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Ch Karnchang

Surviving thanks to Xayaburi until 2019 BUY

Ch Karnchang Plc (CK)

Background: Xayaburi hydroelectric power project. This is a run-of-river hydroelectric dam located on the Lower Mekong River, east of Xayaburi in northern Laos. Construction began in 2012 and is scheduled to be complete in 2019. Total installed capacity is to be 1,285 MW, giving total annual energy production of 7,406 GWh. The lion's share (95%) of the electricity will be sent to Thailand through a transmission line to Loei in the north of Thailand; the Lao PDR takes the rest. Construction had reached 20% by the end of 4Q13, with the two weeks of floods in December causing a small 1-2% delay. We expect this project to be CK's biggest contributor at ~30% of revenues or Bt9bn annually during 2013-2019, meaning CK is getting the most income from backlog of all players.

Money matters. Total investment is ~US$3.5bn or Bt105bn, with Bt76bn of that being civil work, which is what CK is handling. The project is being financed by debt, with a D/E of 3:1 times, through a syndicated Thai baht loan of Bt80bn provided by the four biggest Thai banks and three smaller banks. Major shareholders are CK with 30%, PTT with 25% through subsidiary Natee, Lao PDR with 20%, EGCO with 12.5% and BECL with 7.5%. CK, through wholly-owned CH Karnchang (Lao), is the EPC (engineering, procurement and construction) contractor - and thus the primary contractor.

Operational stats. After completion of construction, CK will continue to be involved as the main operator, though we expect CK to sell its stake to CKP. The electricity tariff for this project has been set at Bt2.20 per unit, above the tariff for Nam Ngam 2 (615MW) of Bt1.6-2.0 per unit - but the cost of building Xayaburi is estimated at three times that of Nam Ngam 2.

Backlog update. End-2013 backlog was Bt111bn, below the earlier report of Bt119bn. This is because CK subcontracted out Bt8bn in Si Rat Expressway civil work (of a total of Bt22.5bn) to STEC at the end of the year. CK said this was to ensure completion by the contractual 2.5 years from 2014.

Maintain BUY with TP of Bt22 using SOTP valuation. We allow Bt22 for its own construction revenue, minus Bt10 for net debt, plus Bt12.5 for subsidiaries (TTW at Bt5.5, BMCL at Bt1.2, BECL at Bt3.5 and CKP at Bt2.2). In the short term, the industry outlook is poor as there is no government in place to start public projects. Earnings in the meantime will be supported by Xayaburi and then, from 2016, BMCL will be contributing.




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