[Click eStock] "Korea Electric Power, Expanding Deficit... Need to Reimplement Fuel Cost Linkage System"

Hana Financial Investment Report

[Asia Economy Reporter Minji Lee] Hana Financial Investment maintained its investment opinion as neutral and target stock price at 25,000 KRW on the 6th, stating that Korea Electric Power Corporation (KEPCO) is expected to see an expanded deficit due to cost burdens until the second quarter of this year.

KEPCO's performance in the fourth quarter of last year is expected to fall significantly short of market expectations. Sales are projected to increase by 7.9% year-on-year to 15.8 trillion KRW, driven by increased electricity sales due to an early cold snap and the base effect of COVID-19. An operating loss of 6.2 trillion KRW is forecasted, indicating a return to deficit.

Researcher Jaeseon Yoo of Hana Financial Investment said, "Due to the rise in crude oil, coal, Asian LNG prices, and exchange rates, the System Marginal Price (SMP) for power purchases remains high, making increases in fuel and purchased power costs inevitable." He added, "Although the nuclear utilization rate has been maintained at a high level since December, which is positive, it is somewhat insufficient to alleviate the cost burden." If raw material prices do not fall and fuel cost adjustment rates are not increased, the deficit is expected to continue until the fourth quarter of next year.

With the disclosure of the total cost based on last year's budget, the standard fuel cost and climate environment charges were recalculated. Due to two increases in the standard fuel cost in April and October this year and the reflection of climate environment charges, an average electricity rate increase of about 6.5 KRW per 1KWh is expected. Researcher Yoo said, "Since a rate increase has already been proposed, the possibility of re-implementing the fuel cost linkage system is low," adding, "If the fuel cost adjustment rate is increased on March 20 after the presidential election, confidence in a turnaround in 2023 will be given."

He further stated, "If cost indicators do not decline, short-term performance recovery may be difficult, but if regulations function normally, even if the variable cost burden is large, it will eventually be fully passed on to sales."