20170510-三星证券-With_nuclear,_less_is_more_32页_1mb

Sector Update Summary: Utilities (OVERWEIGHT)

Core Content

This report provides an update on the utilities sector with a focus on the nuclear power industry in Korea and its implications for companies like Kepco KPS and Kepco E&C. The analysis highlights the challenges and opportunities in the nuclear power market, particularly due to tightening regulations and shifting global trends.

Main Points

• Nuclear Market Stagnation: Tightening regulations in Korea are forcing nuclear power plant firms to look for new profit sources abroad. However, most developed nations are reducing nuclear exposure, and emerging markets are still in early stages of adoption, leading to a lack of immediate orders.
• Investor Focus: Investors should focus on firms with diversified sales and profit sources rather than those heavily dependent on nuclear operations.
• Kepco KPS:
  • Generates over 70% of sales from nuclear business.
  • Expected to see improved margins in 2017 due to growth in its thermal division and stabilized labor costs.
  • Overseas sales are expected to increase by 45% as 2016 orders begin to generate revenue.
  • The Moorside project in the UK could provide long-term growth opportunities for the company.
  • We reinstate coverage with a BUY rating and a KRW78,000 target price, based on a 23x 2017 P/E ratio.
• Kepco E&C:
  • Has a high dependency on nuclear business (71% of sales in 2016).
  • Expected to see nuclear sales rise to 76% in 2017 due to sluggish thermal orders.
  • Earnings are likely to deteriorate unless the company diversifies its operations.
  • We reinstate coverage with a HOLD rating and a KRW27,000 target price, based on a 24.5x 2017 P/E ratio (one standard deviation below its historical mean).

Key Information

Nuclear Plant Orders

• Domestic Market: Regulations are curbing nuclear and coal generation, leading to a slowdown in nuclear plant construction. The 8th national electricity plan is expected to be impacted.
• Construction Delays: The construction of the remaining nuclear plants under the 7th NEP has been delayed by about a year.
• Global Trends: Developed markets are reducing nuclear exposure, while emerging markets are just beginning to adopt it. The UK is the only major developed market increasing its reliance on nuclear power.

Company Analysis

Kepco KPS

• Sales Breakdown: Nuclear and thermal divisions each account for 40% of sales.
• Performance:
  • Expected 14.5% sales growth in 2017.
  • Operating profit is projected to rise by 66.4%, with operating margin increasing by 4 percentage points to 12.6%.
  • Thermal business is expected to drive earnings growth in 2017 and beyond.
• Valuation:
  • Target price: KRW78,000 (36.4% upside from current price).
  • Current price: KRW57,200.
  • Trading at 18.1x 2017 P/E.

Kepco E&C

• Sales Breakdown: Nuclear business accounts for the majority of sales.
• Performance:
  • Expected to have nuclear sales make up 76% of total sales in 2017.
  • Earnings are likely to decline unless the company secures orders outside the nuclear sector.
  • Operating profit is expected to decrease slightly in 2017 and 2018 due to heavy nuclear dependence.
• Valuation:
  • Target price: KRW27,000 (7.4% upside from current price).
  • Current price: KRW25,150.
  • Trading at 22.6x 2017 P/E.

Key Charts

• Kepco KPS Sales and Operating Margin: Projected to increase significantly in 2017.
• Kepco E&C Sales and Operating Margin: Expected to remain stagnant due to reliance on nuclear business.
• Peer Valuation Table: Provides a comparison of key financial metrics across various utilities companies.

Conclusion

The nuclear power market in Korea is facing regulatory headwinds and reduced international demand. Kepco KPS is positioned for growth due to its diversified operations, while Kepco E&C remains heavily dependent on nuclear business, which may limit its short-term performance. Investors are advised to focus on companies with more diversified revenue streams to mitigate the risks associated with the nuclear sector's stagnation.