iM Securities, district heating construction target down… “Prospect for decline in profitability”

iM Securities lowered its target stock price for District Heating Corporation [071320] from 135,000 won to 110,000 won on the 11th, saying that the rise in liquefied natural gas (LNG) prices is not sufficiently reflected in the power purchase price (SMP) and a decrease in profitability is expected. The investment opinion was maintained at Buy.

The previous day’s closing price of the District Heating Corporation was 67,700 won.

In a report published on this day, researcher Jeon Yu-jin explained, "The operating loss in the third quarter was KRW 7.9 billion, a loss compared to market expectations of KRW 47.4 billion. Looking at the power sector, even though SMP rose 14% compared to the same period last year, profit was only KRW 14.3 billion, a 73% decrease compared to the same period last year."

He continued, “The reduction in power sales margins as SMP prices were unable to fully absorb the increase in LNG was a major factor in poor performance,” and added, “The maintenance of major power plants in Daegu, Cheongju, and Paju resulted in a 43% decrease in power sales.”

He pointed out, "Even until the second quarter, there were concerns about the possibility of implementing the SMP cap due to the strength of LNG, but the increase in SMP was limited and actually turned downward in September and October. This is because the contribution of LNG power plants decreased due to the increase in base power generation operation rate and the expansion of designation of essential generators."

However, it is predicted that if LNG prices continue to rise in the future, the amount of increase in SMP will increase to some extent, and the possibility of improved profitability will also increase.

Researcher Jeon predicted, "Considering the structural upward trend in LNG prices due to supply disruptions in Qatar, it is unlikely that the LNG-SMP decoupling (decoupling) phenomenon will continue as in September and October. The domestic LNG import price rose from about $10 at the beginning of the year to an average of $16 in September," and predicted, "The upward pressure on SMP is higher."