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SembCorp Industries Planning for Success?

In my previous article on SembCorp Industries Limited (SGX:U96), I shared the 2015 goals of the company’s utility business. As a recap: for the utility business segment, SembCorp’s plan was to achieve power generation capacity of 10,000-megawatts (MW) by 2015. As of the end of 2013, SembCorp’s power generation capacity (in operation, and under development) stood at 7,300 MW.

Ok, what’s new?

On Monday this week, SembCorp Industries announced a major agreement which might put it closer to its goal for 2015. The company signed a conditional joint venture agreement with ChongQing Energy Investment Group, which could see it acquire a 49% stake in an existing 300 MW mine-mouth coal-fired power plant. Interestingly, the deal also included the joint development of an adjacent 1320 MW mine-mouth coal-fired power plant. The transaction is expected to be completed by 2015, and is contingent upon satisfaction of certain conditions which includes approval by relevant Chinese authorities.

The entire project is estimated to cost approximately RMB6 billion (or around S$1.2 billion), with the development of the new 1,320-megawatt plant expected to complete in 2017.

So what?

If this joint venture comes to fruition, the 1,320 MW power plant deal alone would increase its power generation capacity (including projects under development) by 18% from its current 7,300 MW. Additionally, this would also increase its power capacity in China by two and a half times from 987 MW to 2,607 MW. This could mean good things for the company’s income. In 2013, its net profit margins in China has been significantly better than its main revenue base of Singapore.

Operating in China includes the risk of government regulations changing in country. For instance, one of the risks would be the capping the coal imports, and the other would be electrical tariff cuts. It should be noted that the both plants in question for Chongqing is located at the mouth of coal mines, and is the only mine-mouth coal fired power plants in the province. The location of the plants would give it significant savings in logistics cost, and enable it to be the low cost provider for ChongQing.

Lastly, SembCorp is also one of the cool companies in Singapore that shares its earnings report briefings. In the company’s 2013 earnings briefing, Chief Executive Officer (CEO) Tang Kin Fei suggested that analysts could look at its future power generating capacity coming online, and “do the math” of what it means to the company’s future income.

Foolish take away

For the long term, the future needs of China, India, and other developing countries might continue to grow. According to a report from the International Energy Agency, up to 25% of India, and 57% of Africa does not have any access to electricity in 2011. This could represent areas of growth for SembCorp’s utility business segment.

Along with this, one of the ways to look at the addressable market for SembCorp in the mid-term would be the pipeline of projects under its belt. With the current goal of 10,000 MW now in sight, Foolish investors might do to watch how well the company executes towards its goal.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.