YTL Group was just an ordinary contractor but today, it is so different.
As investors are aware, JAKS’ current market cap is only about RM600 mil. I am confident JAKS will succeed to become a little bit like YTL.
I am proud to say that I have the skill to become 2nd largest shareholder of Latitude and Lii Hen, each of which has gone up more than 800% within 3 years and I was also the 2nd largest shareholder of VS Industry which has gone up more than 550% within 2 years.
I was a co-founder of Gamuda, Mudajaya and IJM Corp.
I am obliged to declare that I am the largest shareholder of JAKS and that I’m not asking readers to buy JAKS to support its share price. If readers decide to buy, then they are doing so at their own risk.