Last week, AES AES +0% Corp (AES) won Vietnamese regulators’ approval to build a 2.2-gigawatt natural gas-fired power plant in the south-central province of Binh Thuan. Slated for service in 2024 under a 20-year government contract, it will be fueled by the company’s 450 Tera BTU capacity LNG import and storage terminal, which enters service in 2022.
The same day, Vietnam’s Minister of Industry and Trade Mr. Tran Tuan Anh was guest of honor at an event hosted by the US-Asia Institute in Washington D.C. The subject: Similar blockbuster opportunities for US energy companies, as the southeast Asian nation electrifies its rapidly growing economy while controlling environmental risks.
Vietnam has historically relied heavily on locally mined coal in its power mix. But as new facilities take the fuel from 49 percent to 55 percent of generation by 2025, projected annual output of 51 to 54 million tons won’t cover the 65 to 70 million tons needed by power plants.
Australian coal companies’ close proximity ensures they’ll get most of the resulting export business. To the extent US miners participate, it won’t offset rapidly falling demand at home. In the past month, Foresight Energy LP (FELP) and privately held Murray Energy have skipped bond interest payments, putting them in line to join the dozen other US coal miners to go bankrupt this decade. Coal’s share of US power is now under 25 percent, from nearly 50 percent a decade ago.
But while Vietnamese demand won’t save US coal, the country offers a massive opportunity for North American natural gas producers, power generators and LNG transportation and infrastructure. Starting from zero, the country expects to ramp up LNG imports to 10 million tons by 2030, while natural gas generating capacity more than doubles from 9 to 19 GW by 2030.
That’s still a small amount of LNG relative to China, which increased its imports by 41 percent in 2018 following 50 percent growth in 2017. But with a population of nearly 100 million, Vietnam is not a small country. And as Mr. Anh seemed to imply during his presentation, demand could be considerably higher if US LNG companies commit to long-term contracts that limit price volatility.
That’s powerful incentive for US shale-rich LNG operators like Cheniere Energy Partners (CQP), Dominion Energy (D) and Sempra Energy (SRE) to forge long-term relationships. The same is true for the world’s largest LNG player Royal Dutch Shell (RDS/A), which is reportedly pursuing growth in Vietnam’s fuel distribution sector.
The country also expects to grow its wind and solar generating capacity even faster, by 7.5 and 41 times, respectively. AES Corp is one likely investor, though Vietnam is not now part of the 13 gigawatts of renewable energy capacity it expects to add globally through 2022.
The game in electricity will be winning long-term contracts to fuel a coming quantum leap in the country’s power intensity. That’s currently about 2,000 kilowatt hours per person per year, compared to developed countries’ 7,000.
Basic infrastructure is already in place, with 98 percent of Vietnam’s rural households connected to its power grid by 2016. What’s needed is investment in generation, smart grid, data capabilities and flexibility to absorb distributed solar as well as support electric vehicle infrastructure.
AES’ American peers have largely sworn off global investing, with US revenue now accounting for 97 percent of sector revenue. That makes non-US utilities like Hong Kong’s CLP Holdings (CLPHY) more likely candidates to take the plunge.
There’s also an emerging opportunity in power sector restructuring as Vietnam adopts a model similar to the UK. T&D will remain a government monopoly, while generation and retail become competitive businesses. The country will also seek to attract global investment in retail and generation.
The US is a primary target. Not many Vietnamese stocks now trade directly in the US. But the Ho Chi Minh Stock Exchange lifted restrictions on foreign ownership in 2015, and US investors can buy Vietnamese stocks by using www.interactivebrokers.com.
One company I’m watching is Vietnam Power Development (Vietnam: VPD), which focuses on hydropower projects. Water presently accounts for 21.6 GW of generating capacity, or about 36 percent of the country’s total output. Production is expected to increase to 33.7 GW by 2030 including pump storage, though market share will drop to 26 percent.
VPD sells at 10.7 times trailing 12 months earnings, yields 6.5 percent and has a return on equity of 13.7 percent according to Bloomberg Intelligence. Free cash flow covered the once annual dividend nearly three fold in 2018.
Also interesting is PetroVietnam Gas (Vietnam: GAS), a leading player in LNG imports that’s 95.76 percent owned by the government’s Vietnam Oil and Gas Group. The stock has coverage from 10 global research houses as well as Bloomberg, with 4 rating it buy versus 6 holds and no sells. The company pays dividends twice annually and has a payout ratio of about 70 percent.
VanEck Vectors Vietnam ETF (VNM) invests at least 80 percent of its assets in the MVIS Vietnam Index, which holds the country’s 25 largest stocks. Those include PetroVietnam Power Corp (Vietnam: POW), which focuses on coal-fired electricity and does not currently pay a dividend.
VanEck is underwater roughly 40 percent not including dividends since its mid-2009 launch. But it’s been a steady performer over the past year, in sharp contrast to most emerging market ETFs. That’s a good sign the Vietnamese market is maturing, even as its Trade Minister has declared the country open for business, especially in energy.
The best way for conservative investors to play is AES Corp, with its massive recent investment in power and LNG and the likelihood of more to come. The stock also trades at half the earnings multiple of the Dow Jones Utility Average, has a highly visible path to 7 to 9 percent annual earnings and free cash flow growth through 2022 and this month achieved the first parent level investment grade credit metrics in its history. The stock’s a buy anytime it trades under 17.
Date: Oct 9, 2019