[Click eStock] "Regional Heating Corporation, Performance Improvement Expected Due to Increased Heat Sales"

Hana Financial Investment Report

[Asia Economy Reporter Gong Byung-sun] Hana Financial Investment maintained a target price of 60,000 KRW and a 'Buy' investment rating on February 2 for Korea District Heating Corporation, expecting performance improvement considering the resolution of accumulated heat fee settlements and improved heat sales volume due to the cold wave.

Korea District Heating Corporation resolved all accumulated heat fee settlements last July by lowering city gas prices. The company explained that the performance slump in 2018-2019 was inevitable due to the reflection of excess profit settlements in the heat sector from 2015 to 2016 caused by low oil prices and frozen city gas prices. After resolving the heat fee settlements, the deficit during the off-season in the third quarter of last year also narrowed.

Sales in the fourth quarter of last year are expected to decrease by 5.2% year-on-year to 644.4 billion KRW. Although heat sales volume grew by 11.9% compared to the previous year, the system marginal price (SMP) in the electricity sector sharply dropped and sales volume decreased.

On the other hand, operating profit is expected to increase by 63% year-on-year to 46.9 billion KRW. Yoo Jae-sun, an analyst at Hana Financial Investment, explained, "The electricity sector underperformed due to decreased sales volume and falling sales prices, but the weak oil prices in the first half of last year led to a drop in liquefied natural gas (LNG) prices for power generation in the fourth quarter, acting as a cost reduction factor."

Normalization of heat fees and increased sales volume are estimated to lead to overall performance improvement. The cold wave continued in January, and February temperatures are expected to show high volatility. Analyst Yoo said, "The fourth quarter and first quarter are seasonal peak seasons when electricity and heating demand concentrate," adding, "While heat demand was increasing proportionally with the increase in reservoir water, the unusual cold wave led to performance improvement."

Furthermore, Analyst Yoo emphasized, "Korea District Heating Corporation's annual performance is especially concentrated in the first quarter," and added, "Depending on the degree of profit improvement in the fourth quarter of last year, the performance outlook for the first quarter of this year will vary, and if there are no special one-time factors this year, meaningful dividends can also be expected."