Twin strengths make CEPA look a safe bet
CONSOLIDATED Electric Power Asia (CEPA) should be less vulnerable to the political and economic problems in China and Hong Kong because of its defensive and aggressive components.
The defensive angle comes from the high quality of its secured earnings. Most of CEPA's power contracts, denominated in US dollars, are signed with an average 25 years of co-operation, minimum offtake, and they are government guaranteed.
As a well-diversified Independent Power Producer (IPP) in Asia, CEPA should also be a major beneficiary of the acute shortage of power supply in developing countries.
And it is important to highlight that CEPA's exposure is not limited to China. It develops, builds owns and operates power stations and related equipment and its original focus was on two major markets - China and the Philippines.
However, within one year, the company has transformed itself into a major IPP in Asia with additional exposure to Indonesia, Pakistan and India.
The stock's aggressive angle comes from its excellent growth potential. At present, total installed capacity of CEPA's secured projects in operation and under construction is 6,515 megawatts. Include the projects under negotiation and capacity would almost triple.
As CEPA is the only major listed IPP in Asia, no direct comparison is available.
Unlike China Light & Power and Hongkong Electric, CEPA is operating in developing countries with estimated five-year average annual growth of 117.7 per cent in utility earnings.
Brokerage Merrill Lynch expects CEPA's net profit to increase by 12.4 times, from $300 million in 1994 to $4 billion in 1999. Utility earnings should surge 17 times in the same period.
Based on pure utility earnings, the shares are now trading on the brokerage's adjusted 1995 P/E of 21.7 times, which falls to 8.7 times on 1996 earnings.
However, there are risks investing in the stock. These include the company's exposure to projects in developing countries, particularly those in China, the Philippines, Indonesia, India and Pakistan.
But the revenue from these projects should be fairly secured because most of these contracts are denominated in US dollars. In addition, the rate of return onequity investment in foreign power joint ventures in China has not yet been confirmed.
And there are also uncertainties about foreign exchange guarantees and the inflationary environment in China.
