Korea Electric Power Corp (ADR) (KEP)

Korea Electric Power Corp. (KEP) founded in 1961, is in the business of generation and transmission of electricity. It is South Korea’s only electricity provider, having an installed generation capacity of around 55,000 megawatts. The company has around 370 generation units that include nuclear, thermal, hydro and internal combustion based plants. KEP caters to a wide range of consumers that includes commercial, residential, educational and agricultural users. The industrial users provide for about half the over all revenues, while residential and commercial users contribute 20% and 22% respectively.

The South Korean power industry is slowly moving to deregulation however it is still largely government regulated. The per capita consumption in the country has seen a major heave by over six times from its 1980’s level, and the future of the industry also looks appealing as the consumption is still much lower than other developing countries, thus providing a huge potential. The demand is expected to rise by 4% - 6% year on year till 2010. The industry is largely impacted by volatile fuel and other input prices, and as imported petroleum is the most significant energy source, the fluctuations in Korean Won and US Dollar also has a significant impact.

KEP has a strong monopoly in the transmission and distribution business. However, the regulated pricing environment is bringing pressure on the margins, and thus the stock has a poor record of generating returns below the benchmark level. Further, the company is unable to transfer the rising cost of production to the ultimate consumers due to regulation, which is further hampering the growth, though it has got some modest respite, as being permitted to charge industrial consumer a marginal higher prices. Adding to it, the huge capital spending and the poor return on capital, makes it a risky stock.