Electricity Rates to Be Raised Eventually
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
This year, KEPCO and KHNP (a 100% subsidiary of KEPCO), are highly likely to win export deals. Also boding well for KEPCO is the Korean government’s nuclear power-friendly policies. We present KEPCO as our top sector pick, drawing attention to likely electricity rate hikes.
To export nuclear power plant technology for first time in 12 years; government policies looking favorable
We maintain a Buy rating and a TP of W30,000on KEPCO. The Polish and Czech Republic governments are both expected to place large-scale orders for nuclear power plants (six NPPs and two NPPs, respectively) from 2H22. Taking into account its cooperation with the US, KEPCO is highly likely to export for the first time since the UAE Baraka project 12 years ago. Of note, the firm won orders of over W20tn from the UAE project (four plants), enjoying high single-digit NP as a result.
Also boding well is the Yoon administration’s likely policy direction favoring nuclear power plants. In line, nuclear power plant utilization rate is forecast to rise. Of note, a 10%p rise in nuclear power plant utilization is equivalent to gas-fired power generation of around 22,000GWh (=25GW×24 hours×365 days×10%), which should translate into a W3.3tn reduction (based on SMP of W150) in power purchasing costs. Building a new nuclear power plant could also be reviewed given summer season reserve ratio issues. Major events for the firm in 2H22 are to include: 1) a decision on construction resumption for Shin Hanul #3 and #4; 2) nuclear power plant project biddings to be held by Poland and the Czech Republic; 3) summer season power supply issues; and 4) the development of the 10th Basic Plan for Electricity Supply and Demand.
Electricity rates to be raised eventually amid absence of negatives
In 2022, KEPCO is forecast to book operating losses of W25tn (RR y-y), a level that is widely accepted in the market. Thus, even if the firm’s losses expand, the impact on its share price performance should be limited. Despite a likely reduction in capital at end-2022, the firm’s shares are currently trading at a P/B of 0.33x, a level that should be justified by both the Korean government’s nuclear power-friendly policies and by overseas exports.
There are some doubts in the stock market over whether electricity rate will be hiked. We note, however, that: 1) KEPCO is expected to be able to endure the large-scale losses seen in 2022 only through 2Q23; 2) the firm will have no choice but to make drastic choices such as a capital increase if it does not boost electricity rates; and 3) large-scale equipment investment is needed in order to export nuclear power plants and to expand the use of renewable energy.