[Into the Stocks] '30 Trillion Deficit' Followed by Legoland Setback, A Blessing in Disguise?

Korea Electric Power Corporation Surges Over 8% on the 9th
Operating Loss of 14 Trillion Won in H1 Expected to Reach 30 Trillion Won Annually
Corporate Value Soars Amid Possibility of 40% Electricity Rate Hike

[Asia Economy Reporter Ji Yeon-jin] Korea Electric Power Corporation (KEPCO) has shown a strong rebound this month. Despite an expected operating loss of around 30 trillion won this year and being shunned in the bond market, this has led to speculation about a possible electricity rate hike, turning the negative situation into an opportunity.

According to the Korea Exchange on the 9th, KEPCO closed at 18,600 won, up 8.77% from the previous day. This marks four consecutive days of gains since the 4th of this month. KEPCO recorded an operating loss of 14.3032 trillion won on a consolidated basis in the first half of this year. The market expects the operating loss to exceed 30 trillion won this year. The surge in global energy prices due to the Russia-Ukraine war that broke out at the beginning of the year caused fuel costs for power generation to rise two to three times higher than usual, but the electricity rate hikes have not kept pace with this increase.

Due to these losses, KEPCO has raised funds in the bond market this year. The amount of KEPCO bonds issued this year alone reached 23.9 trillion won. However, even this has become difficult as investor sentiment in the bond market has been severely dampened by the default of the Gangwon-do Legoland asset-backed commercial paper (ABCP). KEPCO attempted to issue corporate bonds worth 1.2 trillion won in four rounds from the 17th to the 26th of last month, but the bid amount was only 920 billion won, and the actual issuance volume was only 590 billion won, less than half of the target amount.

Reflecting these concerns, the stock price fell to a new 52-week low of 16,500 won during trading on the 18th of last month. However, as of the previous day, the year-to-date decline was -15.45%, outperforming the KOSPI return of -28.2% over the same period.

Furthermore, the stock price surged after it was reported that the government and KEPCO are considering raising the standard fuel cost, one of the components of the electricity rate, by up to 50 won per kWh (kilowatt-hour) next year. A 50 won increase is more than five times the increase this year (9.8 won) and accounts for about 40% of the current selling price.

However, market outlooks on this electricity rate hike are mixed. KB Securities analyst Jeong Hye-jeong said, "Considering the domestic interest rate and inflation increases continuing until the first half of next year, it will be difficult to raise electricity rates to a normalization level," and lowered the target price by 20.8% from 24,000 won to 19,000 won. On the other hand, Meritz Securities analyst Moon Kyung-won emphasized, "Although this year's electricity rate hike is far insufficient compared to the rise in raw material prices, due to the rigid nature of the selling price, it will lead to profit improvement in the future as it coincides with the stabilization and decline of raw material prices," adding, "In the midst of expanding economic uncertainty, attention should be paid to its attractiveness as a defensive stock." Meritz Securities maintained a target price of 28,000 won for KEPCO.

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