Top Pick: KEPCO
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
The aftermath from suspension of the fuel cost pass-through system continues to be felt. Considering rising international commodity prices, electricity prices should be raised by W3.0 per kWh in both 3Q21 and 4Q21; however, if uncertainties stemming from Covid-19 persist, rate hikes are likely to be withheld, continuing suspension of the fuel cost pass-through system. KEPCO and its power generation subsidiaries continue to announce plans to invest in renewable energy. However, based on current electricity prices, it will be difficult to cover related facility investment based only on cash flows from operating activities. Although investment can be financed through the issuance of green bonds, firms’ financial conditions will inevitably deteriorate due to increases in debt-to-equity ratios and net debt.
Interest in nuclear power remains in play. According to media reports, discussions are underway regarding the classification of nuclear power as green investment in the EU. Having requested analysis from an advisory agency, the EU will make a final decision after three months of review. Pressure to raise the portion of renewable energy continues to rise; however, ESSs and hydrogen still have technical and economic limitations regarding the large-scale storage of renewable energy. Globally, nuclear power is expected to play a role in resolving such issues. From 2H21, discussions on nuclear phase-out policy, along with real estate policy, are to take place ahead of Korea’s presidential election.
Top pick: KEPCO (015760.KS); TP of W33,000
In our view, KEPCO’s consolidated debt-to-equity ratio of 190% (+3%p q-q) and non-consolidated debt-to-equity ratio of 117% (+5%p q-q) as of 1Q21 are indicative of deteriorating business conditions. Unlike its power generation subsidiaries that have made large investments in renewable energy and fossil fuel power generation facilities, KEPCO has carried out a relatively limited amount of such investment. Accordingly, any deterioration in KEPCO’s non-consolidated financial structure appears significant.
For reference, KEPCO’s power generation subsidiaries, excluding Korea East-West Power and Korea South-East Power, have a debt-to-equity ratio of over 150%, making active investment in renewable energy facilities difficult. As such firms are in charge of most offshore wind power projects in Korea, swift progress is unlikely.
KEPCO logged consolidated 1Q21 sales of W15.1tn (-0.1% y-y) and OP of W0.6tn (+32.8 y-y), with OP arriving slightly short of consensus. Such results are attributable to: 1) rising LNG power generation costs amid a cold snap; and 2) sluggish coal power utilization rates in January and February. While electricity rates should have climbed in 2Q21 under the fuel cost pass-through system, no rate hikes have been made. With justification for electricity rate increase to be in play again in 3Q21, we advise monitoring (around mid-June) whether the fuel cost pass-through system will regain its effectiveness.