JAKS (4723) Jaks Resources - An investment story made simple to understand

Jaks Hai Duong Power Plant - An investment story made simple to understand
To those new to Jaks forum, this article aims to provide a quick overview of the investment made by Jaks in a 1,200MW coal power plant in Vietnam. I intend to keep the article simple and easy to understand.
It is my intent that this introductory article serves sufficient information for new readers to make preliminary decision to pursue further.


Jaks Hai Duong Coal Power Plant

• 10 years ago, Vietnam hungry for electricity, no money to build large power plants but has ample coal reserves
  
• Vietnam invited foreign investors to build large coal power plants on Build-Operate-Transfer (BOT) basis
  
• Vietnam government guarantees all payments to protect foreign investors and bankers
  
• Vietnam government guarantees full supply of coal for 25 years
  
• Vietnam will buy all electricity produced by the power plants
  
• Vietnam controls electricity output but guaranteed to pay for plant capacity regardless of production level 
  
• Effectively, foreign investors will build power plants and lease them to Vietnam and operate on its behalf for 25 years. Fuel and coal costs are borne by Vietnam. 
  
• To put it simply, Vietnam will pay "rent" for the power plant as well as "service fees" for operating the plant on its behalf. The operator must maintain the power plant in high operating efficiency condition. Higher availability and efficiency increase investment returns from the power plant.
  
• Vietnam awarded around 15 projects but none to china because it wanted to reduce dependency on china
  
• However, most of the projects eventually brought in chinese partnership due to international funding difficulties with other countries
  
• All projects were awarded to mega corporations with the exception of Jaks and Toyoink
  
• Only a handful projects started construction. Many, including Toyoink, still looking for capable partners and funding. It is now getting tougher to seek funding for coal power plant due to environment protection
  
• Jaks won a contract for a 2 x 600MW coal power plant costing USD1.87 billion in Hai Duong Province, 60km north of Hanoi.
  
• The power plant is expected to generate 8 billion Kwh electricity annually
  
• Jaks will build the power plant at its own costs and operate the plant for 25 years
  
• The power plant will be transferred to Vietnam government after 25 years free of charge
  
• Jaks has no expertise to build power plant and is incapable of securing large funding for the project
  
• Jaks was originally looking for chinese partnership on 60:40 sharing. Jaks 60%
  
• Jaks' previous 2 chinese partners, Meiya and Kaidi, failed to secure project loan from chinese banks.
  
• Jaks already spent preliminary expenses of USD50 million on the project
  
• In 2014, Vietnam disputed china's rights over its territory and China halted its investments in Vietnam.
  
• With deadline looming and little hope of securing chinese investment, Jaks had to negotiate with Tenaga.
  
• China Vietnam dispute settled and Jaks secured China Power Engineering Consulting Group Corporation (CPECC) as partner in July 2015
  
• CPECC gets 70% ownership and fully responsible for the construction of the project including full project funding
  
• Jaks gets 30% ownership in the power plant with an option to add 10% ownership at cost, and around RM400m in construction profit
  
• Jaks only paid US$30m of the total project cost of US$1.87b to get 30% interest in the Joint venture
  
• Jaks does not need to secure bank financing for its share of the US$1.4 billion bank borrowings
  
• Jaks fully "subcontracted" its construction jobs back to CPECC group to earn the clean cut construction profit which will be reinjected into the Joint Venture as its equity capital
  
• The power plant capital structure will be 25% equity and 75% debt on non recourse borrowings
  
• Currently, the power plant is over 90% completed with unit 1 of the power plant in commissioning phase
  
• Jaks' management guided that the project has 12% IRR and will get back its project costs in 8 years
  
• Jaks' equity investment in the power plant will be around USD140m (RM600m)
  
• Vietnam is currently anticipating shortage of electricity supply for the next decade starting 2021
  

How did Jaks achieved such remarkable breakthrough ?
The answer is "TIMING, GAMBLE & LUCK"

• Jaks went to Vietnam in the aftermath of 2008 financial crisis when most companies would shy away from capital intensive projects

• With no experience in power plant and financially incapable of such huge project, just like Toyoink, Jaks was betting its luck to secure a capable partner hoping for a slice in ownership without obligation for introduction.

• Having already invested USD50m on the project, Jaks had too much to lose. Had Jaks failed completely, it is probably another penny stock on Bursa now.

• China one belt one road initiatives provide Vietnam power projects timely access to capital financing from china

• As China was fighting coal pollution, power companies in china had to seek opportunities outside China

• The easiest way for Chinese firms to gain immediate project opportunities in Vietnam is to partner those already awarded investment certificates.

• Jaks was willing to give up control of the project to ensure success

 

Food for thought
If Jaks was willing to risk USD50m with low chance of securing a partner for the project, how lucrative must be the expected investment returns of the project for such high risk ? FYI, Toyoink has spent a total preliminary expenses of RM340m on its projects and still yet to secure a partner.
Jaks will invest a total of about RM850m for 40% ownership, and its market valuation is only about RM650m at the time of writing. The power plant is currently more than 90% completed with unit 1 to be commissioned in Q3 2020 and unit 2 four months later. Is Jaks worth your money ?

I wish for no one to miss out on this rare opportunity.

Think and invest wisely

 

DK66

P/S : Those interested to pursue further, you may visit my blog for more indepth articles

 

Charlie Munger's Big Lesson: Prepare for Opportunity 

What is the most important personal quality an investor can have?

Patience... followed by pretty aggressive conduct. It is given to human beings who work hard at it—who look and sift the world for a mispriced bet — that they can occasionally find one. And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.

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