JAKS (4723) - (CHOIVO CAPITAL) Why Business Sense is not enough. (JAKS)




What has there not been said about JAKS?

Koon Yew Yin have been posting from heaven and earth about the wonders of JAKS. He even brought Ooi Teik Bee, and a big group of people to go visit the place.

However, for all that, i think he missed out a very crucial bit of research.

Just how profitable will that powerplant be?

For some reason, people here, including the great ICON8888, one of the few people i consider to be the best in the trading, investing and speculating game in Malaysia,



( I personally really respect how deep he researches and how he stuck to his guns in Airasia, all the way down from Rm3 to RM2.1, saying how RM3 is the correct price, he held and averaged down),

seem to think the profit is self evident. I personally dont think so.

One of the easiest example i can give is Ekovest. Guess how much Ekovest made from the highway division after income expense. Take a minute if you need.

Just below RM10mil a year. Now, i concede there may be some high ways not yet fully tolled or completed, but its definitely not as much as you think.

The Enterprise Value for that high way is in the billions. The returns need to be at least RM100-150 million net. And its far far far from that figure.

So lets do some math for Jaks.





When mathematics meets business sense



The Facts:

1) Loan of RM5.6 billion

2) Coal Plant with capacity of 1,200 MW

3) 40% ownership by Jaks of the powerplant.

4) Vietname Dong term loan rate of 7.5%


You may argue the loan is done in RMB or USD and thus may have lower rates, but there is something called "Interest Rate Parity".

Which means the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate.

If one country offers a higher risk-free rate of return in one currency than that of another, the country that offers the higher risk-free rate of return will be exchanged at a more expensive future price than the current spot price. In other words, the interest rate parity presents an idea that there is no arbitrage in the foreign exchange markets. Investors cannot lock in the current exchange rate in one currency for a lower price and then purchase another currency from a country offering a higher interest rate.

Basically, if you get lower interest rates, you will lose out via foreign exchange loss, if you get higher rate, you will set it off a little via foreign exchange gain. So, we are using Vietnam Rate.



Interest Expense

Now, the loan is RM5.6 bil. At 7.5%, that is RM420mil a year in interest cost.




Earning Capacity of Power Plant

Now, what is the earning capacity of the 1,200 MW Coal fired plant. Well, for our reference, we are going to use Malakoff. Why?

TNB, i cannot find the figure for the effective installed electrical capcity for this company, and its one of the better ones as well, may be too optimistic.

YTLPOWER, this is a rubbish power plant company, that division actually made a small loss unless lumped together with their other utilities.

And so, Malakoff.

Malakoff has effective installed capacity world wide of roughly 6,346MW world wide. Malakoff profit before finance cost is about RM1 bil a year.  Now, lets give JAKS a chance, the profit figure for Malakoff have dropped a bit subsequently with a few one off items and power shortage etc.

We will use Malakoff's record breaking IPO figure, where everyone have massaged properly to show a beautiful RM1.3bil profit before finance expense.

Assuming JAKS can charge Malakoff level rates. Prorated (taking into account Malakoff have much higher capcity of 6,346MW worldwide) their 1,200MW can make RM245mil. So a loss of RM 175mil a year before tax.

And this assumes full capacity usage every day. Also do note Malakoff have gas fired plants, which are sometimes cheaper to run.

So, chances are JAKS got a contract where all the earnings will go to paying the interest to the banks, not counting principal repayment. And their equity may need to throw rubbish bin, as there is a potential loss of RM175 mil a year before tax.

No wonder China let them make some profit on the construction.





Other Business Sense Points

    Do you think that a power plant will run 100% smoothly with no issue on first run? Are you so sure that they can get abnormally good electricty rates? Do you know how much money is flowing into Vietnam now to building more power plants? Do you know how many power plants basically went bankrupt in China and the US.

    You think Vietnam so nice like Malaysia, will give them a monopoly like TNB?

    
    Do you think just because Chinese bank give funding project will be profitable? Do you know that ICBC, the biggest bank in the world, is only valued at 6 PE? Why do you think that is the case? Why every year their loan book go up, revenue up but profit is exactly the same or less?

    Because ICBC and Chinese banks is essentially strong armed by the chinese goverment, their biggest shareholder to fund these unprofitable projects

    Did you know ICBC and other chinese banks funded a multi billion dollar port in Sri Lanka that only has one ship a day? Did you know they also funded a multi billion dollar airport that has less than 30 planes land a month?

    These are also the banks that were willing to fund the HSR, whose projected revenue cannot even cover interest cost.

    China is more than willng to run the "One Belt, One Road" policy at a loss. Because its purpose is not profitability, but strategic. They are more than happy to build these nationally important assets, and pseudo-nationalize them when they cant pay back.

    The goal is strategic and nationally sensitive assets worldwide (do note "Strategic" means "Unprofitable", FGV also did alot of "Strategic" investment, see where they are now), and a way to fill up their industrial overcapacity, and thus prevent defaults in their levered up state run companies.

    You think china like to donate money is it? Give free profitable contract?

    Show me one scenario worldwide, where China financed a project, that did not properly fuck over the other party financially. Just one.

    They borrow money to countries that cannot pay back, because the strategic favour, power, leverage or national asset they can get in exchange, in their opinion, far exceed the economic value.

    I dare you. Find me just one that was profitable for the other party.

    There is a reason why JAKS or HSR cannot get loans from Malaysian banks, despite the banks being now incredibly flush with cash. Because Malaysian banks actually want to be paid back with a profit.



Conclusion

Koon Yew Yin may have been a good businessman, but i think he's a rubbish investor, like many successful businessman (Vincent Tan for example). He may know how to create wealth, but sure cant invest for wealth.

He is at most a very rich goreng artist. 

Those who cannot create wealth, must invest, and this man is so good at business, he never needed to learn how to invest. And he was so rich, he could learn to just goreng.

ICON8888, well, i think he's very shrewd. He will be around long enough to average down and just ride the technical rebound. But I doubt he will be around Jaks when the plant is starting.


http://klse.i3investor.com/blogs/PilosopoCapital/170711.jsp