by NGOC ANH 30/12/2022, 02:38

Wary of power stock risks

There is a dual impact from exchange rate loss and rising financing costs among power firms, said VNDirect.

Investors are recommended to screen power stocks to avoid risks

>> Hydropower will come out of its peak

Since 2Q22, the interest rate has increased dramatically as a result of the Fed's efforts to rein in historically high inflation. The Libor and Vietnam deposit rates, which are typically used as the benchmark for power loans, have increased as a result of this fact, along with overall interest rates.

In addition, the rise in interest rates has put pressure on the USD/VND exchange rate, causing the VND to decline by almost 8% against the USD at this time. As a result, it had a double effect on various power firms and adversely affected its 9M22 financial performance. Due to increased exchange rate loss and interest expense increases, PC1, GE2, PGV, and REE report a spike in financial expenses.

As a result of the Fed's rate hike strategy, which is expected to extend through at least 2H23F, both the exchange rate and interest rates are still under pressure to rise. The amount of the effect, according to Mr. Nguyen Duc Tung, will vary depending on the amount of US debt and the interest rate policy. Power companies with a significant percentage of US dollar debt, like PGV, are the most impacted.

Besides, in Mr. Nguyen Duc Tung’s view, there are also some of the other risks lurking in the power sector:

First, there is still a risk associated with rising input prices. Following Europe's warmer-than-expected winter, gas prices are declining. However, the gas supply from Russia, the top supplier of gas to Europe, has been shut off, putting pressure on short-term options.

Second, as China reopens, demand for coal will increase, pushing up the cost of this commodity.

Third, the steel sector, which consumes the most electricity in Vietnam, is postponed as the main driver of power consumption increases to achieve the desired aim.

Fourth, the prospects for the power industry would be further hampered by the extended delays in the release of PDP8 and the RE price mechanism.

>> What is the outlook for coal-fired power?

"We see the power sector will go through a robust transition in the upcoming years. Our top picks include PC1, POW", said Mr. Nguyen Duc Tung, adding that the picture of Vietnam power sector is clearer, favoring toward RE and gas-fired power after the government determination in the COP26. Under the high portion of RE power in the following years, the companion of gas-fired power will serve as a reliable support for power systems.

"We identified several Vietnam companies that will benefit from the gas-fired power chain, including POW, PGV, and GAS," predicted Mr. Nguyen Duc Tung.

The postponement of the RE price mechanism is a major headwind, hampering RE capacity development. The untying of this bottleneck will open up an enormous playground for large investors. Although the FIT period has attracted large private capital flows into this sector, the post-FIT period is expected to be more competitive in a healthier manner.

"We put great faith in enterprises with large scale, strong cost management, and project implementation to grab larger opportunities to expand its RE capacity in this phase. We see the ESG flow with its attractive cost of capital emerging worldwide, and gradually creeping into Vietnam. Therefore, companies that seize this opportunity will stay ahead in the RE race. We named some of the heavyweight contestants including BCG, GEG, PC1, and REE", emphasized Mr. Nguyen Duc Tung.  

Tags: power stocks,