Dependence on client risks
Major clients of the Company and its subsidiaries in government sector include the electricity-related agencies such as the Provincial Electricity Authority, the Metropolitan Electricity Authority and the Electricity Generating Authority of Thailand. The revenue from sales to these customers is based on the governmentûs budget for the development of production capacity and supply. If there is a change of the cabinet that results in alteration of electricity investment policy or any delay in approval of procurement for various projects, the Companyûs revenue in relation to these clients may be affected. Moreover, procurement processes of the government agencies are carried out mostly by competitive bids that sometimes involve many bidders. If the Company does not win the bids, it will lose revenue from these clients.
Investment in electricity capacity development and supply is regarded as investment in basic public infrastructure that grows continually. In times of economic expansion, the government sector needs to expand its public utilities to support the national growth and the increase of population and households. On the contrary, in times of economic slowdown, the government sector usually uses the public investment in infrastructure as a mechanism to stimulate economic recovery. So it can be said that the risks arising from the change of investment policy in the government power sector is quite low. As for the bids for government projects, they tend to be carried out separately according to product groups. The Companyûs products are not only of great variety, but also accredited by ISO 9001 quality standards. Many of them are registered with the Ministry of Industry as well as guaranteed by the tests of independent institutes, both domestically and internationally. Some of its products are certified by the Office of Industrial Standards (TIS) as well. The Company is therefore at an advantage when competing in bids for supply of products to the government agencies and state enterprises, which generally promote and encourage the procurement of products accredited and certified by the Ministry of Industry. For this reason, the risk that the Company may not be selected in a project bid of any type is low as well.
Risk of dependence on large clients
In 2015, the company sold products to approximately PEA offices in different areas for the value of 310.25 million baht or equal to 6.96% of the company's sale income according to consolidated financial statements.
Major customers of the company are regular customers who have maintained contact and business with the company for a long time and have a good relationship. Maintaining good standards of goods and services quality for over 30 years, the company is confident that it will continue to gain trust of customers. However, the company has a policy to reduce risk of dependence on any particular customer in each market, by constantly seeking new customers in order to expand customer base and to create more business opportunities and development of new products such as development of energy-saving LED light bulbs for distribution to the government sector and private sector, the LED lamps classified under the consumer products with a high market value. The lighting products are available in all buildings. Also, it is a product that has been promoted by the government for purchasing to replace instead of the traditional lamp that uses more electricity or power.
Risk of dependence on revenue from Myanmar
In due mainly to the change of procurement policy from using foreign currencies to Myanmar currency (Kyatt) and not to be direct business partner with Myanmar government. The company considers that procurement according to this new policy has a risk of payment and exchange rate uncertainty of Kyat, which is highly volatile. Therefore, the Group undertakes businesses carefully by focusing on projects due directly with the government under foreign currency deals only. However, after the elections, and during the transition of power making projects delays. In most cases, to wait for the government done.
In order to reduce dependence on revenue from Myanmar, the Group has a policy of market expansion into neighboring countries, such as Lao PDR, Vietnam, Cambodia and Malaysia. Moreover, the Group has a policy to undertake the business of power generation from renewable energy sources and the business of power plant construction, both in Myanmar and Thailand. In this regard, the Group gains the trust of Myanmar government and is thus assigned to conduct a feasibility study of wind power development project. So, the Group believes that its policy can reduce the risk of dependence on revenue from Myanmar.
However, the Group has a policy to prevent risk of dependence on any particular customer, by expanding customer base in public and private sector clients, including in export segment in order to soften the impact of possible decrease of purchase orders from any segment. The proportion of goods sold to each segment would vary from period to period. The company would consider factors that might affect order placements of each segment, such as electricity budget, related industrial circumstance and economic situation of Thailand and of customer countries, etc., in order to set an appropriate marketing policy for conditions in each period of time. For example, when the budget approval of government sector is slow, orders from customers in this sector will drop, and the Group will maintain its revenue size by focusing more on private sector and oversea clients. On the other hand, when private sector decreases investment, the Group will have orders from oversea customers and also government sector customers who use their budget to stimulate the economy. Therefore, diversification of customer segments can reduce risk of dependence on any single customer group, enabling the Group to maintain revenue scale in each period of time.
Risk of exchange rate fluctuation
As the nature of business of the Group involves export to and import from foreign countries, which are paid mostly in US dollar or euros, the Group might be affected by the fluctuation of exchange rates. It might have gains or losses on exchange rates if the date of purchase or sale is different from the date of the delivery or payment.
However, as the Group both makes import and export in foreign currency, it can reduce risk of exchange rate fluctuation on an extent. In case the dollar or euro is strong against baht, the Group will have increased income from foreign deals when the payment is converted into baht, yet the cost of imported raw materials will rise. Conversely, in case the dollar or euro weakens against baht, the Group will have decreased income from foreign deals upon currency conversion, and the cost of imported raw materials will drop.
The above characteristics are therefore regarded as prevention against fluctuations in exchange rates as follows:-
- Planning of purchase orders and delivery (Natural Hedge). The Company will open a deposit account in foreign currency when the payments or sales are made in foreign currency. When the Group is paying for imported raw materials in the near future, the Companyûs management team will be assigned to monitor changes in exchange rates and use the information to plan the purchase of raw materials and deliveries that are paid or received in foreign currency, to help reduce the risk of exchange rate (Natural Hedge).
In 2015, the Group purchased raw materials and goods from overseas in the amount of 333.76 million baht, equal to 11.35 % of total value of raw materials and goods purchased by the Group over the same period. According to the consolidated financial statements as of 31 December 2015, the Company had debt liabilities in foreign currency of approximately USD 9.13 million, EURO 0.004 million and YEN 2.51 million The foreign currency has been managed through the advice by financial institutions who support for credit facilities, in order to decide on the appropriate and necessary schedule of the forward contracts. In 2015, the Company had been successful in foreign currency management through the Financial Management Committee by providing to the authorized person as the level of transaction.
Possible risks to the power generation and supply business
The ability to generate electricity of a solar power plant depends on two main parts, i.e. the quality of the solar panels and the amount of losses incurred in the electricity generation system. To prevent such risks, the Group uses solar panels from the top well-known companies which is regarded as one of the best manufacturers of quality solar panels recognized around the world.
Present, the Company has successfully realized its potential and proficiency in solar farm construction, developed the engineering team and subcontractors, as well as meticulously selected key equipment related to solar farm construction from manufacturers who have delivery capability, proper after-sale services and warranty. As a result, the Company can reduce risks from dependence on large contractors in power plant construction, thus being a big step forward in the greater enhancement of managerial competitiveness, cost controlling and efficiency of power plant construction.
After the completion of solar farms, the Companyûs joint venture partners and other operators have placed trust in the Company with the signing of operation and maintenance agreements for power plants more than 160 MW and making commercial sales. This enables the Company to comprehensively control and monitor the capacity of power supply and efficiency of solar farm operations, thereby mitigating risks from guarantee of minimum supply quantity of each project.
Risk of power supply
The Group has signed a power purchase agreement with PEA for distribution of power at the amount specified in each contract. The contract is a Non-Firm type for reasons that in the generation of solar-base power, the amount of power generated each time cannot be specifically controlled. According to the agreement, the PEA will purchase all electricity produced by quantities specified for each project. The contract is five years from the date of signing the contract and automatically continues for a period of five years. The PEA does not have the right to terminate the agreement as long as the company complies with the conditions specified in the contract. Due to the said conditions and the contract party being a government agency, it is considered that the Group has no risk from the inability to generate and supply electrical power, or the inability to collect payments.
Risks of economic and political factors
After the government of General Prayut Chan-o-cha started the administration in the year 2014, it can be seen that Thailandûs overall economic situation was improved with high confidence from both domestic and international investors. The government has set various policies in stimulating the economy as the report of Office of the National Economic and Social Development Board (NESDB) indicated that the economy in the year 2015 expanded at 2.8 percent when compared to 0.8 percent in the year 2014. Both government and private sectorsû investment projects indicated favorable adjustment in the fourth quarter of 2015 while the expectation of Thailandûs economy in the year 2016 shall be increased between 2.8 - 3.8 percent. Although the worldûs slow economic recovery is one of Thailandûs major economic risk factors in the year 2016, there are supporting factors in the economic expansion in the form of expenditure acceleration and higher budget in government investment for the year 2016. In addition, the progress of government infrastructure projects results in the higher disbursement of the stat enterprises as well. The Companyûs major customers are state enterprise sectors which obtained high budget support from the government. At the same time, the Companyûs equipments are related to these infrastructure projects, therefore, the Companyûs business has the high tendency in growing in relevant to the governmentûs investment expansion.
Moreover, energy policy is one of the significant policies in which the government is concerned about as the Energy Policy and Planning Office has passed the resolution in the Thailand Power Development Plan for the year 2015 - 2036 (PDP2015) in focusing the stability of power distribution by spreading fuel in energy generation, reducing natural gas dependability, adding the proportion of energy generation from clean coal technology, increasing foreign power supply, adding the proportion of energy generation from renewable energy, developing transmission and distribution system in order to support the development of renewable energy, joining in ASEAN Economic Community (AEC), arranging Energy Efficiency Development Plan (EEDP) and Alternative Energy Development Plan (AEDP) to be in the same timeframe with the PDP2015. In the future, these plans shall greatly support the Companyûs business growth in manufacturing and distributing equipments for transmission and distribution system, manufacturing and distributing energy-saving equipments (LED) and developing renewable and alternative power plants.
Risks of investing in solar power plant in Japan.
According to Japan suffered from the effects of the earthquake and tsunami disaster wave as a result damage to nuclear power plants at Fukushima province in Japan and finally to be closed. As the effect causing a panic with the population, the Government of Japan should rethink the power policy by using other energy for replacing and reducing the proportion of nuclear energy, by defining the policy of promoting solar power and geothermal energy, etc.
During the early impact, the Government of Japan aims to encourage the private sector and investors, both of domestic and foreign, to invest in solar power plant as the purchase rate of feed in tariff that is highest rate in the world. The power purchase rate has dropped from 40 yen to 27 yen, which is the purchase of electricity from solar energy.in current. As the power policy issuing by the Government of Japan in the purpose of accelerating solutions to the shortage and demand for electricity in the country, has been effected to the purchasing price of electricity which has been the main factor for consideration of the return on the investment of the company. GUNKUL has managed risk in this case by investing in the project that received an acceptance letter or completed for signing in power purchase agreement on feed in tariff.
Risk in laws and obtaining necessary licenses.
As the development of solar power plants in Japan comparing with a similar project in Thailand, there is some issue that should be considered rather than in Thailand such as land development for the project. If there are large trees in the area of the project, the project developer should avoid and request for permission of using the area to the related governmentûs entities by taking the process for consideration and approval at a long time. Moreover, if cutting down some trees, the matter will be specified in the license and the project developer should do the planting for replacement as the proportion which considered by the related entities and must to strictly comply with the conditions during processing and completion of the project.
In case of applying for the extension of transmission lines into the area for project development of solar power plant, the processing period for Thailand is approximately 6 months until to 1 year that able to be developed along with the construction of the power plant that is in the same processing period of extension of transmission line. In Japan, the private concessionaire who is the electricity supplier to the public and also private sector is the representative of the government for power purchasing. However, the procession period for Japan to extension of transmission lines into the area of project is approximately 2 - 3 years. Therefore, the Company has been negotiating for reduce the risk to be the appropriated duration for project development and/or requesting to be allowed to directly act as an extension arranger for transmission line connection to electrical power distribution in the power plants of its own directly, depending on the appropriateness and necessity of each area in each case.
The risk of holding structure in the proportion of investment and project financing from financial institutions in Japan.
As of the development of solar projects in Japan, two projects include solar projects at Sendai, Miyagi, Japan capacity of 31.75 MW and solar projects at Kimitsu, Chiba, Japan capacity of 33.66 MW in proportion of 100% which was approved by the Risk Management Committee and the Board of Directors, considering for related risks and return of investing. However, GUNKUL need to get financial support from the financial institutions in Japan and low interest rates low for private sector in Japan. The company has been supported by a commercial bank in Thailand who is a financial partner with the company to provide find out for matching financial institutions in Japan for supporting credit facilities which in the suitable rate according to the conditions of financial assumptions as presenting to the Board for consideration of investment in Japan in the proportion holding 100%. Although may be having some limitation to match with the term condition offering by financial institutions in Japan, the Company will take the best decision by matching with the good terms and conditions and may be alter the proportion of investment holdings only as much as necessary for acceptance by financial institutions in Japan.
Risk in management and development projects to be completed by the due date of the contract. As developing solar power plant in the capacity of 31.75 MW in Sendai, Miyagi, Japan and 33.66 MW in Kimitsu, Chiba, Japan, the processing period starting development until completion for electricity commercial supplying is taken 21-24 months and 29-31 months that need to manage and control the project to be completed within the term of the power purchase agreement with within the following factors. As the investment of solar power project In Japan, the Company has got the Power Purchase Agreement by feed in tariff at the rate of 36 Yen per kilowatt per hour for 20 years. Although the Company will recognize the revenue in yen but also repay the loan in the same currency which to hedge the exchange rate at 85 percent of project investment. As expectation that its project financing offering by financial institutions in Japan, comparing with the proportion of equity in percentage of 85:15, the profit return earned from investment as yen currency will be returned as dividend to the Company in Thailand, therefore, the Company should manage to prevent the currency risk by arranging for hedging fund of foreign exchange rate in the long term and also arrange in other method to be served for risk management as foreign currency investment.
Risk in management of returns and exchange rates in the long term.
As the investment of solar power project In Japan, the Company has got the Power Purchase Agreement by feed in tariff at the rate of 36 Yen per kilowatt per hour for 20 years. Although the Company will recognize the revenue in yen but also repay the loan in the same currency which to hedge the exchange rate at 85 percent of project investment. As expectation that its project financing offering by financial institutions in Japan, comparing with the proportion of equity in percentage of 85:15, the profit return earned from investment as yen currency will be returned as dividend to the Company in Thailand, therefore, the Company should manage to prevent the currency risk by arranging for hedging fund of foreign exchange rate in the long term and also arrange in other method to be served for risk management as foreign currency investment.Risk in management and development projects to be completed by the due date of the contract.
As developing solar power plant in the capacity of 31.75 MW in Sendai, Miyagi, Japan and 33.66 MW in Kimitsu, Chiba, Japan, the processing period starting development until completion for electricity commercial supplying is taken 21-24 months and 29-31 months that need to manage and control the project to be completed within the term of the power purchase agreement with within the following factors.
- To provide the professional partner who expertise in solar power plant construction through the evaluation process and the criteria selected by the company.
- To manage the power plant construction and to obtain licenses to complete timely and consistent with the goals set forth by the power distribution commercially.
- To recruit Japanese official who have the expertise in project management, controlling and maintenance of power plants after electricity commercially successful.
- To manage and control the overall of projects, investment cost within the budget and also completion within the timeframe.
The Company has got the supporting by contracting partner who will support overall of project until receiving financial support from the financial institutions in Japan. Including must be taken to complete the construction in the duration of the term power and also take responsibility for maintenance of the plant after the plant completion by the fee will be paid as the success of the project in each period.
Risks in the provision of insurance coverage of the earthquake and disaster.
Risk management provider of insurance coverage of the earthquake disaster for solar projects at Sendai, Miyagi, Japan capacity of 31.75 MW and solar projects at Kimitsu, Chiba, Japan capacity of 33.66 MW. The company has hired consultants Insurance Kyoritsu Insurance Brokers of Japan Co., LTD) studies and preparation of insurance, including insurance coverage of the earthquake disaster and continuity. which was a condition to obtain financial support from the Bank of Japan.