REE published Q2 2021 results with revenue growing 25% YoY to VND1.6tn (USD70mn) and NPAT-MI increasing 3% YoY to VND383bn (USD17mn) mainly driven by REE’s hydropower portfolio and full-quarter contribution of 2020-installed rooftop solar capacity, which were partly offset by weakness from the coal-fired power portfolio (PPC) as well as the M&E and real estate segments. REE’s H1 2021 NPAT-MI reached VND799bn (+27% YoY) and completed 43% of our 2021F forecast. We continue to expect REE’s hydropower portfolio to strengthen in Q3 2021 as this period is Vietnam’s rainy season and as there will be more aggressive revenue booking for the M&E and real estate segments in H2 2021. Overall, these results are in line with our expectation as downside risks for the Pha Lai Thermal Power (HSX: PPC) due to a technical shutdown of one of its power generators are offset by significant upside risks at Vinh Son – Song Hinh hydropower (HSX: VSH) as its H1 2021 load factor and profits strongly exceeded our expectations. 

Figure 1: REE’s Q2 2021 and H1 2021 results

Source: REE, VCSC

Power & Water Segments

Power NPAT-MI jumped 16% in Q2 2021, driven by hydropower and REE Solar Energy. REE’s hydropower continued to gain traction in Q2 2021 as its NPAT-MI contribution jumped 105% YoY thanks to favorable weather conditions. Meanwhile, the company’s coal-fired power portfolio — which is mainly driven by PPC — recorded a 77% YoY earnings decline due to a technical shutdown at the Phai Lai 2 plant (see more in our July 1, 2021 PPC Earnings Flash). The full-quarter operation of 86 MWp of new solar power capacity under REE Solar Energy contributed VND23bn (USD1mn) and VND43bn (USD2mn) to REE’s NPAT-MI in Q1 2021 and H1 2021, respectively, vs a negligible amount in H1 2020.

Assets jumped 50% to VND30tn (USD1.3bn) on VSH consolidation and robust dividends from associate companies. In April 2021, REE raised its ownership at VSH from 49.5% to 50.5%, thus consolidating VSH’s total assets of VND10tn (USD434mn), including the new Upper Kon Tum (UPKT) hydropower plant (220 MW). Accordingly, REE’s total debt doubled QoQ to VND11tn (USD478mn) in Q2 2021 while net D/E jumped from 30% in Q1 2021 to 50%. Meanwhile, REE’s cash and short-term investment balance jumped 60% to VND3.2tn (USD139mn) following record high dividend income (+50% YoY) from PPC and other hydropower associate companies.

VSH’s profit jumped in Q2 2021 on a significant improvement in load factor, implying upside risk to our forecast. VSH’s NPAT-MI reached VND135bn (USD6mn) in Q2 2021 and VND237bn (USD10mn) in H1 2021 vs a small loss of VND3bn (USD130,000) in H1 2020 and exceeded our full-year forecast of VND89bn (USD4mn). This upbeat performance was driven by a stronger-than-expected load factor of ~75% in H1 2021 at the Vinh Son and Song Hinh hydropower plants and 68% load factor in Q2 2021 at the UPKT hydropower plant. From 2022F, we expect UPKT can successfully raise its PPA price by ~20% to VND1,308/kWh vs VND1,095/kWh in 2021F, which would significantly boost VSH’s bottom line.

REE’s three wind farms are on track to come online before October 31, 2021, which is Vietnam’s wind power feed-in tariff deadline. According to its financial statements, REE spent a total of VND1.2tn (USD54mm) of capex toward its three wind farms in Q3 2021. Specifically, REE spent 13%, 51% and 40% of its planned capex for the Tra Vinh offshore wind farm and the onshore Loi Hai 2 and Phu Lac wind farms, respectively. We note these completion rates could be higher as some of the capex — especially for wind turbine purchases — was booked under advance payments to suppliers that amounted to VND1.5tn (USD65mn) in Q2 2021 vs VND633bn (USD28mn) in Q4 2020.

Water NPAT-MI jumped 27% in Q2 2021. This strong performance was driven by higher sales volume at the Tan Hiep II water processing plants and a contribution from new subsidiary TK+ JSC — a technical adviser and solution provider in the water processing industry in which REE acquired a 65% stake. In Q2 2021, TK+ contributed VND23bn (USD1mn) to REE’s consolidated revenue.

Office Leasing Segment

The office leasing portfolio continued to operate close to its maximum occupancy rate. Per REE, its average occupancy rate reached 99.1% in Q2 2021 vs 98.6% in Q2 2020. That said, REE’s office leasing NPAT-MI declined 7% YoY in Q2 2021 due to a VND10bn (USD435,000) one-off reverted provision recorded in Q2 2020.

The new Etown 6 office building is poised to begin commercial operation in Q2 2023. REE states that it plans to acquire a construction license in August 2021 and begin foundation construction in October 2021. This new office building will have a net floor area of 40,000 sqm vs the existing 150,000 sqm of leasable office space.

Other Segments

M&E NPAT-MI contribution remained modest in Q2 2021 due to project delays. H1 2021 NPAT-MI from M&E declined 12% YoY to VND67bn (USD3mn) and completed only 27% of our 2020F forecast. Per REE, this weak performance was mainly driven by continued projects delays caused by COVID-19. While we expect more aggressive profit booking in H2 2021, the recent resurgence of COVID-19 may imply downside risks to our current forecasts.

The real estate segment’s earnings contributions were negligible in Q2 2021. Earnings from the real estate segment were weak as SaigonRes (a 29%-owned associate) recorded VND5bn (USD210,000) of NPAT-MI in Q2 2021 due not having any major project deliveries vs VND80bn (USD3mn) in Q2 2020. Nevertheless, we expect SaigonRes’s earnings will accelerate in this year’s future quarters thanks to project handovers, per management guidance.