Electricity Generating

Overinflated hopes on new IPP bid; still Neutral

Electricity Generating Plc (EGAT)

- Installed capacity will be on the rise for the next seven years

- New SPP COD could be moved forward to 2016F from 2018-19F

- TP raised to Bt145 but maintain Neutral

Surge in share price overdone. EGCO's share price has surged 26% over the past

three months and outperformed peers in both the power generating business and the

energy sector. We believe this reflects market optimism on a potential win of a new

IPP, as the first short-list of winners is due to be announced next month. We have

raised our end-2013 TP from Bt124 to Bt145 to reflect the higher stake in Quezon that

is bringing better returns and the rescheduling of commercial operations of its two

new SPPs to 2016 from 2018 and 2019; we did not earlier include these projects in our

valuation as contribution is small. Limited upside to current price keeps us Neutral.

Installed capacity to continue moving up. Current installed capacity has risen by

6.5percent from the end of 2011 to 4,712MW, largely from the acquisition of renewable

power projects in Thailand and adding more stake in Quezon in 2012. This will go up by

another 1,726MW (+37%) in the next seven years to 6,438MW as more power plants

under development come on stream. Capacity comes down to 4,457MW if the power

plants in Rayong and Khanom (KEGCO) are idled due to the expiry of PPAs in 2014 and

2016, but could be offset by capacity from new IPPs if bids are won this year.

More renewable power could be added. EGCO has built up its capacity in renewable

power projects to 64MW or 1.4% of total capacity, which will increase to 104MW (1.6%

of total capacity) by the end of 2013. It has a goal of 300MW of renewable power by

2015. Adding to this has, however, become more difficult since the government

suspended issuing new PPAs for solar power until a new incentive scheme is finalized.

Greater unreliability makes investment in wind power projects more risky, but its pilot

project for wind power (7.5MW) could commence operations in Aug 2013. If it is

successful, EGCO plans to invest more to add 170MW.

Rescheduling new SPP startup dates. Management guided that the commercial

operating dates of two new SPPs, TP Cogeneration and SK Cogeneration, will be

moved forward to 2016 from 2018 and 2019 in response to higher demand from

industrial customers. It will negotiate with Egat with regards to the new schedule, but

this should fit in well with EGAT's policy to accelerate new power plants to secure the

power supply in the system due to stronger than expected demand. This is a key factor

behind our valuation upgrade, since it gives higher time value for money.

Higher dividend but lower yield. The company announced a final dividend of

Bt3.25/share, giving a full-year dividend of Bt6/share, the first dividend increase in the

last four years. Management appears to be more generous, with a dividend payout of

49% of normalized profit from the previous ~40%. Management also guided that the

company will attempt to keep only enough cash on hand for working capital, using the

remainder for more investment opportunities or as a dividend.