Employees at the three domestic power equipment makers (HD Hyundai Electric, Hyosung Heavy Industries, LS ELECTRIC) are letting out happy screams these days. They say in unison, "We expected the market to improve, but we didn't think the day would come this fast when we could sell transformers at such high prices."
According to the industry on the 20th, the operating margin this year of HD Hyundai Electric, the No. 1 domestic power equipment company, is expected to reach about 27%. Just seven years ago, it was treated like an ugly duckling in the group after posting consecutive losses, but it has now established itself as a bona fide cash cow.
Securities circles expect that if you look only at the power equipment and heavy industry institutional sector, LS ELECTRIC and Hyosung Heavy Industries will also post operating margins above 18%. Compared with the average operating margin of domestic manufacturing, which stood at 7.1% as of the third quarter of last year, the prevailing view is that the power equipment business has entered a "dream margin" zone.
This boom stems from an explosion in demand for ultra-high-voltage transformers, which command premium prices, triggered by the data center investment surge fueled by artificial intelligence (AI). On top of that, the strong won-dollar exchange rate effect has helped the domestic power equipment industry rake in money, literally.
HD Electric, which is expected to have posted more than 900 billion won in operating profit last year, paid bonuses to employees late last month amounting to 1,195% of their agreed wages, including base pay. This is the highest payout ratio among HD Hyundai group affiliates. Employees at rivals such as Hyosung Heavy Industries and LS ELECTRIC are also elated, expecting record bonuses.
◇ Big Techs line up, paying premiums amid ultra-high-voltage transformer shortage
The market strength is expected to continue for the time being. The order books of domestic power equipment makers are filled through 2028. With supply unable to keep up with demand, these companies have emerged as "super buyers' market 乙," and they can now selectively take orders, focusing on high-priced, high-margin products.
Big Techs, in a hurry to expand data centers, are lining up to get ultra-high-voltage transformers quickly, even if they have to pay a premium. As this seller's market continues, the three domestic power equipment makers are improving profitability by filling more than half of last year's order backlog with orders from the United States.
In the case of HD Hyundai Electric, the share of U.S. orders in its total backlog is already understood to have exceeded 65%. An industry official said, "A higher portion of U.S. orders means the quality of earnings has changed," adding, "Products for Big Tech data centers typically have margins more than 20% higher than orders from other regions."
◇ "Start with the expensive orders"… strategy to maximize profitability
Domestic power equipment makers are in fact pursuing a profitability-first strategy rather than simply bulking up sales. Samsung Securities and Kiwoom Securities estimated HD Hyundai Electric's operating margin this year at 27.9% and 27.2%, respectively. On Feb. 7, HD Hyundai Electric's sales outlook for this year (4.35 trillion won) came in about 10% below market expectations, briefly jolting the share price, but this is interpreted as a strategy to reject low-price orders and selectively take higher-margin ones.
Hyosung Heavy Industries is easing the risks of its "aching finger," the construction institutional sector, thanks to the boom in power equipment. With the expansion of its Tennessee, Memphis plant, a U.S. production foothold, kicking in in earnest from this year, the share of high-margin U.S. orders is also expected to increase. Kyobo Securities projected that the operating margin of the heavy industry institutional sector, which handles power equipment at Hyosung Heavy Industries, will reach 18.5% this year.
LS ELECTRIC, a latecomer in ultra-high-voltage transformers, is experiencing growing pains as it restructures its China subsidiary, but the industry expects profitability to improve once this is shaken off. Kyobo Securities forecast that the operating margin of LS ELECTRIC's power equipment institutional sector will reach 18.4% this year. With production capacity at the Busan ultra-high-voltage transformer plant tripled since late last year, the company is seen as having entered the highest profitability zone since its founding.
◇ "At least three years of shortage"… preparing for phase 2 of the supercycle
Some worry that the simultaneous expansion moves by power equipment makers could bring oversupply sooner than expected. But across the industry, the prevailing response is that the down cycle is still far off. That's because transformer manufacturing is largely handwork, requiring skilled labor, which is hard to secure, making it impossible to rush into capacity additions.
An industry official said, "Companies are approaching capacity expansion cautiously, like tapping a stone bridge before crossing, so supply is expected to be short for at least the next three years," adding, "We are also accelerating research and development (R&D) to prepare for supercycle phase 2, including direct current (DC) and energy storage systems (ESS)." The power industry's innovation race to avoid missing the flow of a never-before-experienced supercycle is expected to continue.