Consolidated Electric Power Asia

Abstract

The case is set in Asia. It focuses on the valuation of a company which builds, operates, and then transfers power plants. The valuation problem is to value the projects in place and the estimate how much of the current stock price reflects projects in place and how much is attributable to anticipated future growth. Ideally, the case can be used as a transition between valuation of free cash flows with WACC and valuation equity cash flows. The case also provides an overview of the relationship between infrastructure needs and economic growth. Excerpt UVA-F-1123 Rev. Jan. 29, 2010 HKUST Hong Kong University of Science and Technology CONSOLIDATED ELECTRIC POWER ASIA Winnie Chin was sitting at her desk on July 7, 1994, as the market closed. The closing price of Consolidated Electric Power Asia (CEPA) was (Hong Kong dollar) HKD12.00. Chin had been a research analyst for about five years but had only recently been assigned to cover CEPA. Most analysts projected tremendous growth in the demand for electric power in Asia and many believed that CEPA was uniquely positioned to benefit from this growth. A recent lack of brownouts and blackouts in the Philippines was attracting a lot of media attention. For the past few years, four- to six-hour blackouts had plagued Metro Manila during June and July. This year, thanks to cooler weather and power generation facilities provided by CEPA (including generators mounted on barges), things had improved dramatically. That improvement had focused attention on CEPA's ability to provide unique solutions to the region's growing energy needs. Chin's first research report on CEPA was due by the end of the week. Thus, her report and recommendation would be very timely. Chin needed to focus on the extent to which CEPA's current stock price reflected future expectations and whether those expectations were reasonable. She believed that these issues would be the key variables in her recommendation to sell, hold, or buy. Asia's Power Generation Needs . . .