VPower had a share placement of 83mn shares at HK$3.75 completed on 23 Jul. Share price turned weak since the placement. We see overall impacts very limited, as the share placement only brought 3.2% EPS dilution, which would be negligible comparing with 150.6%/64.5% earnings growth in FY20/21E. We take a closer look at the Company’s Myanmar JV. Under current LNG spot price, we think our earnings estimates remain intact, and we see potential upside from better-than-expected fuel costs realized. We maintain high conviction BUY rating with TP slightly trimmed to HK$ 5.47 to reflect EPS dilution.
- Negligible impacts from share placement. VPower had a top-up share placement of 83mn shares completed on 23 Jul. Placement price was HK$3.75, which was at 13.0% discount to pre-placement closing price. The transaction helped VPower raise HK$299mn net of fees, which we estimate will reduce VPower’s net gearing from 112.7% in 2019 to 81.8% in 2020E. Share price exhibited quite deep decline after the placement, reflecting market concerns on VPower and its placement. We think the market has overreacted, as the share placement scale was mild with only 3.2% EPS dilution impact, and we also think the placement had clear out short term dilution risk in 2H20.
- A closer look at Myanmar JV. We continue to place our key focus on VPower’'s iconic Myanmar JV. We expect the JV has invested more than HK$5.5bn for a total installed capacity of 1.06GW. According to Myanmar Times, tariff of the JV would be ~US$0.12/KWh. In our base case estimates, we think the JV will generate more than 20% IRR, with superior profitability comparing with VPower’s normal IBO projects. Key exposures of the JV would be 1) LNG cost, 2) utilization rate, and 3) energy efficiency of the JV’s gen-sets. We think the JV would have room to improve profitability through proper management of those exposures.
- Favorable LNG market environment. VPower caught a good timing to expand its LNG-fueled distributed power projects, in our view. Asia LNG spot market is currently at a range of 3-yr low, while Bloomberg data shows JKM future is priced at only ~US$2.6/MMBtu. We think plentiful supply of LNG will help VPower easier to manage fuel costs exposure, and a considerable LNG consumption volume will also enable VPower to leverage its purchasing power.
- Reiterate high conviction BUY. We are confident that VPower will deliver high earrings growth in FY20/21E. Our FY20-22E EPS forecasts are trimmed 2.0-2.6% to reflect share dilution. Our DCF TP is slightly trimmed to HK$5.47.
