[Into the Stocks] KEPCO Raises Electricity Rates, Stock Price Remains Unmoved

Trust Declines After Two Price Increase Delays... Coal Price Rise Also Drives Cost Up, "Additional Rate Hike Needed for Profit Improvement"

[Asia Economy Reporter Song Hwajeong] Although electricity rates have increased for the first time in 8 years, the stock price reaction of Korea Electric Power Corporation (KEPCO) has been lukewarm. For earnings stabilization and stock price growth, it seems necessary to normalize electricity rates through additional increases.

As of 9:15 a.m. on the 27th, KEPCO was trading at 23,900 KRW, up 100 KRW (0.42%) from the previous day. This marks a rebound after three days. After the announcement of the fourth-quarter electricity rate hike on the 23rd, KEPCO’s intraday stock price rose to 25,500 KRW but closed lower, showing weakness for two consecutive days.

KEPCO’s stock price has fallen more than 13% since the beginning of this year. After hitting a 52-week high of 30,000 KRW intraday on December 18 last year, it has been on a downward trend. Although it recovered to the 27,000 KRW range in June, it fell again and has been trapped in a box range of 23,000 to 24,000 KRW.

The sluggish performance of KEPCO this year is due to the electricity rate hike not being properly implemented as expected. In December last year, the electricity rate system, which was previously composed of basic charges and electricity consumption charges, was restructured to separately distinguish fuel cost adjustment charges and climate environment charges, reflecting costs and external expenses. This reform led to a strong stock price for KEPCO. At that time, securities firms raised their target prices for KEPCO, expecting normalization of electricity rates this year. However, this year’s four fuel cost adjustments ended with one increase, one decrease, and two freezes. In the first quarter, the rate was reduced by 3.0 KRW per kilowatt-hour (kWh), frozen in the second and third quarters, and increased by 3.0 KRW per kWh in the fourth quarter. Despite the fourth-quarter increase, the rate remains unchanged compared to December last year. Moon Kyungwon, a researcher at Meritz Securities, said, "This electricity rate increase is the first in 8 years and the first since the implementation of the fuel cost linkage system," but added, "Given the two previous freezes that damaged the system’s credibility, it is difficult to see the significance of this single increase as substantial."

In this situation where the electricity rate hike falls short of expectations, concerns about deteriorating earnings due to rising coal prices are emerging. Coal prices have nearly doubled over the past three months due to supply disruptions in Australia and increased demand from China. Researcher Moon said, "This is a cost increase factor for KEPCO, whose coal power generation ratio was 41% as of the first half of this year," and analyzed, "Despite the electricity rate increase, KEPCO’s 12-month forward earnings forecast is likely to decline." Lee Minjae, a researcher at NH Investment & Securities, pointed out, "Despite the fourth-quarter electricity rate increase, an additional increase of 7.37 KRW per kWh is estimated to be necessary," adding, "In the first quarter of 2022, when the sharply rising coal prices, oil prices, and exchange rates will be actually applied, an additional increase of more than 20 KRW per kWh will be required." According to financial information provider FnGuide, KEPCO’s earnings consensus for the fourth quarter of this year expects sales to increase by 2.48% year-on-year to 15.0573 trillion KRW, with an operating loss of 1.6898 trillion KRW, indicating a return to deficit.

Additional electricity rate hikes are expected to be necessary for stock price and earnings improvement. Lee Jonghyung, a researcher at Kiwoom Securities, said, "Despite the fourth-quarter rate increase, there remains a fuel cost increase factor of 10.8 KRW per kWh that has not yet been reflected, and due to recent rises in coal and oil prices, additional fuel cost increases are occurring in the fourth quarter. Therefore, several more rate hikes will be necessary for KEPCO’s earnings normalization," and analyzed, "Currently, electricity rate increases are limited to a maximum of 3 KRW per kWh per quarter and 5 KRW per kWh annually. For rapid earnings normalization, additional rate hikes along with fuel cost reductions due to falling coal and oil prices must occur simultaneously."