With the expansion of the artificial intelligence (AI) market and rising demand to replace aging power grids, Korea's power equipment companies are continuing to boom. The four power equipment firms have already secured about 30 trillion won in backlogged work, and analysts say the trend of improving results will continue for several years.
◇ LS Electric operating profit up 45% from a year earlier… the other three firms are also strong
LS Electric said on Apr. 21 that it posted its best-ever first-quarter results. On a consolidation basis, revenue rose 33% on-year to 1.3766 trillion won, and operating profit increased 45% to 126.6 billion won. The operating margin was 9.2%.
Hyosung Heavy Industries, which will report results on the 24th, has a consensus first-quarter operating profit estimate of 168.3 billion won, up 64% from a year earlier. The consensus for HD Hyundai Electric and Iljin Electric is 270.8 billion won and 45.1 billion won, respectively, expected to rise 24% and 33% from a year earlier.
The power equipment industry is booming because electricity demand is surging as AI data centers increase. Orders are pouring in for ultra-high-voltage transformers and switchgear that distribute electricity, but it is difficult to ramp up production quickly because large transformers require skilled manual work. As demand outpaces supply, a supplier-advantaged market has formed.
The four domestic power equipment firms have secured at least three years' worth of work. LS Electric's order backlog stood at 5.6425 trillion won at the end of the first quarter, up 13% in three months. Hyosung Heavy Industries' heavy industry institutional sector order backlog was 11.9 trillion won at the end of last year, while HD Hyundai Electric's reached $6.731 billion (about 9.4 trillion won). Iljin Electric's heavy electrical equipment order backlog is also around $1 billion (about 1.6 trillion won).
◇ North America business drives results… "There is fallout from the Middle East war, but it is temporary"
Korean power equipment companies are earning substantial profits particularly through their North America business. For LS Electric, first-quarter North America revenue was about 300 billion won, up 80% on-year to a quarterly record. The share of the North America market in total revenue expanded to about 22%.
As more U.S. data center customers choose on-site power generation that produces and consumes electricity on their own, orders are also following for high-efficiency direct current (DC) power equipment. Jeong Hye-jeong, a KB Securities analyst, said, "From ultra-high-voltage transformers to medium- and low-voltage switchgear across the power grid value chain, new orders are increasing in multiple areas," adding, "Full-year orders are expected to exceed the 4 trillion won guidance."
HD Hyundai Electric also derives more than 40% of its revenue from North America. Orders for 765 kV (kilovolt) ultra-high-voltage transformers, which have been rising notably since this year, are cited as a factor that improves profitability because their average selling price is high.
In addition, Hyosung Heavy Industries is rapidly increasing sales of ultra-high-voltage transformers in the North America market. Iljin Electric is also improving overall profitability as the share of North America sales for heavy electrical equipment such as transformers—which are more profitable than cables—rises.
However, over the past month, the operating profit consensus for power equipment companies has inched down. Some project revenue was pushed to the second quarter and beyond due to transport delays stemming from the war between the United States and Iran. HD Hyundai Electric derives around 20% of its revenue from the Middle East, and Hyosung Heavy Industries is around 10%.
An industry official said, "Transport times have lengthened and transport cost increases have raised the expense burden due to Middle East risks, but this is a temporary phenomenon unrelated to a slowdown in demand." The official added, "With ample work already secured and steady growth in power infrastructure demand, profit growth is likely to widen in the second quarter."