Korea Electric Power Corporation Expects Significant Earnings Improvement in Second Half

[Asia Economy Reporter Park Jihwan] NH Investment & Securities on the 6th expressed expectations for a full-scale earnings improvement for Korea Electric Power Corporation (KEPCO) starting in the second half of the year, recommending a 'Buy' rating and setting a target price of 26,000 KRW.

Lee Minjae, a researcher at NH Investment & Securities, stated, "From the third quarter, an oil price of 30 dollars per barrel will be reflected, leading to significant cost reductions," and forecasted that "due to structural changes in electricity demand after COVID-19, there will also be an effect of increased electricity sales prices."

Analysis suggests that KEPCO's earnings improvement will begin in the second half of the year. Researcher Lee Minjae explained, "From the third quarter, the sharply fallen raw material prices will be reflected in power generation costs, resulting in substantial cost savings," adding, "Due to the SMP (System Marginal Price) determination structure, the decline in oil prices is expected to lead to a decrease in LNG power generation costs."

The structural changes in electricity demand after COVID-19 are also expected to have a positive impact on SMP determination and electricity sales prices. The researcher analyzed, "Residential electricity rates apply a progressive rate system, while industrial and general electricity rates use time-of-use pricing; thus, the changing electricity demand after COVID-19 is positive for electricity sales prices."

However, even if the low oil price situation continues, without a reform of the electricity rate system, it is pointed out that the structure will inevitably shift to operating losses starting from 2022. The researcher added, "A fundamental reform of the electricity rate system, such as a linkage system with power purchase costs, rather than a simple rate increase, is necessary."