As demand for power infrastructure surges amid the artificial intelligence (AI) boom, fourth-quarter earnings outlooks for Korea's three major power equipment makers are diverging. HD Hyundai Electric and Hyosung Heavy Industries are benefiting from an unprecedented supply shortage in the ultra-high-voltage transformer market, with profit estimates being raised one after another, while latecomer LS ELECTRIC is seeing expectations trend lower.
◇ The "name-your-price" ultra-high-voltage transformer business splits the field
According to FnGuide on the 14th, HD Hyundai Electric's fourth-quarter operating profit consensus (the average of securities firms' forecasts) stood at 276.1 billion won as of the previous day, up 4.8% from a month earlier and 11.6% from three months earlier. Hyosung Heavy Industries' operating profit estimate also rose to 212.3 billion won, up 11.5% from a month earlier and 14.6% from three months earlier. In contrast, LS ELECTRIC's fourth-quarter operating profit estimate fell to 122.5 billion won, down 5.1% from a month earlier and 13.4% from six months earlier.
A similar pattern appears in full-year outlooks. This year's operating profit forecasts for HD Hyundai Electric and Hyosung Heavy Industries have been steadily revised up to 950.6 billion won and 669.2 billion won, respectively, compared with six months ago. In contrast, LS ELECTRIC's operating profit estimate was revised down more than 10% over the same period to 420.7 billion won.
Expectations for profits at HD Hyundai Electric and Hyosung Heavy Industries are rising because demand is exploding for ultra-high-voltage transformers driven by AI data centers, where these companies have an advantage. Ultra-high-voltage transformers are core equipment that convert voltage as power produced at power plants is transmitted to substations near factories, urban areas, and data centers.
Ultra-high-voltage transformers are largely made by hand and require skilled workers, making it difficult to ramp up output in a short period. As supply fails to keep up with demand, a handful of leading players in the global market are facing a "name-your-price" situation.
In particular, only about five companies worldwide, including HD Hyundai Electric and Hyosung Heavy Industries, can produce extra-large 765 kV (kilovolt) transformers ordered by U.S. big tech.
As a result, profitability at these companies is improving rapidly. HD Hyundai Electric, the No. 1 player in the North American ultra-high-voltage transformer market, posted third-quarter operating profit of 247 billion won and an operating margin of 24.8%, both record highs on a quarterly basis. Hyosung Heavy Industries also recorded third-quarter operating profit of 192.7 billion won, up 101% year over year, and an operating margin of 18.7% in its power division, which handles ultra-high-voltage transformers.
Backlogs are at all-time highs. In the third quarter, HD Hyundai Electric won orders worth 258 billion won, including 765 kV ultra-high-voltage transformers, from the largest power company in Texas. Including this, as of the end of the third quarter, HD Hyundai Electric's order backlog stood at about 10 trillion won, and Hyosung Heavy Industries' backlog for transformers and other products stood at about 11 trillion won. The industry says "work equivalent to already five to six years has piled up."
◇ LS ELECTRIC faces gaps in ultra-high-voltage and burden from renewable business
By contrast, LS ELECTRIC's ultra-high-voltage transformer business itself is still small. Third-quarter sales were only 88.7 billion won, making the size gap clear with Hyosung Heavy Industries' power division (sales of about 1 trillion won), which handles the ultra-high-voltage transformer business, and HD Hyundai Electric's power equipment segment (about 590 billion won).
LS ELECTRIC instead has strengths in distribution. If ultra-high-voltage transformers (transmission) are the "power highway" that runs from power plants to substations, distribution plays the role of the "on-site power grid" that subdivides and supplies/controls electricity from substations to server racks. While demand for distribution is also increasing with AI data center expansion, suppliers are not as limited as in the ultra-high-voltage transformer market.
An industry official said, "In the past, distribution margins were better, but as the shortage of ultra-high-voltage transformers has worsened, the profitability gap between the two markets is widening," and added, "Distribution has relatively many participating companies, so the extent of price increases is limited."
Some also say LS ELECTRIC's renewable business is weighing on profitability. The securities industry estimates that LS ELECTRIC posted an operating loss of 11.5 billion won in the third quarter in businesses such as solar power plant EPC (engineering, procurement, and construction) and ESS (energy storage systems).
This impact is also creating differences in operating margin outlooks among the three companies. Kyobo Securities projected HD Hyundai Electric's operating margin to rise from 20.1% this year to 24.5% next year, and Hyosung Heavy Industries' from 7.4% to 14.4%, while LS ELECTRIC would remain at a level rising from 8.6% to 10%.
To narrow the gap as a latecomer, LS ELECTRIC will begin mass production of ultra-high-voltage transformers at its expanded Busan plant from the end of this month. Jeong Hye-jeong, an analyst at KB Securities, said, "With the expansion of the Busan ultra-high-voltage transformer plant, LS ELECTRIC's annual production capacity is expected to grow about 2.5 times from the end of this year," and added, "If distribution business and orders from big tech are combined, after a period of adjustment this year, growth could accelerate from next year onward."