What is the outlook for Vietnam’s power stocks?

Many investors expect POW, NT2, and REE to benefit from the transformation of power sector. Photo: Quoc Tuan

>> Will coal-fired power output see a solid recovery?

As businesses resumed normal operations following Covid-19, total electricity consumption grew 7.8% yoy to 63.03 billion kWh in 1Q22. Gas-fired power output increased by 3.5 percent points to 7.5 billion kWh (1.6 percent yoy), accounting for 12 percent of overall output, up from a modest level in 2H21. Thanks to a longer-than-expected La Nina period, hydropower output increased 18.9% year over year to 16.48 billion kWh. Due to a coal scarcity, coal-fired output fell 4.6 percent year over year. Due to the addition of 3,980MW of wind power on November 21, 2021, RE output increased by 28.4% yoy to 10.01 billion kWh.

A bountiful year for hydropower

Hydropower output fell considerably in 1Q22 compared to the past two quarters of 2H21, but increased 18% year over year. The first quarter of each year is often when hydropower is used the least, as these facilities (particularly in the north) must store water for high-load hot weather. As a result, A0 will contemplate a minor hydropower mobilization. However, hydropower output increased significantly in 1Q22, owing to a coal-fired power deficit that forced A0 to mobilize other power sources, of which hydropower is one. As a result, several hydropower businesses, including REE, VSH, DNH, and SBH, took advantage of the situation and reported a good profit result in 1Q22.

According to the latest ENSO projection from the International Research Institute (IRI), the La Nina phase will endure until May 2022, then return in August 2022, with the highest probability remaining for the remainder of 2022. El Nino phase is also expected to have the lowest probability of occurring, and in a lower scenario, Neutral phase will be more likely to occur, benefiting hydropower.

Mr. Nguyen Ha Duc Tung, a VNDirect analyst, expects the hydropower segment to benefit for the entire 2022F, resulting in high volume mobilization, as hydropower is always the cheapest energy source. As a result, A0 is always considered to mobilize as much as possible from hydropower, especially in the context of EVN not raising electricity retail prices for 2022F. With the positive assumption that rapid energy demand will rise in 2022F, and that higher thermal output will mobilize in the CGM at higher SMP cap prices, Mr. Nguyen Ha Duc Tung believes that hydropower will gain with highest Qm output (10%) because to its low price.

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Mr. Nguyen Ha Duc Tung anticipates that power equities concentrating on cleaner alternatives will outperform for a few years due to the extent and faster-than-expected pace of the energy transition. “We feel that investing in defensive equities with growth potential that are closely related to economic growth, such as the power industry, is a safe and prudent choice, especially in light of recent market turbulence. We expects stronger power consumption growth from 2022F onwards, owing to the expected rapid speed of economic recovery as Vietnam emerges from the Covid-19 issues”, said Mr. Nguyen Ha Duc Tung.

>> Gas-fired power to rebound from its low base

Mr. Nguyen Ha Duc Tung believes that following a steep drop in 2021, gas-fired power generation would rebound in 2022F, trailing the revival of manufacturing activities and the predicted spike in power demand. He also expects that, due to the high likelihood of the La Nina phenomena, hydropower will remain at high production mobilization in 2022F. As a result, he expects POW, NT2, and REE to benefit from this trend. He also sees a stronger output expectation for coal-fired power in 2022F, because to a higher ASP price in CGM and increased demand, particularly in the North.

In regional emerging markets, Mr. Nguyen Ha Duc Tung also notices a significant increase in ESG fund inflow. He sees ESG spreading even at the early stages of investing in Vietnam. He favors companies that have ongoing renewable energy (RE) projects that profit from the lucrative feed-in tariffs, as well as those who are developing RE infrastructure. However, he feels that the outlook for renewable energy will be better in the long run, and that investors will need a clearer transitional price structure for this energy source right now. "We expect a transitional attractive policy to continue benefiting RE power investors to continue operating in this area", Mr. Nguyen Ha Duc Tung stated.