Chapter 5

Company Strategy Analysis

5.1 Corporate Strategy Analysis

YTL Power first mover tactics in the utility business is capitalizing on Malaysia
nationwide blackout that occurred on 29 September 1992. This blackout left Malaysia
without electricity for two days and has exposed flaws in power generation policies of
utility giant Tenaga Nasional Berhad (TNB), hence damaging country’s attractiveness to
foreign manufacturer. In the wake of this incident, the government moved to allow
independent power producers (IPP) to enter the electricity-generation business. YTL
Power captured this opportunity and started building two power stations, one in Pasir
Gudang, Johor and another one in Paka, Terrenganu, which were successfully
commission in year 1995. YTL Power is between the IPPs that signed the first generation
Power Purchased Agreement (PPA) which has the most ‘favorable’ contract terms
between other generation PPA in term of capacity payment, energy payment and FDI
(Failure to comply Dispatch Instruction). Being the first mover in the IPP power
generation industry, YTL Power had definitely secured a good deal in the PPA which
will guarantee its revenue for contract tenure of 21 years. This is the timing tactic that
YTL Power had carried out, making it as competitive advantage among other IPPs. As
part of the power consolidated industry, which mainly dominated by only few IPP players
such as Genting Sanyen, Powertek, Sime Darby and Malakoff, YTL Power competition
forces are relatively low.

Asian Financial Crisis happened in year 1997 where majority Asian’s countries were
affected. According to International Monetary Fund (IMF) the key factor for this crisis is
the 1extended maintenance of pegged exchange rates, sometimes at unsustainable levels
and a lack of enforcement of prudential rules and insufficient supervision of financial
systems. It was an irony where YTL Power actually exercised it’s listing on Kuala
Lumpur Stock Exchange (KLSE), now known as Bursa Malaysia, during this crisis stage.
1
http://www.imf.org/external/pubs/ft/fandd/1998/06/imfstaff.htm
The market response is low and it is not a good time to get investor to buy IPO share. On
the other hand, it could be YTL Power strategy to raise fund for its acquisition plan for
ElectraNet as part of its concentric diversification. YTL Power has an indirect investment
of 33.5% in ElectraNet Pty Ltd. ElectraNet owns, operates and maintains South
Australia’s 5,566 km of high voltage transmission lines under a 200-year power
transmission concession. Learning from Asian financial crisis and understanding the need
to diversify its business as not to confined only in Malaysia, YTL Power started to
explore international business. This will be its premier abroad investment in South
Australia and also its first acquisition for organization growth strategy. International
business will definitely create jeopardy to YTL Power but after assessment that 2South
Australia main industry is manufacturing which contribute 15% of the state's Gross State
Product (GSP) and playing a large part in exports, it bet on this calculated risk. The
investment proved right as 3ElectraNet continued to perform well during the year by
maintaining transmission circuit availability in excess of 99%. In this context, YTL
Power had applied its strength to avoid threats from financial crisis by diversifying its
portfolio to international market to set as a buffer or contingency, if Asian financial crisis
happens again.

The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the
Enron Corporation, an American energy company based in Houston, Texas and the
termination of Arthur Andersen, which was one of the five largest audit and accountancy
partnerships in the world. Besides being the largest bankruptcy reorganization in
American history at that time, Enron undoubtedly is the biggest audit failure4. What do
Enron bankruptcy has to do with YTL Power? They are very much relevant indeed as
YTL Power 5acquire 100% stake in Wessex Water from Enron with £1.24billion in year
2002, a year after Enron filed bankruptcy. YTL Power used its timing tactic for its
growth strategy and this time they explore the international business to United Kingdom
(UK). This acquisition had accounted to the largest contribution for the organization
2
http://en.wikipedia.org/wiki/South_Australia
3
YTL Power Annual Report 2009
4
http://en.wikipedia.org/wiki/Enron_scandal
5
HWANGDBS Vickers Malaysia Equity Research on YTLPOWER
growth which apportions 74.4% of total earning before interest and tax (EBIT). Wessex
Water provides water services to 1.2 million customers and sewerage facilities to 2.5
million customers over an area of about 10,000 sq km in the south west of England. It
operates under a 25-year license contracted by the UK government. Wessex’s operation
ranges from collecting and treating raw water, and storing and transporting high quality
drinking water to households and businesses all around the region. Wessex Water also
responsible for collecting, treating and disposing of sewerage safely back to the
environment. YTL Power growth strategy by obtaining Wessex Water due to Enron
bankruptcy has given the organization a competitive advantage as Wessex Water is
known as one of the best run companies in the water industry and this has created value
the company’s shareholders. Wessex performance has also contributed to YTL Power’s
mother company success as YTL Corp. attained its highest ever profits and revenue in
year 2009. In less than a year, Wessex Water has contributed substantially to the Group’s
profitability. In brief, this acquisition has set the company pace on dynamic growth. YTL
Power ability to react towards global market opportunity has proved the organization
flexibility in adopting to ever-changing environment and situation.

Ever since the taking over of Wessex Water, YTL Power is getting aggressive with
acquisition-driven growth strategy. In 2004, the company’s expansion plan is acquiring
PT Jawa which owns a 1220MW power station at the Paiton Power Generation Complex
in Jawa. YTL Power owned 35% of PT Jawa. PT Jawa is the second largest IPP in
Indonesia and has a 30-year PPA with PT PLN (Persero), the state-owned electric utility
company. PT Jawa posted the best ever performance in 2006 with high availability of
94.8% compared to 83% contracted under the PPA. YTL Power acquisition plan is
consistent with its concentric diversification growth strategy with focus on utility related
business. The company has scanned the Indonesia societal environment especially
political aspect as the acquisition is carried out after the general election of Indonesia.
After the general election, the political scenario is back to on track and the currency is
back stable. YTL Power had also acknowledge that 6Jakarta Stock Exchange has been
one of the best performing in the region and this proved positive economic growth in

6
http://www.ytl.com.my/getnews.asp?newsid=14375
Indonesia which is good for power generation business. YTL Power careful scanning on
the international societal environment has proved rewarding as PT Jawa posted a strong
operational performance with 7average availability of 90.6%, well in excess of the 83%
rate contracted under its PPA.

The recent global financial crisis due to subprime mortgage problem has cause
international depression and big player likes Lehman Brothers had filed bankruptcy.
Regardless on this global issue, YTL Power continue to progress with its legacy
performance of positive annual growth. The company 2009 revenue jumped a whooping
43.6% from its previous year RM4.2billion had been mainly contributed by its latest
acquisition of PowerSeraya Ltd, Singapore, 2nd largest power utility in Singapore
injected total generation capacity of 3100MW or 25% of Singapore’s power into the grid.
The main activities of PowerSeraya are those relating to the full value chain involved in
the generation of electricity.8 These include the trading of physical fuels and trading of
fuel-related derivative instruments, tank leasing activities and sale of by-products from
the electricity generation process. In this S$3.8 billion acquisition from Temasik
Holdings Ltd, YTL Power also have to absorbed S$200million of the debt which indicate
that the Singapore power company is not performing well. 9 YTL Power had strategize
this concentric diversification to further growing its core businesses. This acquisition
strategy is also to foresee its upcoming Malaysia PPA expiring in year 2015. YTL Power
knew that the renewal of PPA will not stomp the similar attractive deal as the previous
contract and possibility this would be its exit strategy to shift business to other more
potential countries.
Surviving in an ever-changing environment require careful scanning on its environment
and definitely formulating relevant strategy to support the organization’s objectives,
sustainability, stability and growth. The acquisition of prime asset such as Wessex Water,
PowerSeraya, Electranet and PT Jawa has proven to enhance YTL Power’s overall
financial performance. The positive financial growth has given its shareholder a smile on
7
YTL Power Annual Report 2009
8
http://www.lexiconpartners.com/uploads/YTLPoweracquiresPowerSerayaLimitied.pdf
9
http://biz.thestar.com.my/news/story.asp?file=/2008/12/3/business/2705784&sec=business
their face and this is definitely a key success factor to ensure the organization’s survival.
Next chapter will explore the new strategy of YTL Power to adopt 4G WIFI broadband
technology as its conglomerate diversification strategy.

5.2 “4G” as Conglomerate Diversification Strategy

YTL Power has taken another step to invest in 4G technology as part of its conglomerate
diversification strategy in Malaysia. 4G refers to the fourth generation of cellular wireless
standards. It is a successor to 3G and 2G standards, with the aim to provide a wide range
of data rates up to ultra-broadband Internet access to mobile as well as stationary users.
Through strategic alliances with industry-leading business partners including Cisco,
Clearwire and Samsung, YTL Communications (subsidiaries of YTL Power) is in the
midst of building a complete 4G wireless ecosystem in Malaysia, utilizing the 2.3GHz
spectrum. 10 This will include the 4G Innovation Network, a hub where developers can
build and test applications and solutions that takes advantage of 4G technology. The 4G
Innovation Network will be linked to Clearwire's innovation network in Silicon Valley,
making it easy for entrepreneurs and developers to explore opportunities for
commercialization in Malaysia and beyond. YTL Communications is expected to roll out
its nationwide mobile Internet network in 2010. This conglomerate diversification growth
strategy is inline with the global thirst for high-speed data transmission. The effectiveness
of this strategy is yet to be assessed but looking at YTL Power and YTL corporation
strong fundamental in providing world class products and services at competitive prices;
4G technology roll- out in Malaysia will definitely bear good fruits.
Business and functional strategy is also important to ensure long term sustainability of a
company. Let’s take a look at the business and functional strategy of YTL Power on the
following chapter.

5.3 Business and Functional Strategy

10
http://www.ytlpowerinternational.com/our_business/comms.asp?catName=our_business
At business level, YTL Power had adopted two main strategies, namely low cost
leadership and focus on niche, to compete in local and international market. Quoting its
mother company’s mission, YTL Corporation, to achieve “World Class Products and
Services at Competitive Prices”, YTL Power has managed to sell power profitably at the
most competitive price in the world (at 3.8 US cents per kw/h, a lower average-per-
kilowatt than anywhere in the United States). 11 This result has proved that YTL Power
adept low cost leadership in its power generation business. Operating in international
PPA environment can be a big challenge to any energy players as the machine must
operate in efficient manner while satisfying strict PPA requirements. This can only be
achieved with well-in-place business processes. The next YTL Power’s business strategy
is focus on niche. Unlike other industries, a utility industry is considered as a niche
market because of the high initial capital requirement that has served as a high entry
barrier for any new entrant. The cost to build a typical 100MW Gas Turbine power
generator can go up to RM1billion. In focusing on its core investment in utility business,
YTL Power has fair well with eye-catching growing revenue and profitability.

While at functional level, YTL Power had demonstrated a positive approach on its
operational and financial perspective. The company had adopted Reliability Centered
Maintenance (RCM) in achieving its maintenance excellence. By implementing RCM,
their operation and maintenance philosophy is not based on OEM recommendations. 12
The driving factor for this is based on research findings from engineering experts that for
certain equipment unnecessary dismantling and reassembly of parts during maintenance,
incurs the bathtub curve of infant mortality rate. Thus, the maintenance work can be
optimized as not to overspend on additional activities while ensuring the machine is
running without breakdown. Conversely, YTL Power’s financial strategy is always allied
with its international growth strategy. The company has a successful achievement track
record with acquisitions of Wessex, PT Jawa and ElectraNet at attractive prices, resulting
in commendable three-year FY05-07 net profit of 28%. YTL Power is actively looking
out for new opportunities, focusing on regulated assets. 13 Given the organization’s gross
11
http://www.ytl.com.my
12
http://www.ytlps.com
13
HWANGDBS Vickers Malaysia Equity Research on YTLPOWER – 30 Jan 2008
cash of RM6b, there is a tremendous opportunity for YTL Power to acquire regulated
assets in the region. The company has proposed to raise RM2.2b bond in November 07 to
refinance existing debts and to fund potential new acquisition. The new acquisitions will
be funded mostly by non-recourse project financing loans.

The above business and functional strategy has served a good supplement for YTL Power
international expansion plan. Its acquisition-driven growth can only be realized with
efficient business process in place and effective functional activities. Besides adopting
business and functional strategy, YTL Power has also actively involved in corporate
social responsibility (CSR) activities. The following chapter will disclose how CSR can
serve as a strategy to YTL Power.

5.4 Corporate Social Responsibility as Strategy

Despite YTL Power aggressive oversea venture, the organization also practices corporate
social responsibility (CSR) as part of its sustainability plan. As environmental issues
increasingly affect every citizen, YTL Power believes that they have a duty to ensure that
broader strategies for development and profitability are carried out in a sustainable
manner.14 Driven by this commitment, the organization has often exceeded environmental
legislative requirements. They continue to impart this accountability into each of our
subsidiaries to develop our businesses responsibly to protect the environment and the
wider communities in which they operate. According to Caroll’s four responsibilities of
business, ethical and discretionary activities are categorized as the social responsibilities
of an organization. Satisfying on economic and legal aspect only is not sufficient to
ensure the long run of an organization. Growing concern on environmental issue has
directly affected the organization strategic decisions. Pressures from its secondary
stakeholders such as the broad community and NGOs are high. After considering the
above factor, YTL Power involved fairly active in CSR related activities. For example its
subsidiary, Wessex Water, is actively involved in educational efforts around the UK to
help students and communities learn more about water conservation issues. It also

14
http://www.ytlpowerinternational.com
supports environmental initiatives such as river and canal conservation. This
sustainability strategy may not be business feasible but it will serve as a long term
investment to gain strategic advantage once UK declare its river and canal conservation
as full legal requirement in future. This strategy will also satisfy its secondary
stakeholders, hence serving as an advantage for YTL Power to sustain long term
operation in the country without many hurdles.

Understanding the rationale of YTL Power strategies in competing in current utility

business, the next question is will the company able to sustain its growth strategies while
maintaining its financial position. The following chapter will provide the insight on the
above matter.
 Chapter 6
Sustaining Growth Strategies while Maintaining Financial Position

YTL power has gained a reputation for the quality and innovativeness of its financial
management as much as for its ability to deliver successful projects in record time. They
believe that people are their key strategic asset and form the cornerstone of their growth
and success. YTL Corp has a long-standing commitment to good corporate governance
and the protection of shareholder value. This commitment has seen them achieve strong
financial results and growth in YTL Corp and its subsidiaries. As of 31 January 2010,
their market capitalisation stands at RM14.8 billion (USD4.4 billion).

Their growth strategy is centred on acquiring regulated businesses under long-term

concessions, which would yield highly predictable revenue streams and profits. So, going
by his own estimates, the vision is well within the company's capabilities. In pursuit of
this strategy, YTL power has been aggressively seeking investment opportunities abroad.
The expansion of the YTL power into other regions is hardly surprising, considering how
crowded the local power generation scene has become. There are five independent power
producers (IPPs) currently supplying Tenaga Nasional, with two more in Sabah due to
begin operations in 2005, once the country's largest-ever generator, the 2,400MW Bakun
dam, now under construction in neighbouring Sarawak, is complete. Some analysts were
speculating the only growth Malaysian power firms would be able to achieve would
come from mergers and acquisitions.

There appears to be little desire for mergers, however, with most of the operators, like
YTL power, looking to diversify and expand their operations. Most of the companies
have been concentrating on regional expansion, and YTL power is simply the most
visibly successful at reaching beyond the region to more mature markets. YTLP is one of
the few companies listed on the Bursa Malaysia that has demonstrated a steady yield and
commendable growth. YTL Power’s acquisitions over the last five years including
Wessex Water, Jawa Power and Electranet, resulted in commendable FY05-07 net profit
CAGR of 28%. YTLP has also declared average net dividend yields of 8.3% over the
past two years, thanks to a combination of cash and share distribution in specie.

The Group’s utilities division, YTL Power registered a 43.8% jump in revenue for the 12
months ended 30 June 2009 to RM6,101.9 million (US$1,743.4), due principally to the
consolidation of approximately 4 months’ results from PowerSeraya Limited. Profit
before taxation stood at RM1,352.4 million (US$386.4) for the 12 months ended 30 June
2009, with PowerSeraya contributing RM197.4 million (US$56.4) in profit before tax.

YTL Power’s net profit stood at RM625.8 million (US$178.8) for the 2009 financial year
over RM1,038.8 million (US$296.8) for the same period last year. The decrease in net
profit resulted from a one-off deferred tax charge of RM442.5 million relating to Wessex
Water Limited, the Group’s wholly-owned subsidiary in the UK, following the abolition
of industrial building allowances under the UK Finance Act 2008. The said one-off
deferred tax charge does not have an immediate effect on the Group’s cashflow and was
recognised in compliance with the application of Accounting Standard FRS 112 Income
Taxes.

Nevertheless, operational performance remained robust for the 12 months ended 30 June
2009, with the Group’s utility businesses comprising the Paka and Pasir Gudang power
stations in Malaysia, Wessex Water in the UK, P.T. Jawa Power (a 35%-owned associate
company in Indonesia) and PowerSeraya in Singapore, continuing to turn in strong
performances. Sustaining growth while ensuring positive financial position is a great
challenge to any company in current economic situation but YTL Power managed to sail
through the rough wave comfortable. Let’s take a look on what is the key success factor
for YTL Power in the following chapter.