Utilities – Several positive catalysts coming

Soon-coming Phase 2 of renewable energy bids. The Energy Regulatory Commission (ERC) has officially announced the first round of bids for Phase 2 of the renewable energy program, with feed-in tariff (FiT) purchases for wind power capped at 600MW and ground-mounted solar power at 1,580MW for a total of 2,180MW. It will prioritize the first-round bidders (198 bids) that met criteria but were not selected. The ERC has not yet confirmed the details for the remaining 1,488MW open for general bidding.

Expect the new PDP2024 to finalize in early 2025. The Energy Policy and Planning Office (EPPO) held a public hearing in June for the draft of the new power development plan (PDP) for 2024-2037. Key details: 1) CAGR for 2024-2037 electricity demand is projected at 3.5%, driven by rising demand for electric vehicles (EVs), high-speed trains and green data center projects. 2) EPPO plans to prioritize renewable energy sources to where this accounts for 51% of total electricity generation by 2037. To achieve this, it will add capacity of 24.4GW to the country’s solar capacity, 5.3GW to wind, 1,046MW to biomass and 936MW to biogas. We expect the new PDP 2024 to approved by Cabinet in early 2025. Phase 2 of the renewable energy plan and PDP 2024 are expected to benefit the Thai utilities sector in the medium to long term, with a focus on power capacity additions within Thailand, where risks are generally lower, returns are fair, and close monitoring is easier than for overseas projects.

Benefits from downtrend in global interest rate cycle and appreciation of the baht. Given the sector’s capital-intensive nature that necessitates a high proportion of debt funding, a step down in interest rates will benefit. Our sensitivity analysis suggests that each half point decline in interest rates will raise earnings for GPSC by 4.8%, BGRIM by 3.2% and GULF by 0.5%. As some of the funding is in USD-denominated loans, the appreciation of the baht against the USD is also good for the sector: GULF has a USD loan portion of 41%, BGRIM 21%, and GPSC <5%. Our sensitivity analysis suggests that each Bt0.5/USD appreciation per year will lift 2025F net profit by 8.5% for BGRIM, 1.4% for GULF and 2.9% for GPSC.

Good 2H24 earnings. The downward movement in interest rate and boost to sector earnings from FX gains will benefit BGRIM the most, followed by GPSC and GULF. In terms of core operating profit, we expect GULF to report record-high earnings in 2H24 due to addition of GPD unit 4. GPSC earnings will grow after the COD of its CXFD offshore wind farm and better earnings contribution from the AVAADA group. We expect a dip in BGRIM from higher gas cost with some partial offset by capacity additions.

Positive on the sector: Top pick is still GULF, GPSC raised to Outperform. We maintain our 3-month tactical Outperform rating on GULF, raising our mid-2025 DCF-based target price to Bt70.0/share from Bt63/share (WACC at 4.7%, long-term growth at 1.5%), on its potential to win a project in the upcoming bidding for both Phase 2 of the renewable energy scheme and PDP 2024, which is expected to be finalized next year. We expect its earnings to be strong in 2H24 upon the full-quarter recognition of revenue from the new GPD and HKP projects, as well as the planned COD of its solar, solar + battery energy storage system (BESS) and solar rooftop projects that will add 605MW in 2H24. We upgrade our recommendation for GPSC to Outperform from Neutral, as the onset of a cyclic interest rate downtrend will be very positive given the 35% of its debt that carries a floating interest rate. The potential for lower market LNG prices and its low net debt/equity ratio will allow medium- to long-term growth investment. We expect 3Q24 core earnings to grow slightly QoQ on better contribution from AVAADA, the full COD of the CFXD offshore wind farm and better contribution from Xayaburi hydropower. For BGRIM, although we expect it to benefit from the appreciation of the baht in the short term, core profit will soften due to potentially higher gas costs, with LNG price currently high.

Key risks: Higher than expected gas cost. Key ESG risks are the environmental impact from exposure to fossil fuels, energy management, high greenhouse gas emission and nearby community impact.