Tianjin Case Study
Advanced Corporate
Case 2 – Tianjin Plastics
Executive Summary
Although business risk is low due to contractual obligations, and so is financing risk (despite high debt levels), Tianjin Plastics project carries material currency risk, both for its cash flows as well as dollar-profitability of Maple, the main sponsor. However, this should not turn the project unprofitable. Broadly defined political/country risk must be considered and accepted by Maple, if project is to happen. Hedge possibilities for those two risk categories are limited. We recommend going on with the investment – NPV for Maple is around $ 12 Mio assuming constant RMB/USD rate, and remains positive under all plausible FX scenarios. On the basis of profitability considerations, we reject full Rmb financing option. With some reservations, we support back-to-back deal with Wintel.
Introduction. Project’s Risk Assessment.
While analyzing Tianjin Plastics project, we were mainly using capital budgeting tools, in particular the Net Present Value concept, applying it from the equityholder (Maple Energy) point of view. In short, we obtained cashflows for each year as Operating Margin net Interest Expenses net Taxes, corrected for formerly deducted depreciation (non-cash expense) and not included so far principal debt repayments (cash outflows, although no income statement event). The cash flows are discounted at the rate of 17%, which is explicitly mentioned by Maple as expected return and as such approximates the cost of equity. It exceeds Maple’s hurdle rate by 2 p.p., which should already be perceived as adjustment for general projects risk (see section: Conutry/Political Risk). We account for Maple’s initial outlay of $8,085Mio. The project has no salvation value – at the end of operating it is passed to Chinese authorities and no equity can be repatriated.
-5759451062355We use the risk matrix approach to assess the materiality of various risks associated with the project, with both business
Case 2 – Tianjin Plastics
Executive Summary
Although business risk is low due to contractual obligations, and so is financing risk (despite high debt levels), Tianjin Plastics project carries material currency risk, both for its cash flows as well as dollar-profitability of Maple, the main sponsor. However, this should not turn the project unprofitable. Broadly defined political/country risk must be considered and accepted by Maple, if project is to happen. Hedge possibilities for those two risk categories are limited. We recommend going on with the investment – NPV for Maple is around $ 12 Mio assuming constant RMB/USD rate, and remains positive under all plausible FX scenarios. On the basis of profitability considerations, we reject full Rmb financing option. With some reservations, we support back-to-back deal with Wintel.
Introduction. Project’s Risk Assessment.
While analyzing Tianjin Plastics project, we were mainly using capital budgeting tools, in particular the Net Present Value concept, applying it from the equityholder (Maple Energy) point of view. In short, we obtained cashflows for each year as Operating Margin net Interest Expenses net Taxes, corrected for formerly deducted depreciation (non-cash expense) and not included so far principal debt repayments (cash outflows, although no income statement event). The cash flows are discounted at the rate of 17%, which is explicitly mentioned by Maple as expected return and as such approximates the cost of equity. It exceeds Maple’s hurdle rate by 2 p.p., which should already be perceived as adjustment for general projects risk (see section: Conutry/Political Risk). We account for Maple’s initial outlay of $8,085Mio. The project has no salvation value – at the end of operating it is passed to Chinese authorities and no equity can be repatriated.
-5759451062355We use the risk matrix approach to assess the materiality of various risks associated with the project, with both business
References: Dailami, M., & Leipziger, D., Infrastructure Project Finance and Capital Flows: A new perspective. Economic Development Institute, 1997. Fight A., Introduction to Project Finance, Elsevier, 2005, Ch. 2 - Understanding Key Project Risks, (pp. 45-80). Lessard Donald R., Incorporating Country Risk in the Valuation of Offshore Projects, Journal of Applied Corporate Finance, 9 (Fall), pp. 52-63, 1996. Resnick B., Eun Ch., International Financial Management, Third Edition, The McGraw-Hill, 2004, ch. 17.