Clear Outlook for KEPCO in the Second Half Amid Cost Decline Triggered by COVID-19

Raw Material Prices Drop Amid Recession, Costs Significantly Reduced
Q3 Operating Profit Expected at 2.6 Trillion Won...114% Increase YoY

[Asia Economy Reporter Minwoo Lee] Korea Electric Power Corporation's (KEPCO) operating profit is expected to increase significantly in the second half of this year. This improvement is attributed to the drop in raw material prices caused by the 'chicken game' among oil-producing countries and the spread of the novel coronavirus disease (COVID-19).

On the 10th, Hana Financial Investment forecasted that KEPCO will achieve sales of 58.1905 trillion KRW and an operating profit of 3.2947 trillion KRW this year. Although sales are expected to decrease by about 1.7% compared to last year, the operating loss of 1.2765 trillion KRW is projected to turn into a profit exceeding 3 trillion KRW.

Positive signals are anticipated starting from the first quarter results to be announced soon. Sales are estimated at 14.8988 trillion KRW, down 2.3% year-on-year, and operating profit is expected to turn positive at 567.2 billion KRW. For the third quarter, which is expected to record the best performance, operating profit is projected at 2.6487 trillion KRW, an increase of 113.7% compared to the third quarter of last year.

The main reason for this performance improvement is considered to be the easing of cost burdens. It is analyzed that cost reductions comparable to the levels of 2015-2016 are possible. Yuje-seon, a researcher at Hana Financial Investment, explained, "The resumption of the oil-producing countries' chicken game and the spread of COVID-19 triggered a decline in raw material prices. Recently, even thermal coal has shown a weak trend, and the only worsening indicator is the KRW/USD exchange rate, which is not a significant burden." Fuel cost reductions and the drop in the System Marginal Price (SMP) have led to decreased power purchase costs, and the momentum for profit improvement is expected to become clearer as summer approaches.

Regarding whether the reversal of the dispatch order, which determines the sequence of power plant operation according to electricity demand, will affect performance improvement, the analysis suggests it will not have a significant impact. Researcher Yu said, "The reversal of the dispatch order means that the upper limit of SMP is determined by coal power rather than LNG, which clearly sets a lower bound for the power purchase price. Profitability improvement will be more evident in LNG power plants than in coal, but overall cost reductions in the electricity market are definitely positive for KEPCO's performance."

Hana Financial Investment views the duration of low oil prices and the remaining three months until summer as critical factors for KEPCO's future performance. Since the recession is the source of profit increase, if economic activities normalize and raw material demand rises, causing prices to increase, the performance improvement may slow down. Meanwhile, based on these factors, the investment opinion on KEPCO remains 'Buy,' and the target stock price has been raised to 30,000 KRW. The closing price on the previous trading day was 22,450 KRW.

This content was produced with the assistance of AI translation services.