Top Picks: KEPCO, Doosan Enerbility, CS Wind
The authors are analysts of NH Investment & Securities. They can be reached at minjae.lee@nhqv.com and ys.jung@nhqv.com, respectively. -- Ed.
The Russia-Ukraine war has caused the prices of key commodities to skyrocket. As a result, interest in nuclear power plants (NPPs) is rising, and investment in large-scale NPPs is increasing, especially in Eastern Europe countries such as Poland and the Czech Republic. Adoption of small modular reactors (SMRs) is expected to expand to Eastern Europe after 2025. However, believing that supply-demand conditions for natural gas (including LNG) will remain unstable for now, we expect accompanying price tags to remain lofty.
Even in 2022, major countries such as the US, EU, and China have strengthened renewable energy supply policies to improve energy security and decarbonize. We expect to enter a cycle of increasing renewable energy installations from 2023 thanks to the US’s Inflation Reduction Act (IRA) and Europe’s REPowerEU policy initiative. Interest rate hikes, which have been weighing on sector share prices, are expected to ease gradually, and OP figures at global renewable energy players should resume rising once transportation and raw material cost burdens stabilize downward.
Among utility players, we like KEPCO and Doosan Enerbility. The global power market is being reorganized around large NPPs and falling raw material prices, and electricity rate hikes are also creating positive investment circumstances. We offer CS Wind as our top pick among renewable energy companies. Once detailed enforcement decrees for the US’s IRA are announced, CS Wind’s top-line growth visibility should increase further, led by its US subsidiary. Subsidy income from production in the US and expansion of the offshore wind power market represent new drivers for the firm’s earnings growth.
I. European power market changing following outbreak of war
Since the outbreak of the Russia-Ukraine war, Europe has been: 1) converting away from Russian-supplied natural gas over to LNG; 2) increasing coal use due to facility defects in French NPPs; and 3) rapidly expanding solar power plants. Natural gas remains key, and although it is difficult to solve all problems in the short term, coal prices are projected to decline over the mid/long term. Investments in renewable energy and nuclear power are expected to continue.
II. Nuclear energy era is approaching
Large-scale NPPs are scheduled to be ordered in earnest from 2023, and it is estimated that about 13 large-scale NPPs (worth about W100tn) are likely to be awarded by 2030. Light-water reactor type SMR demand should grow in earnest from 2027, three to four years later than that for large NPPs. As it takes a considerable amount of time for large NPPs and SMRs to enter full-fledged order cycles, companies with competitive advantages are to be those that: 1) can participate in projects that are expected to receive orders in 2023; 2) have cooperative arrangements so that it does not matter whether Korea or the US wins a given order; or 3) can engage in large NPP projects at the same time as SMR projects.
III. Global renewable energy push; loftier policy goals
Inflation and the Russia-Ukraine war have heightened the need for countries to improve their energy security. Major countries including the US, European countries, and China have been raising their renewable energy supply targets and strengthening their energy security policies. Korea has shown a slightly different stance by lowering its renewable energy target, but it has rolled out concrete policies for developing the hydrogen industry. In 2023, we expect the sector to enter a cycle of expanding renewable energy installations thanks to policy support. Despite product price decline, global renewable energy players’ OP figures are set to resume rising in response to increased sales volume.
IV. Top picks
We maintain a Positive stance towards the utilities and renewable energy sector. Investments in nuclear and renewable energy are expected to continue. On the large-scale NPP and SMR side, our top picks are Korea Electric Power Corporation (KEPCO) and Doosan Energy, and among wind power players our top pick is CS Wind. In particular, KEPCO should see profit figure turnaround in 2H23 thanks to electricity rate hikes and an expected drop (from 1H23) in coal prices.