CH. Karnchang

CH. Karnchang Plc (CK)
 

What's new? The Mekong River Commission (MRC) yesterday announced that construction of the Xayaburi Dam will be postponed again until additional environmental impact studies are carried out.
Comment: The postponement seemed to disappoint the market, but was in line with our thesis. CK management is confident that the project will go ahead sooner or later, but we think at this moment that the possibility of it being scrapped is quite high. Concerns about the ecological and economic stability of the lower Mekong region are likely to trump the argument for producing electricity from the proposed dam.
Another piece of evidence supporting our thesis that there are efforts to make Mekong hydropower dam development more difficult is that last week the US Senate Foreign Relations Committee approved Senator Jim Webb’s resolution calling on US representatives at multilateral development banks to support strict adherence to international environmental standards for any financial assistance to hydropower dam projects on the mainstream of the Mekong River.
Despite the postponing of the Xayaburi project, CK should report better core earnings next year, underpinned by a big backlog on-hand and greater equity income from associates. But the stock lacks any near-term catalysts. Besides the Xayaburi project, we are concerned about the delay to the signing of the Bt14bn Green Line (Bearing-Samutprakarn)—CK was the lowest bidder—as the National Anti-Corruption Commission’s investigation into the permanent secretary to the Ministry of Transport may result in many projects overseen by the ministry being added to the inquiry.
Action: The postponement of the Xayaburi Dam doesn’t affect our valuation, but the news may generate negative sentiment toward the stock in the short-term. However, if the share price were to drop, we do not think it would be a good time to load it into portfolios. CK’s earnings visibility is still not clear enough. We recommend switching to STEC—our most preferred choice within Construction space.