Sector Top Picks: BHI and Woojin
The authors are analysts of Shinhan Investment Corp. They can be reached at mingu.jeong@shinhan.com and wonyong.sim@shinhan.com, respectively. -- Ed.
Nuclear power returns to favor
We initiate our coverage on the nuclear energy sector with an OVERWEIGHT view. We believe nuclear energy is ready to make a comeback in 2H22. While global power demand is increasing steadily, the full transition to renewable energy will take more time and the supply of coal and gas for electricity generation is facing disruptions due to geopolitical issues.
Against this backdrop, nuclear power is seen as a solution to accelerating the transition towards zero carbon and improving power generation efficiency. The development of small modular reactors (SMRs) has enabled expansion into the market for variable power generation that is about four times larger than that of base load power produced by large-scale nuclear reactors. We focus on the value chain of NuScale Power, the leading provider of nuclear SMR technology. Companies that supply main/auxiliary components and provide services should see their profits jump sharply once SMRs start commercial operation in earnest.
Industry-wide demand is forecast to rise on the back of: 1) innovative SMR (i-SMR) being developed by Korea Hydro & Nuclear Power (KHNP) as the next-generation reactor; 2) resumption of the construction of Sinhanul #3 and #4 reactors; 3) lifetime extensions for domestic nuclear reactors; and 4) spent nuclear fuel disposal programs. Greater focus is placed on companies that are included in the so-called “Team Korea” created by KHNP for exports of the country’s homegrown nuclear power plant technology to the UAE and those that are likely to secure orders based on core SMR technology.
Related stocks gained 473.5% on average during the first domestic nuclear energy market boom of 2008-2011. The market is set to enter the second growth phase this year based on: 1) policy support from the new government; 2) strong Korea-US alliance in nuclear power technology; 3) growth potential of SMRs; and 4) oligopolistic standing of companies that have survived the previous government’s nuclear-free energy policy. Among the beneficiaries, we recommend BHI (main/auxiliary components, spent nuclear fuel management) and Woojin (industrial measuring instruments, etc.) as our top picks. Doosan Enerbility (main components), KEPCO Engineering & Construction (reactor design), and the US-based NuScale Power are stocks of interest.