The rating reflects EVNCPC's 'bb' Standalone Credit Profile (SCP), which is assessed at the same level as that on the parent, Vietnam Electricity (EVN, BB/Positive), because EVN exerts significant control over EVNCPC's financial profile, including determining its profitability. This is despite EVNCPC's financial profile being much stronger relative to its SCP. The SCP also reflects EVNCPC's stable operating profile as a pure distribution utility with monopoly position in its area of operation.
The Positive Outlook on EVNCPC is in line with that on EVN. EVNCPC's ratings will be equalised with EVN's should its SCP weaken, based on our assessment that EVN has 'Strong' incentive to support the subsidiary under Fitch's Parent and Subsidiary Linkage Rating Criteria.
KEY RATING DRIVERS
Strong Market Position: EVNCPC benefits from its monopoly position in electricity distribution in the central region of Vietnam. We expect Vietnam's strong growth prospects expectations to continue to drive power demand and revenue growth for EVNCPC. EVNCPC's diversified counterparties and low receivable days also support its credit profile. However, the regulatory framework's short history, the short six-month period set for tariffs under the framework and political risks limit its business profile, as they do for its parent.
Diversified Counterparties, Low Receivable Risks: EVNCPC's credit profile benefits from its stable and diversified customer base with the top-20 customers accounting for only 8.56% of total revenue. Lower counterparty risk is also reflected in EVNCPC's high collection rates of almost 100% and low receivable days of around four days.
Controlled Tariff Increases: EVN can raise retail electricity tariffs every six months, in line with rising production costs, under the regulatory framework introduced in August 2017. Automatic adjustments are limited to 5%. Price increases of 5%-10% require approval from the Ministry of Industry and Trade, and larger increases need the prime minister's approval. The government maintained the overall tariffs during 2022 to support the post-pandemic economic recovery, despite increasing fuel prices. We expect tariffs to increase only modestly during 2023 amid softening commodity prices.
Low ROE: We expect EVNCPC's return on equity (ROE) to be pressured by higher fuel prices and relatively stable tariffs in 2022. EVN sets bulk-supply tariff, the major cost component for distribution companies, including for EVNCPC, with the aim of providing a modest level of profit. EVNCPC's ROE has averaged around 2% and we expect it to return to around historical levels from 2023, given our expectations of some tariff increases and lower commodity price assumptions.
High Capex Forecast: Fitch expects EVNCPC's capex to remain high at around VND4.1 trillion a year in 2023-2025 after spending was constrained by the pandemic in the last two years (2021: VND5.1 trillion, 2022E: VND4.3 trillion). EVNCPC's capex is mainly for enhancing the distribution grid and building substations and transmission lines to improve the power-supply capacity. Fitch estimates EVNCPC's EBITDA net leverage will stay at around 2.9x in 2023 (2021: 2.5x, 2022E: 2.9x) and 2.3x-2.6x in 2024-2025.
Integral Position in EVN: We assess EVN's incentive to support EVNCPC as 'High' should EVNCPC's SCP weaken below EVN's, resulting in their ratings being equalised. This is based on our assessment of 'High' operational and strategic ties between the two given EVNCPC's integral position within the group. EVNCPC is one of the five distribution companies under the EVN group with monopoly position in its area of operation. EVN appoints EVNCPC's key management, approves its business and investment plan, oversees the subsidiary's financial management, and approves key executives' compensation packages.
DERIVATION SUMMARY
EVNCPC's rating reflects its 'bb' SCP, which is at the same level as that of state-owned EVN, which owns 100% of EVNCPC. The SCP reflects EVN's significant control over EVNCPC's financial profile, including determining its profitability despite EVNCPC's financial profile being much stronger relative to its SCP.
EVN has a monopoly over electricity transmission and distribution in Vietnam. It also owns and operates the majority of the country's installed power-generation capacity. EVN's distribution businesses are highly strategic and are operated through EVNCPC and four other wholly owned subsidiaries.
The ratings on Vietnam Electricity Northern Power Corporation (EVNNPC, BB/Positive), Southern Power Corporation (EVNSPC, BB/Positive), Hanoi Power Corporation (EVNHANOI, BB/ Positive) and Ho Chi Minh City Power Corporation (EVNHCMC, BB/ Positive) also reflect their SCPs, in accordance with Fitch's Parent and Subsidiary Linkage Rating Criteria. EVN has strong linkages and extensive influence over the business and financial profiles of EVNNPC, EVNSPC, EVNHANOI and EVNHCMC via its 100% ownership of the four companies.
The ratings on National Power Transmission Corporation (EVNNPT, BB/Positive, SCP: bb+) - a power transmission company within the EVN group - are capped at those on parent EVN. EVNNPT has lower operating risk as a pure transmission player with better geographical diversification compared with EVNCPC. Furthermore, EVNNPT's ROE is determined by the regulator, albeit in consultation with EVN. This compares with EVN's more significant influence on EVNCPC, including determining the profitability, which explains why EVNCPC's SCP is a notch lower than that of EVNNPT.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- EVNCPC's electricity demand to increase by 6.3% in 2022, 2.7% in 2023 and 6.5%-7.2% for 2024-2025
- Weighted average retail tariffs to increase by 2.1% in 2022, and by 0.2%-0.3% in 2023 and beyond
- EVNCPC's customer base differs from that of EVNNPC and EVNSPC, resulting in a higher weighted average tariff of around VND1,887/kWh in 2021. Our base case in 2022 is for the VND1,926/kWh Bulk Supply Tariff (BST) to have increased by 9.9% in 2022, and then to fall by 11.9% in 2023 and increase by 1%-2.7% in 2024-2025
- Distribution losses to improve to average of 4.1% in 2022-2025 (2021: 4.4%).
- Average annual capex of VND4.1 trillion in 2022-2025 (2021: VND5.1 trillion).
- Average interest rate to increase to 8.8% in 2023 (2021: 5.6%, 2022E: 5.7%), in line with the APAC Corporates Interest Rate Assumption Guidance.
- No dividend pay-outs
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Positive rating action on EVN
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Negative rating action on EVN
For EVN's rating, the following sensitivities were outlined by Fitch in a Rating Action Commentary on 6 September 2022.:
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Positive rating action on the Vietnam sovereign (BB/Positive), provided the likelihood of state support does not deteriorate significantly
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Negative rating action on the sovereign
- Deterioration in EVN's SCP, along with significant weakening in linkages with the state. We see this as a remote prospect in the medium term.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Fitch estimates EVNCPC's cash of around VND4.1 trillion at end-2022 can cover debt maturities of VND2.5 trillion in the next 12 months. Fitch expects the company to generate negative free cash flow over the near to medium term due to the high planned capex. However, we do not expect liquidity to be a risk for the company as it has direct and indirect linkages to EVN and the state, respectively.
ISSUER PROFILE
EVNCPC is one of five electricity distribution companies in Vietnam with a monopoly position in electricity distribution in central Vietnam. EVNCPC is responsible for the development, operation, and maintenance of facilities for the distribution of electricity.
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
EVNCPC's rating is directly linked to the credit quality of the parent, EVN. A change in Fitch's assessment of the credit quality of the parent would automatically result in a change in EVNCPC's rating.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Source: https://www.fitchratings.com/research/corporate-finance/fitch-affirms-vietnam-electricity-central-power-corporation-at-bb-outlook-positive-28-03-2023