India Industrial & Infrastructure "Our talk with UBS Korean utilities..."

Research evidence excerpt

India Industrial & Infrastructure "Our talk with UBS Korean utilities..."

Valuation Method and Risk Statement

We believe sector risks that could affect India’s industrial and infrastructure companies

include: 1) a slower-than-expected recovery in overall GDP growth, leading to sluggish capex

and, in turn, a weak recovery in India's investment cycle; 2) delays in asset monetisation

leading to government spending cuts on urban infrastructure; 3) a slower ramp-up in high-

growth urban infrastructure segments, such as transportation and renewable energy; and 4)

a sharp increase in crude oil prices, which could reduce the government's flexibility to step up

public investment.

KEPCO:

We base our price target for KEPCO on a target P/BV multiple compared with its own history,

and cross-checked against P/E and dividend yield.

Korea’s power generation industry is heavily regulated by the government. Majority of

KEPCO’s shares are controlled directly by the government, and management is appointed by

the president. Therefore, government policies and legislation greatly influence KEPCO’s

decisions on matters such as electricity prices, customer discounts, capacity investment and

utilisation rates. Any unexpected policy changes could pose a risk to our view. Discussions on

lowering electricity price could arise once KEPCO starts to generate profits.

KEPCO’s earnings are highly exposed to the prices of commodities such as coal and LNG, as

well as the foreign exchange rate. KEPCO does not hedge its commodity price exposure. The

tariff-adjusting system often fails to pass through large increases in costs, posing a risk to our

earnings estimates if commodity prices or FX rates move sharply.

KEPCO owns coal-fired power plants which may face reduction in utilisation rates in the long