REE bets on market-based energy pricing future

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A technician installs electric switches at Thac Mo Hydropower Plant in Binh Phuoc Province, southern Vietnam, of which Refrigeration Electrical Engineering Corp. (REE) has a 35 percent stake

Refrigeration Electrical Engineering Corp. plans to buy more stakes in Vietnamese state-run power companies, anticipating the government will gradually deregulate electricity pricing.

"I hope that in the near future, this energy market will change," General Director Nguyen Thi Mai Thanh said in an interview. Power prices should "free over time, some percentage every year," she said.

REE, as the company is known, said last week profit surged 71 percent in the nine months ended September 30, buoyed by investment income. The company will seek opportunities to add more utility assets and may consider separately listing the power and water holdings eventually, she said.

Vietnam is moving the power sector toward competitive market-based arrangements, the World Bank said in a report this year. As the country struggles with slower economic growth, the government is seeking ways to save money. The government raised the average retail power price in August by 5 percent to VND1,509 (7 cents) per kilowatt hour, according to state utility Vietnam Electricity Group.

"The government, if they keep the price like now, it means they have to pay extra, to subsidize," Thanh said last week in Ho Chi Minh City, where the company is based. "They don't have money to do it. They need the money to do many things," including building infrastructure, she said.

REE owns stakes in companies including Pha Lai Thermal Power Joint-Stock Co., Thac Mo Hydropower Joint-Stock Co. and Thac Ba Hydropower Joint-Stock Co. All three are controlled by Vietnam Electricity.

Separate listing

REE, among the first state companies in Vietnam to sell shares in 1993, will set up a holding company to include energy and water units alongside its engineering, property and air-conditioning businesses, Thanh said. The company is now less than 6 percent owned by the state, she said.

"REE is a transparent company with well-run business lines, great assets and solid revenue, and is seen as a safe investment in a risky environment," said Attila Vajda, head of institutional clients at ACB Securities Co. in Ho Chi Minh City. "The question is how they can wrap all their businesses in a way that investors can understand the value creation in the different business lines moving forward, how they can connect the dots and show where they will add value."

REE, one of the first two companies to trade on the Ho Chi Minh City stock exchange when it opened in 2000, has jumped 57 percent this year, compared with a 20 percent gain in the VN-Index. (VNINDEX) The stock rose 0.4 percent as of 11:07 a.m. local time in Ho Chi Minh City. REE is ranked 19th by market value among the exchange's 301 members.

"˜Interesting opportunities'

A unit of Singapore's Jardine Cycle & Carriage Ltd. (JCNC) said last year it bought a 10 percent stake in REE, citing the company's mechanical and engineering business as offering "stable returns" and its property and infrastructure operations as "interesting opportunities."

"They've got good governance, understand finance and understand construction," said Dominic Scriven, chief executive of Dragon Capital Group Ltd., which manages funds that hold REE shares. "If you take all three of those factors together, it gives you three very good reasons to go into infrastructure."

REE reported nine-month net income of VND839 billion. Investments in associate companies contributed VND382 billion to earnings. Power and water investments may make up 60 percent of profit by next year, Thanh said. Full-year profit this year will probably reach VND1 trillion for the first time, exceeding a target of VND650 billion, she said.

Opening market

Vietnam is phasing in the development of a wholesale power market, with a first stage where multiple generators compete to sell to one wholesaler, which then sells power to distribution companies and large consumers at regulated prices, according to the World Bank. A final stage, scheduled for 2022, would be a competitive retail market, the bank said in its report.

"The goal is to introduce incentives and regulations to bring about improvements in the quality of service, the efficiency with which energy is used, and to enable existing and new investors to finance sufficient generation," the Washington-based World Bank said.

REE has a 42 percent stake in Thu Duc Water B.O.O. Corp.; 35 percent of Thac Mo Hydropower; 29 percent of Ninh Binh Thermal Power Corp.; 24 percent of Thac Ba; and 22 percent of Pha Lai, according to last week's earnings report. The Pha Lai stake was listed as its most valuable at VND1.16 trillion.

REE's background is "mechanical and electrical, so we can understand the water system easily, we can understand the power system easily," Thanh said. "We know the technology, the technical issues, and we have our own idea about investment."

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