Winds blowing in favor for us in 2012.

Year 2012 with full vigor and conviction.

Year 2011 was a difficult one.  After a solid start the SET index dwindled only to bounce back by year end.  My DEMCO enthusiasm was too premature and then besides most all shares drifted lower after the EU flared up and Thailand’s worst floods in 65 years,  all as happened in the final months of this year.   The March 11 Japan tsunami started with the worst earthquake ever recorded in human history.  It disrupted and in some cased erased supply chains across the entire region with under-reported duress.  All in all it’s a year I happily have behind me. 

This time 12 months ago I sensed the market would be forward looking as markets should be and often are  (recognizing this is less so in Thailand) , and so see DEMCO superb earnings prospects in the coming by 3 Q as the trigger event.   Alas, DEMCO took understandably longer to get the Wind project started (August) and the market here is as ever in-mature in that it only sees value,  after it happened.  At least so too often with smaller cap stocks.    Yes,  the SET is forever evolving but not necessarily for the better! 

Then again, maybe more then some just think the wind story is overblown;  -or just don’t believe it? Or worry about the adder rate etc..  Since starting this mega billion Baht wind project only one broker wrote about DEMCO.  Before that Bualuang wrongly so claimed the project was delayed.   Regardless the market price of this core choice performed below expectation.  Surely with more then a few of late I was not able to successfully anticipate price movements but at least PYLON is soaring which give Demco warrant holders some relief, as I mentioned to own both.   At the same time I avoided a few disasters AJ and PTL not withstanding.  But TTCL keeps doing well.

The SET index as a whole recovered smartly in the final weeks of this year and it was wrong to bail out either on the Thai floods or due to the EU financial crisis, at least so far, as the market seems to want to hold up above 1000 on the SET index.

As we all know, over the past year I have visited, written, analyzed allot on DEMCO (3.40), which along with PYLON,  remain my two top picks for 2012, stated here for members for many weeks. 

After delays in getting their project off the ground, DEMCO is now in full swing constructing their mega wind farms and more this coming year.  Solar farms also features in DEMCO’s business mix.   As with PYLON, revenues and earnings appear/assure for both very promising to say the least for the next 4-6 quarters.  Not least, because backlogs are increasing regularly.  My 2 core choices are in the right sector at the right time. 

Here is what I posted to the Nation and BKK Post today after reading all the semi negative broker reports on SET movements for next year.

There are many sectors in Thailand which have nothing to do with tourism nor the EU crisis, nor exports.  Are brokers here attuned to that?  Like Thai infrastructure plays or green energy which will grow regardless of EU/USA troubles.   The "problem" as always is that stocks in these sectors command often smaller cap. status and so are off the radar screens of institutions and the dominant day traders; but not the rational individual investors which are a silent majority.

The floods have not affected DEMCO except in a mild positive business way this due to jobs received in reconstructing flooded electrical systems for industrial parks.  (DEMCO is drifting of late likely only due to the up coming Warrant #3 conversion.  Conversion price is 2.69 and the expiration to convert  end of January, and so there is likely some selling pressure just to not miss them).

I reported in a recent writing that the majority shareholders will likely convert before year in end -so in a voted of confidence. This has not happened as I was told.  I remain convinced that news of warrant conversion along with stating Huaboyng #2 project has started are  imminent positive announcements.  In the meantime I view this weakness in the stock as likely the last opportunity to get in at an true investor bargain.  I predict that when the major shareholders announce their warrant conversion this stock will bottom.  

Since the above, I just spoke to them yesterday and was told 40% of the first project Huaboyng #3  is already completed and 5% of the second phase done for Huyabong #2.   The company also told me just yesterday that the majority shareholders will be converting their warrants into new shares (60+ mill) and that they expect 80 to 90% of all warrants to be converted by end of January ’12.

Today I review some on the macro aspects of Wind/green energy – to share why I remain at this time a fan of wind energy in Thailand as my favorite company is doing it. 

      “The prospects for electric power in the 21th century can be summarized in a single word: growth.  Electricity consumption both world wide and in the US,  has doubled  since 1980. It is expected  on global basis to about double again, by 2030.” * 

       And China literally doubled its electric power system between 2006 and 2010. And this is likely to double yet again in just a few years.  Thailand’s electricity consumption is growing 6-7% per year, this means that total electric power consumed here will double within just 10-12 years.  This requires huge investment in new capacity and we know it will not come from Nuclear whose renaissance has been derailed.

     Coal is by far the fuel now dominantly used to generate electricity around the world and there is plenty of it,  but it is also the most polluting!  Reasonable estimates today are that if you incorporate the cost of pollution due to CCS/Co2 emissions from coal,  its cost would rise the price of coal generated power,  by 80 to 100%.*  Hence in these times of global warming and increasing grave pollutions concerns,  it grossly and irresponsibly misleading to believe coal remains the cheaper alternative.  In year 2012 more then anytime before the world will wake up and must do something about that. I think that time has come.

The new frontier is Cleantech. 

The energy sector has never seen before such a strong focus and drive on innovation and technological change which is lead by the renewable as is spelled out in the excellent book quoted below.

Can today’s 65 trillion US$ world economy be sure to have its energy needs met, when it becomes a 130 trillion economy in 2 decades?   Presently oil,  coal and natural gas provide over 80% of the world’s energy,  it is obvious this mix will/must change over the medium term.  After dragging their feet, the emphasis on energy innovation along with venture capital, across the energy spectrum, is now greater now ever before.   The last time renewables got derailed was due to the global price of oil collapsing, this is very unlikely to happen now or in the near future.  

“Wind energy is becoming the largest and fastest growing sources of renewable energy in the world today.”  *

In the US alone power from wind has increased ten fold in the past 10 years -and between 2005 and 2010 new wind energy  capacity there grew by 40%, a year.   In Germany, wind accounts for about 60% of the total renewable  capacity added over the past decade.   Surely Wind energy makes sense and will keep commanding adder tariffs due to its non-polluting status.

China was a latecomer to wind but then leapfrogged to the top in terms of adding new capacity and so will account for the largest growth in wind generation for many future years to come.  Thailand often follows trends from China.

In 2009 worldwide sales of wind generating equipment totaled 64 Billion US$, now that is a huge amount of money -and puts to rest any skeptic.   Wind so has reached a stage where it is no longer really an “alternative”:  it is becoming a “conventional” energy source increasingly visible on the landscape of electric power.*    Wind energy is costly to build and put in place, as it has plenty of headaches and obstacles to overcome, such as land access and transmission lines etc…, but once in place it needs little maintenance and no fuel to power it.  Most of all, its totally clean.

As seen, Wind energy is a big business,  yet it is still small in the total power usage matrix, accounting for just 2% of total electricity generated in the US.  Pure and raw wind energy is still expensive but its costs are declining rapidly.  Variable speed technology  (VST)  is the most important technical advancement in the industry since the beginning.   VPT enables turbines to adjust to very low and very high wind speeds -and yet continue to produce steady levels of electricity so helping contributing to the stability of the overall grid.  “A standard turbine today turns out a hundred times as much electricity as one did in 1980”.**  

However,  offshore wind energy is estimated to be 2-3 times more expensive and so is in most instances not yet competitive. 

Some countries are more open to wind then others.  Germany has been very much so,  Britain far less.  While turbines have killed birds, cars and high rise buildings kill far, far more every year,  then any modern wind mills.  Thailand with its 10 year feeder tariff rebate of 3.5 Baht per unit, is bound to make its mark starting in 3Q. of 2012, when the largest wind farm in this region will be started through DEMCO and AELOUS .  This multibillion Baht project has already started in full this year with 2 major Electric Utilities, (one from Japan and the other here in Thailand) as co-investors.

 Wind “It is one alternative that can clearly deliver today.”  *

Best Regards and Happy New Year to all Members for 2012.

Paul A. Renaud.

www.thaistocks.com

*  “The Quest,  Energy, Security and the Remaking of the Modern World”  By Daniel Yergin, winner of the Pulitzer Price. (Penguin Books, 2011)  

** This quote on Page 604 of “The Quest,  Energy, Security and the Remaking of the Modern World”  ”  By Daniel Yergin, winner of the Pulitzer Price. (Penguin Books, 2011)

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Good news as the company just announced the second phase on December 29, 2011 at 2 PM.  

(Translation)

DEMCO 064/2011 December 29, 2011

Subject : To report the progress of the Company's investment in Aeolus Power Co., Ltd.

To : President, The Stock Exchange of Thailand

Ref : The resolutions of the Extraordinary General Meeting of Shareholders No.   1/2011 held on 27 June 2011

Demco Public Company Limited (the Company) would like to inform that the   third subscribing for 6,470,270 new ordinary shares in Aeolus Power Co., Ltd. which are   equal to 5.85 per cent. of its registered capital with the share price of Baht 37 each is   amount Baht 239,399,990.  

The company entered into an agreement relating to the Company's acquisition of shares in Aeolus on July 26, 2011 and piad for the share subscription, 3 times totaling  14.96 percent.  

The result of the investment fulfill the financial close condition for the West Huay Bong 3 and West Huay Bong 2 project. Therefore, the company can start construction and realize the revenue since August 1, 2011 and the West Huay Bong 3 project will be finished in October 2012 and the West Huay Bong 2 project will be finished in December 2012

Please be informed accordingly.

Yours Faithfully,  

(Mr.Paitoon Gumchai)

Company’s Secretary

Authorized to sign on behalf of the company

Huaybong 2 Wind-Turbine Power Project Description:

Huaybong 2 Wind-Turbine Power Project is developed and operated by K.R. Two Co., Ltd.  The project has installed capacity of 103.5 megawatts and values at Baht 6,100 million approximately.  It is located in Nakorn Ratchasima Province near Huaybong 3 Wind-Turbine Power Project and has  been awarded a non-firm power purchase agreement for small power producer from the Electricity  Generating Authority of Thailand with 10-year subsidy of Baht 3.50 per unit adder from the Power Department Fund Management Division, Office of the Energy Regulatory Commission. The  commercial operations are expected by 2013.