The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. -- Ed.
Preventative maintenance schedules have been extended for Hanbit #3 & #4. Also of concern, utilization rates at CPPs will likely drop further on reinforced ESG management. But, remaining valid in our view are expectations towards: 1) earnings improvement from 1Q20; 2) test operations at Shin Hanul #1 within 2020; and 3) electricity rate system reform.
Risk factors: Extended maintenance at Hanbit #3 & #4; reinforced ESG management
Originally scheduled to wrap up on Feb 25 and 29, preventative maintenance at Hanbit #3 & #4 has been extended to May 4 (Hanbit #3) and Sep 30 (Hanbit #4). As of today, Hanbit #3 and Hanbit #4 have been under maintenance for 660 days and 1,018 days, respectively. However, assuming further delays, we now do not expect maintenance work at Hanbit #3 to be completed until September. Accordingly, we downwardly adjust our 2020 utilization rate forecast for nuclear power plants (NPPs) from 82% to 80%.
Reflecting: 1) cuts to our utilization rate estimates for coal power plants (CPPs) and NPPs of 4%p and 2%p, respectively; 2) a US$1/bbl lowering in our 2020 Dubai crude price projection, we downwardly adjust our 2020 OP estimate for KEPCO from W3.5tn to W3.0tn. The drop in our CPP utilization rate estimate was prompted by the firm’s ESG management efforts to cope with environmental issues. For reference, we estimate that: 1) a 1%p decline in the NPP utilization rate translates into a W0.2tn fall in OP; and 2) a 1%p reduction in the CPP utilization rate leads to a W0.1tn narrowing in OP.
Momentum factors: Earnings growth (1H20), test of operations of Shin Hanul #1 (2H20), and electricity rate reforms
We adhere to a Buy rating and TP of W37,500. Despite downward revisions to our 2020 earnings forecasts, we believe that KEPCO’s earnings will improve in 1H20 on y-y basis thanks to: 1) a likely recovery in its NPP utilization rate to the low-80% range; and 2) expectations that Shin Hanul #1 will conduct a test run in 2H20. Also positive, electricity rate reform efforts should gain force after the general election in April. In order to respond to emerging environmental issues, the government is expected to outline electricity rate reforms in the 9th Basic Plan for Long-term Electricity Supply and Demand. Construction at Shin Hanul #1 and Shin Hanul #2 (capacity of 1,400MW, respectively) is scheduled to finish in Oct 2020 and Aug 2021, respectively, and fuel loading is expected to take place at Shin Hanul #1 this coming April, with test operations slated to take place during 2H20. The construction progress rate for Shin Hanul #1 stood at 98.87% as of end-2019.