[Click eStock] Korea Electric Power Corporation Avoids Worst Case Scenario

Kiwoom Securities Report

[Asia Economy Reporter Minji Lee] Kiwoom Securities maintained its market perform rating and target price of 24,000 KRW for Korea Electric Power Corporation (KEPCO) on the 28th.

The government raised the electricity rate by 5 KRW per kWh for the third quarter, reflecting the fuel cost adjustment unit price. The increase is about 4.6% compared to the average rate of 109.0 KRW in the first half of the year. In this rate adjustment, the maximum quarterly adjustment range of the fuel cost adjustment unit price for electricity rates was expanded from the previous 3 KRW to 5 KRW, and simultaneously, the discount limit for welfare discount customers was temporarily expanded for the third quarter.

KEPCO's expected annual electricity sales volume for this year is 550,000 GWh. Multiplying the electricity rate increase of 5 KRW results in an estimated revenue increase effect of 2.75 trillion KRW. If changes in the power generation mix or raw material prices remain consistent with previous estimates, an improvement effect of 2.75 trillion KRW in annual operating profit is expected.

Jongmyung Lee, a researcher at Kiwoom Securities, said, "Although the improvement effect compared to the previously expected large operating loss of KEPCO this year may be limited, this can be seen as an opportunity to confirm that the government agrees it can no longer delay the electricity rate increase," adding, "We believe KEPCO has passed the worst situation for now."

However, additional rate increases and a sharp drop in costs are necessary for a turnaround to profitability. This is because the rate increase factor due to the rise in actual fuel costs calculated in the second quarter of this year alone amounts to 33.6 KRW/kWh. Researcher Lee said, "The electricity rate increase due to last year's fuel cost rise is scheduled to be 4.9 KRW in the second quarter and another 4.9 KRW in the fourth quarter this year, but with the power purchase cost at 140 KRW/kWh in May, it is difficult to expect an immediate turnaround to profitability even after the increase."

He explained, "Despite the third-quarter electricity rate increase, reflecting the rise in oil prices and the USD-KRW exchange rate after May, we maintain our existing operating profit forecast for this year."