Regarding the space between the dropcap 'S' and the rest of the first word, it's clear to me that GeoffR identified the problem correctly.
The OP said he used these conversion options
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I also ticked Remove spacing between paragraphs (indent size 1.5 em and line size 0.5 em)
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Just my opinion but these are terrible conversion options if you hope to retain style formating after a conversion. To the best of my understanding:
- it will force an indent of 1.5em on every paragraph. To look right dropcaps require the paragraph to have a text-indent of zero. It's obvious the source book has a zero indent for the dropcap paragraph but the converted book hasn't.
- remove spacing between paragraphs stands a good chance of removing every scenebreak in the book for some books.
- forcing a line-height of 0.5em is asking for trouble as lines of text are likely to overlap. The fact that the kepub in the photo doesn't show may be due to the agressive nature of the kepub renderer in enforcing the line spacing set in the Kobo font menu. Other epub reading apps are likely to show exactly what was specified and be unreadable.
- the original complaint was that the H2O is not displaying fonts correctly. I see no evidence of that. The capital 'S' dropcap itself looks the same in the before/after shots. What reason is there to believe embedded fonts are involved at all?
Finally, my biggest confusion is why is conversion to kepub required at all if the OP wants to read the book in KOReader? Surely the original standard epub would be the most sensible format to transfer to the Kobo, thus avoiding any destruction of styling.