[Click eStock] "Jiyok Nanbang Gongsa, Burdensome Cost Increase"

Cost Burden Increases Due to Rising Costs Since Late Last Year
Hana Financial Investment "Maintains Target Price of 60,000 Won for Jiyok Nanbang Gongsa"

[Asia Economy Reporter Gong Byung-sun] The Korea District Heating Corporation posted a loss in the third quarter of this year due to the off-season. Furthermore, the deficit widened compared to last year as cost increases were not passed on to selling prices.

According to Hana Financial Investment on the 12th, the Korea District Heating Corporation's sales in the third quarter of this year increased by 40.60% year-on-year to 407 billion KRW, while operating losses widened to 37.5 billion KRW during the same period. Operating losses in the third quarter of last year were 13 billion KRW. However, third-quarter sales this year exceeded market consensus by 20.88%.

Even considering the off-season, the widened deficit was due to cost increases not being reflected in selling prices. Heat tariffs are linked to city gas residential tariffs, and the price trend of the main raw material, liquefied natural gas (LNG), moves together with power generation natural gas tariffs. Since the end of last year, the rising trend in cost indicators began to be reflected in actual raw material prices, significantly increasing cost burdens.

Yoo Jae-sun, a researcher at Hana Financial Investment, explained, “There are still factors for tariff reductions, and it is difficult to raise selling prices. Cost burdens can be resolved by raising prices, but due to the public utility price freeze policy, the capacity to pass on costs in the short term is considered limited.”

However, performance is expected to improve in the fourth quarter of this year and the first quarter of next year as the peak season arrives. Heat demand is expected to increase along with electricity demand, and the dispatch priority is also expected to improve. Additionally, the utilization rate of power plants is predicted to rise, according to Hana Financial Investment. Researcher Yoo said, “The cost increase this year will be a factor for tariff hikes in the heat tariff settlement in July next year, so most of the remaining tariff reduction factors will be resolved.”

Accordingly, Hana Financial Investment maintained its investment opinion of ‘Buy’ and a target price of 60,000 KRW for Korea District Heating Corporation. The closing price on the previous day was 40,100 KRW.