The author is an analyst of NH Investment & Securities. He can be reached at [email protected]. –Ed.
Favorable investment points remaining intact for KEPCO include both the likely adjustment of Korea’s electricity rate likely to an appropriate level and the firm’s competitive advantage in nuclear power plant construction markets that are closed to its Russian and Chinese rivals. The current won-dollar exchange rate and high raw material prices both justify an electricity rate hike. We maintain KEPCO as our sector top pick.
Favorable investment points remain intact
We maintain a Buy rating and a TP of W30,000 on KEPCO. It is looking increasingly likely that domestic electricity rates will be hiked to an appropriate level in light of: 1) electricity supply-demand issues amid a severe summer heat wave; 2) the firm’s plans to bid for nuclear power plant projects in Poland and the Czech Republic; 3) continued efforts to raise capital between KEPCO and its power generation subsidiaries; and 4) a widening electricity rate gap compared to Europe. With competition in the overseas nuclear power plant construction market in a situation where Russia and China have become unable to bid in some regions (including Eastern Europe), we see a competitive advantage for KEPCO. Moreover, the possibility of forming a consortium with the US is still strong. A supply-demand imbalance for coal (incurred by continuing abnormal temperatures around the world and ongoing Russia risk) is likely to continue through end-2022. But, with power generation demand expected to decrease from 1Q23, related issues should alleviate to some extent.
Amplified cost burden to continue until end-1H23
We expect KEPCO to post consolidated 2Q22 sales of W14.4tn (+7% yy) and operating losses of W4.6tn (RR yy), roughly in line with consensus. We see the main reason for the likely large-scale operating loss figure as being the heavy difference between the average electricity sales unit price and the average electricity wholesale unit price. In detail, the unit price for electricity sales in 2Q22 was W110/kWh and the wholesale electricity price was W156/kWh. Looking at 2Q22 expenses, we estimate fuel costs of W5.8tn (+49% yy) and electricity purchase costs of W7.2tn (66% yy).
We estimate 1H22 operating losses of W12.4tn, believing that the amplified expense burden will continue pushing down operating income into red until end-1H23. In general, LNG and coal imported under long-term contracts have a time lag of 4~6 months, so raw material prices in Jul 2022 are to affect fuel costs in Jan 2023. With fossil fuel prices likely to remain lofty through end-2022 , related impacts are to stay in play until end-1H23.
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