VIETNAM MARKET EQUITY RESEARCH

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1 VIETNAM MARKET EQUITY RESEARCH PHALAI THERMAL POWER JOINT STOCK COMPANY-PPC INITIAL COMPANY REPORT Recommendation: HOLD Date: 28/8/214 Company information Name: PhaLai Thermal Power JSC Chartered Capital: Bill VND Market cap: 7.31 Bill VND Sector: Uitilities- Electricity Listed on: HSX Ticker: PPC Outstanding shares shares Foreign ownership 14.7% Source: MBS collection Price fluctuation of stock: Price 28/8/214: 22.1VND/share Target price 12 months: 24.VND/share Earnings Strip H1.214 Revenue 4,183 3,738 4,131 6,589 4,277 EBITDA ,235 2, EBIT ,45 27 Net Income , EPS* VND ,587 5, Div VND 1 15 Na Div Yield.%.% 8.4% 5.98% Na ROA.4%.3% 4.18% 13.7% 1.93% ROE.11%.13% 12.15% 3.19% 3.94% Source:PPC s annual reports and financial reports Pha Lai Thermal Power Plant has a significant role in annual electricity supply of the whole system despite the decrease of its annual output (due to the increase of the system s productivity). The company continues to improve its capacity by investing in new power generation projects. Electricity production and selling is fairly stable, yet business result depends considerably on the effect of the fluctuation of foreign exchange rate on foreign debts. The firm has gradually negotiated long-term price with electricity merchants to stabilize its future business result. Based on the firm s performance in the last several years and its future prospect, we recommend to HOLD the stock on the viewpoint of investment. Investment highlights: Valuation based on financial analysis: P/E Method: 2.1 P/B Method: 25.1 FCFE Method: 13. FCFF Method: 35. Target price 12m: 24. Recommendation technical analysis Recommendation:: BUY Price on 28/8/214: 22.1 Short term trend: Up Middle term trend: Up Long term trend: Up Buying price: Target price: >24. Cut loss price: <2.3 Research: Chu The Huynh huynh.chuthe@mbs.com.vn Tel: ext:6118 Sales: Gordon Edward Alexander Gordon.Edward@mbs.com.vn Mobile: The first biggest thermal power plant of the North: Currently, total capacity of PPC is 1,4 MW including 1 plant established in 1986 with 4 machine units, capable of 44MW and a second plant employed in 24 with 2 machine units, capable of 6MW. PPC had contributed to the stability of Vietnam s power system. - Components of the plant is highly synergized, which help maintain a smooth operation: The first plant is equipped by intergrated modules from Russia, whereas the second factory was using equipments imported from Western countries such as UK (steam drum), America (turbine), which are famous for possessing a developed thermalelectric component manufacturing industry. This is a strong fundamental for the company to ensure the safety and sustainability in electricity production. - Healthy financial backgrounds: High-cost fixed assets have been mostly depreciated, whereas other financial assets, which contain mainly investments in new power projects, are staying at a favavorable condition. Capital structure has been well maintained to have equity accounted for 5%. Short-term debts are subject to decrease while Long-term debts remain at the current level. - Significant financial investments: For receiving a considerable cash flow annually, PPC has established a good resource for investing in new power plants, which potentially brings the company beneficial outcomes. - High electricity demand for enocomic development: Vietnam s economy has been recovered, which signals a rise in electricity demand for industrial production. Major risks: - Electricity price is governed: Selling price of PPC to EVN is determined annually through long negotiations which postpone the planning process for next year operation and so place a negative effect on the company s business. Currently, the firm is trying to negotiate for a longer-term agreement, which helps stabilize the effectiveness of the firm s operation. - Foreign exchange risk: PPC has many long-term debts denominated in Yen. Thus, any fluctuation in foreign exchange rate will pose a direct effect on annual business result. Business result in H1/214 In 214, PPC plans to produce 5,572 mil Kwh, in which the amount expected to sell to EVN is 5,7 mil Kwh. This is a decrease of 12.3% and 11.3% compared to the outcome of 213 and last year plan respectively. By the end of the second quarter, PPC s plan still has not had a detailed value for revenue and profit since the negotiation for selling price to EVN has not been finished. The Board of Management (BoM) has suggested shareholders to delegate the board to build and report after the electricity price this

2 Installed Capacity of existing Power Plants % 7% 13% Power Source Breakdown Generation Output 21% 13% 14% Installed Capacity 23% 23% 4%.4% 25% 2% 15% 1% 5% % Growth 49% Hydro Coal Fired Combined/open cycle gas turbine FO oil fired year is finalized. In the first half of the year, the productivity of the firm is reported to be 3,625 billion kwh, in which commercial output claims 3,282 billion kwh The result of the first 6 months operation has been published. Overall, revenue increases quite well compared to the same period last year, yet gross profit suffers from a significant fall. This, along with the appreciation of the Yen, results in a sharp decline in earning. A spotlight is that the company has begun to receive income from its affiliates. Revenue reached 4,276 bil, or 17.3% increase from the same period in 213. Gross profit, on the other hand, is reported to be 323 billion, equivalent to a decrease of 56.8% yoy. Gross profit margin also reduce to 7.55% from the level of 2.49% in the same period last year. According to the firm s representative, the reason comes from the growing divergence of the production cost and the selling price. In fact, the rise of electricity price is not enough to compensate for the increase in production cost. Financial expense increases sharply in Q2, which leads to a rise in the first 6 month financial expense. This is a result of the appreciation of the Yen. Foreign exchange loss in this period was staying at 259 billion while in the same period last year, the company enjoyed a foreign exchange gain of 88 bn. Operating income is 129 billion, equivalent to a decrease of 8.9% yoy. Net income from subsidiaries is recorded to be 5 billion, which is considered to be a breakthrough when this source of income has showed an opposite trend in the last several years. Profit before tax is 196 billion and profit after tax is 174 billion, in which the profit after tax to shareholders of parent company reached 172 billion, corresponding to a 75% drop yoy. EPS of the first 6 months is 528 VND. In our opinion, the electricity production of PPC in the first half of the year is positive, revenue shows a positive growth. However, while the fuel price augment, the selling price is being controlled, which deteriorates the effectiveness of the firm s operation. Based on the information related to the volume produced and sold to EVN, price negotiated in 214 as well as the effect of foreign exchange on debts denominated in foreign currency, we forecast that PPC can acquire 6,956 billion for revenue, 564 billion for net income, equal to EPS of VND 1,728 in 214. Overview of Electricity Industry: 15 15% 13% 14% 16% Electricity industry overview Electricity Comsumption 1% 11% 9% Generation Output Power Sale Growth of Power Sale 4.7% 1.3% 4.9% 36.3% 52.8% 12% 8% 4% % Electricity has a significant role in the development of Vietnam s economy and sociaty, especially in the industrialization and modernization period. In spire of shortcomings, Electricity sector continute to receive investments in many areas, while the state monopoly is reducing and investments in electricity genoeration are encouraged. The power market is developing through the plan comprising of 3 stages: competitive power generation competitive wholesale competitive retail. In the last few years, besides EVN, there has been many other individuals and organizations invested in the power plants, notably as PVN with investments in gas turbines or TKV with coal turbines. Total capacity of the system until 213 is 3,597MW, in which hydropower plants is 14,925MW, coal turbine plants is 7,58MW, gas turbines power plants is 7,167MW, Wind plants and others is 133MW. Transmission network: 22V/5V transmission network is presented in 61/63 provinces/ cities, satisfy (or meet) the need of citizens and the development of the Vietnam s economy. The number of 5kV substations is 2, 22kV substations is 75. Total capacity is 46,576 MVA and 17,366 Km of 22-5 kv transmission lines. At the present, 57/63 cities/provinces of Vietnam have 5kV and 22kV substations. Modern technologies such as multi-circuit, multi-voltage transmission lines, underground 22kV cables, GIS 22kV stations, 5 kv vertical compensation capacitors and the Integrated Substation Automation Control System are being applied in the transmission network of Vietnam. In 213, EVN has provided sufficient electricity for the growth of economy and the society s current demand. The sum volume of prodution and purchasing was billion kwh, corresponding to 8.47% increase compared to the amount in 212. The group has outperformed the producing target of billion kwh. For commercial electricity, the group has distributed billion kwh to consumers, increasing 9.1% compared to 212. Retail price of electricity is adjusted higher to better reflect the input cost, encourage the investors to invest in power source development. Futural outlook Industry and Construction Residence, Office, public lighting Business and Services Agriculture-Forestry-Fishery Source: EVN According to the National power development plan for the period of approved by the government in 211 (Electricity plan VII), the demand for electricity nationwide will be fullfilled. By 215, electricity produced and imported will be kwh; in 22 and 23, the amount will be kwh and kwh respectively. For the power supply, according to the plan, total capacity need more investment in the period 211 to 23, estimated around 12,299 Mw. Indeed, from 211 to 215 the additional volume required is 19,9 Mw; from 216 to 22, this amount is 34,378 Mw; in the year 225 and 23, the amunt is

3 PPC Revenue Breakdown % % 26,95 MW and 39,1 MW respectively. About the structure of the power supply, until 22, total electricity production capacity is around 75, MW, including 23.1% from integrated hydropower plants, 2.4% from pumped-storage hydropower plants, 48% from coal thermal power plants and 16.5% from gas turbine thermal power plants In regards to the market, after successfully testing and applying the stage of Competitive Power Generation from July 212, power industry continue to prepare for testing the Competitive Wholesale stage in 216 and further stages so that by 22, Competitive Retail can be fully applied % Company s position in the Industry: Revenue, gross profit (Bil VND) 7, 6, 5, 4, 3, 2, 1, Net income, ROA, ROE 2, 1,5 1, 5 % 5% 1% Electricity Revenue Revenue growth 1,639 Gross Profit 3.4% 8% 6% 4% 2% % -2% 5.% 4.% 3.% 2.% 1.% 1.5%.% -1.% Net Income ROA ROE PPC has been a large thermal power factory from before 21, when thermal power plants had not received much investment. For having large capacity (1,4 MW), every year PPC supplies 6 bil KWh electricity to the market, account for 7-1% of total electricity output. PPC takes an important role in ensuring the stability of electricity source for the development of national economy, especcally in dry season when hydropower plants are limited. Currently, the intergrated production chain with modern equipments imported from European countries is being strickly maintained and exploited stably. Supply volume accounts for 4-5% of the total electricity output. PPC continues to take a significant role in providing a stable power source for the North and the wole country. On the other hand, with an ample financial resource, PPC continues to expand and invest in many other big power plants such as Hai Phong Thermal Power (25.5%), Quang ninh Thermal Power (16.4%), Buon Don Hydropower (64MW), Vietnam Electricity Development JSC. Total value of these investments is approximately VND3, billion. Especially, for being the first largest manager and operationer in thermal power industry, PPC has become a main source of expertise and skilled workers for other projects as well as thermal power plants nationwide. Haiphong Thermal Power JSC Hai Phong Thermal Power developed by EVN (major sharesholder) is a coal turbine factory.its designed capacity is 1,2MW including 4 machine units already in commercial service, annual electricity output is around 7.2 billlion kwh. By June 214, total asset of Hai Phong Thermal Power is 22,452 billion. Equity is 5,872 billion/5, billion of chartered capital. Long-term capital is 13,519 billion/16,58 billlion of total liabilities. In the first 6months of 214, revenue is reported to achieve 4,14 billion, earning before tax reaches 359 billion. In the same period last year, the company recorded nearly no profit. QuangNinh Thermal Quang Ninh Thermal Power also developed by EVN (controlled shareholders), is a coal turbine factory.its designed capacity is 1,2MW including 4 machine units. By March 214, all of these 4 units have already been in commercial service. Annual output reaches 7.2 billion kwh. By June 214, total asset of Quang Ninh Termal Power is 21,42 billion, shareholders equity is 4,623 billion/4,5 billion of chartered capital. Long-term debt is 12,514/16,797 billion of total liabilities In the first 6 months, volume supplied to the network achieves 3.28 billion kwh, revenue reaches 4,319 billion, profit before tax attains 387 billion. In the same period last year, the company had no profit. Business result in 211-6/214: Asset structure 14, 12, 1, 8, 6, 4, 2, 44% 5% 4% 3% 2% 1% % The company has been able to maintain a safe and stable electricity production business in recent years. Annual output always meets or outperforms the target, which contributes an important role to ensure the sustainability of the power supply for whole system. Electricity output in the period of is recorded to reach bil kwh, equivalent to 6.3 bil kwh annually on average. Comercial output achieves billion kwh. During the last several years, the company has continued to discover and invest in many new power projects. By 213, the company had invested in Hai Phong thermal power factory (1,2MW-25.5%) and Quang Ninh thermal power plant (1,2MW-16.4%), Besides, the company also had some in other small power projects such as Buon Don hydropower plant. Business result Long term Asset Short term Asset Equity rate Source:PPC s annual report and financial report Generally, annual revenue depends on the output produced each year and the selling price negotiated with EVN; However, operating profit is affected significantly by the volatility of VND/JPY through foreign debts. Electricity production and sales has been stable for recent years; from 211 to 212, output had reduced slightly due to favorable hydrological conditions, which allowed EVN to employ hydroelectric plants. In 213, the output has risen again to the level of 6.24 billion kwh. Revenue grows 19.8% on average in the period. In 213, revenue enjoyed the highest growth of

4 Longterm debt and Exchange rate (Mill JPY) 6, 5, 4, 3, 2, 1, - 48,359 26, Longterm debt in Yen JPY/VND Source:PPC s Financial Reports, Vietcombank 59.8% since electricity output and price both increase. Gross profit grows 28.1% on average in the last 4 years, corresponding to the value of 671 billion. In two years 211 and 212, gross profit suffered from the deepest decline. In 213, gross profit increases substaintially to 1,3 billion. Gross profit margin in 213 also rises to 15.6% compared to the level of 11.2% in 212 and 12.7% in 211 Financial expense in the period of increases considerably due to the strong appreciation of the Yen, which made the firm suffer from a total FX loss of 1,442. From 212 to 213, price of the Yen decreased so the company received a benefit of 1,14 billion, in which 1,36 is recorded for the financial year of 213. Further more, investments in subsidiaries in recent years have not been effective. In 213, the company recorded a loss of 7 billion. However, the situation has been more favorable when the company reported 5 billion gain from its subsidiaries. Earning before tax, as a result, fluctuated strongly over years. In 21, the company only achieved 6 billion for this item, for 211 is 1 billion, 78 billion for 212 and a record of 2,25 billion for the year end 213 The company still has 2 more years enjoying tax incentive of 7.5% for electricity business. Therefore, net income is unlikely to experience a substantial divergence from profit before tax. In 213, net income achieved 1,639 billion, which is translated into 5,122 dong in EPS. Financial perfomance In general, the financial condition of the company has been staying at a favorable level, the size of total assets fluctuates within the range of 11,5 12, billion. There are also various modifications in the asset structure. Firstly, it was the slight increases of cash and cash equivalent. Secondly, noncurrent assets decrease consistently due to the fact that fixed assets have been depreciated annually while long-term investments remain constant. Meanwhile, capital structure was invariable with equity increases gradually and debt decreases consistently when it has been paid semiannually. While Yendenominated debt was decreasing in value, value of domestic debt tends to fluctuate in accordance with the volatility of VND/JPY By June 214, total assets reach the level of 11,498 billion, in which, current assets contribute 7,468 billion, equivalent to 65% of total assets whereas non-current assets has been achieving 4,29 billion, account for 35% of total assets. Current assets comprise of 4,655 billion worth of short-term financial investments, cash and cash equivalents. Among non-current assets, fixed assets continue to suffer from the steep downward trend; the value at the end of this period is 1,257 billion. Long-term financial investments remain at the level of 2,767 billion, in which 1,33 billion invested in Hai Phong Thermal Power and 817 billion in Quang Ninh Thermal Power In regards to book value of capital, at the end of June 214, total liabilities is 6,421 billion, slightly decrease from the level of 6,46 in year end 213 and account for 55.9% of the capital. The rest 44,1% contributed by 5,42 billion of shareholders equity, which is, again, a slight decrease compared to amount of 5,397 billion in 213. Shareholders s equity declines mainly because the company has paid dividend in cash in the period. Long-term debt has a value of 5,56 billion, corresponding to billion Yen, somewhat increasing compared to the level of 5,4 billion at the end of 213. Since the Yen has appreciated, the value of debt continues to increase despite of the fact that the company has paid back nearly 938 million Yen. Cash Flows: Although the business result during the last 4 years of PPC has fluctuated fairly strong due to the volatility of Foreign Exchange rate, annual cash flows from operation is still strong and stable at the average level of 1, billion. This cash flow in 213 and in the first half of 214 is 1,66 and 198 billion respectively. Annual depreciation is high, interest expense is low, receivables are well managed, and inventories are the main reason for positive cash flow. The result from these is the consistent increase of cash and cash equivalent and that the company enjoys a favorable condition for short-term as well as long-term investments, which is believe to help the company improve its operational effectiveness

5 FINANCIAL STATEMENTS INCOME STATEMENT Bill VND H1.214 Net Revenue 3,738 4,131 6,589 4,277 Cost of Goods Sold 3,262 3,666 5,558 3,954 Gross Profit ,3 323 Financial Revenue , Financial Expenses Interest expenses Selling Expenses General and Administrative Expenses Operating net income , Other income Other expense () Other profit (2) Net income from JVC (16) (7) 5 Earnings Before Taxes , Payable Income tax expenses Deferred income tax expenses Net income , Minority interests Net Income for common Shareholders , BLANCE SHEET H1.214 SHORT-TERM ASSETS 5,698 6,641 7,298 7,468 Cash and cash equivalents 1,183 1,7 1,186 1,319 Short-term financial investments 2,832 3,466 3,753 3,337 Accounts receivable 957 1,365 1,413 2,113 Inventories Other current assets LONG-TERM ASSETS 6,97 5,432 4,598 4,3 Long- term accounts receivable Fixed assets 3,128 2,56 1,871 1,257 Real Estate Investments Long-term financial investments 2,664 2,691 2,721 2,767 Goodwill Other long-term assets TOTAL ASSETS 11,795 12,73 11,896 11,498 LIABILITIES 8,814 7,881 6,46 6,421 Short-term liabilities 1,136 1,396 1,456 1,366 Short-term borrowing Accounts payable - Trade Advance from Buyers Long-term liabilities 7,678 6,485 5,4 5,56 LT borrowings 7,677 6,485 5,4 5,56 OWNERS' EQUITY 2,952 4,156 5,397 5,42 Paid - in capital 3,262 3,262 3,262 3,262 Surplus share capital Treasury stocks (126) (126) (126) (126) Retained earnings ,717 1,267 reserve fund (342) Minority interests TOTAL LIABILITIES AND EQUITY 11,795 12,73 11,896 11,498 (Source: PPC s audited financial reports) CASH FLOW STATEMENT Cash flow from operating activities Net profit ,63 Adjustments for: Depreciation and amortisation Increase/ decrease in inventories (22) (96) (154) Increase/ decrease in trade receivables 154 (388) (38) Increase/ decrease in trade payables Cash flow from operating activities 1,3 1,5 2,259 Cash flow from investing activities Increase/ decrease in tangible fixed assets (158) Increase/ decrease in intangible fixed assets (1,74) (634) (287) Increase/ decrease in long - term investments (51) (26) (3) Increase/ decrease cash flow from investing activities (1,284) (645) (138) Cash flow from financing activities Equity issued (817) 1,199 1,239 Increase/ decrease other fund Increase/ decrease in financial debts 76 (48) (77) Increase/ decrease in long term liabilities 767 (1,193) (1,481) Dividend to shareholders (4) (55) (1,63) Increase/ decrease cash flow from financing activities 92 (536) (1,942) Net cash flow (188) (176) 179 Opening cash 1,371 1,183 1,7 Closing cash 1,183 1,7 1,186 FINANCIAL RATIOS Liquidity ratios Current ratio Quick ratio Activity ratios Receivables turnover Inventory turnover Asset turnover Debt ratios Debt ratios Debt/ Equity Profitability ratios Gross profit margin 12.7% 11.2% 15.6% Operating net income ratios.3% 18.3% 35.2% ROA.% 4.2% 13.7% ROE.1% 12.1% 3.2% EPS 12 1,587 5,122 BPS 9,135 13,63 16,964 DPS 1, 1,5 Dividend Yield.% 8.4% 5.98%

6 RECOMMENDATION: MBS recommendation system is the difference between the price and the market price at the issued time up to 6 months. There are 3 levels for each stock recommendations which can be changed to fit the companies situation: SALE: when the market price is above 15% HOLD: when market prices are +/-15% BUY: when the market price is under 15% DISCLAIMER: Copyrights. MBS 214. ALL RIGHTS RESERVED. Authors have based this document on information from sources they believe to be reliable but which they have not independently verified. The views expressed in this report are those of the authors and not necessarily related, by any sense, to those of MBS, Neither any information nor comments were written for advertising purposes or recommendation to buy / sell any securities. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic. Mechanical, photocopying recording, or otherwise, without the prior written permission of MBS. MB SECURITIES (MBS) Established since May 2. MBS was one of the first 5 securities firms operating in Vietnam. After years of continuous development. MBS has become one of the leading securities company in Vietnam, providing a full range of services including: brokerage, research and investment advisory, investment banking and capital markets underwriting. MBS s network of branches and transaction offices has been expanded and operated effectively in many major cities such as Hanoi, Ho Chi Minh City, Hai Phong and other strategic areas. MBS s clients include individual investors and institutions, financial institutions and enterprises. As a member of the MB Group, including MB Bank. MB Land. MB Asset Management. MB Capital and Viet R.E.M.A.X (Viet REM). MBS is able to leverage substantial human, financial and technological resources to provide its clients with tailored products and services that few securities firms in Vietnam can match. MBS is proud to be recognized as: - A leading brokerage firm ranked No.1 in terms of brokerage market share since 29; - A renowned research firm with a team of experienced analysts that provides market-leading research products and commentaries on equity markets and the economy; and - A trusted provider of investment banking services for corporate clients. MBS HEAD OFFICE MB Building. 3 Lieu Giai. Ba Dinh. Ha Noi Tel: Fax: Website: