[This Week's Industry Insight] Leading Global Infrastructure... Diyapower, No.1 in Hydraulic Cylinders

Growing Investor Interest in Ukraine Reconstruction-Related Stocks
HD Hyundai Infracore, HD Hyundai Construction Equipment, Terex, Hitachi Among Clients
Positive Industry Outlook Due to North American Infrastructure Investment and Emerging Market Mining Development Expansion

Editor's NoteDear individual investors dreaming of successful investments. How well do you know the stocks you buy with your own money? In the unrefined and chaotic online environment filled with all kinds of information, Asia Economy aims to be your hands and feet, eyes and ears, delivering accurate information about companies. Each week, we focus on companies that rank high in stock inquiries by the financial information provider FnGuide, delivering everything from basic information to analyses of related companies such as partners, customers, and investors. We will explain the financial status, performance, and future value of companies in an easy-to-understand manner. We meet you every week under the name “This Week’s Watchlist,” highlighting stocks of interest. This week, we analyzed DY Power, which is gaining attention as a stock related to Ukraine reconstruction.

As stocks related to Ukraine reconstruction attract market attention, DY Power is drawing investors’ interest. Discussions on Ukraine’s recovery and reconstruction preparations are underway, increasing interest in companies related to construction machinery accordingly.

DY Power is the No. 1 domestic company in hydraulic cylinders, a core component of construction machinery. Hydraulic cylinders are essential parts used for automatic control and power transmission in construction heavy equipment such as excavators, machine tools, transport machinery, and special vehicles. Major customers include HD Hyundai Infracore, HD Hyundai Construction Equipment, Terex (USA), and Hitachi (Japan). DY Power’s consolidated sales last year amounted to 419 billion KRW. The regional sales distribution is Asia 39%, domestic 33%, USA 17%, and Europe 9%, in that order.

No. 1 Domestic Producer of Hydraulic Cylinders, a Core Component of Construction Machinery

DY Power was established in 2014 through a spin-off of the hydraulic equipment division of DY Co., Ltd. It was listed on the KOSPI in January 2015. Its predecessor was Dongyang Hydraulic Co., Ltd., founded in 1978, initially operating in the domestic market. In 2001, it expanded overseas by entering the Chinese (Yantai) market jointly with Doosan Infracore. Following China, in 2014, it entered the Indian market together with Hyundai Construction Equipment to secure new markets. It has expanded overseas operations by establishing local production subsidiaries. In 2015, the largest shareholder changed from DY Group founder Cho Byung-ho to DY Co., Ltd., which is a holding company owning 38.4% of DY Power’s shares.

Hydraulic cylinders are highly sensitive to the construction industry cycle. Particularly, the scale of infrastructure investment in each country is important from the demand perspective. Due to a high export ratio, exchange rate fluctuations also affect the business. Changes in steel prices, a major raw material, also impact performance. Generally, when raw material prices rise, demand tends to increase due to increased mining investment and higher operating rates of heavy equipment. The construction industry shows seasonal patterns with high demand in the first half of the year and lower demand in the summer months. The peak season is from March to June when construction and civil engineering projects are active, while July to September is the off-season due to heat and monsoon effects. October to December is also a peak season but with lower demand compared to the first half.

The construction heavy equipment that uses DY Power’s hydraulic cylinders the most is the excavator. About six hydraulic cylinders are installed per excavator and about four per aerial work platform. Excavators serve as a barometer for construction market conditions and infrastructure investment scale. Typically, excavator sales trends are the most important leading economic indicator when analyzing China’s construction market. An increase in excavator sales indicates expanded infrastructure investment.

Domestic Excavator Exports in Q1 Reach Highest in 11 Years

Domestic excavator exports in the first quarter rose 11.5% year-on-year to 940 million USD, marking the highest level in 11 years since 2012. Exports to North America and Europe continue to perform well, and exports to China, which were sluggish last year, are showing signs of recovery.

Strong performance is also expected from domestic and overseas subsidiaries in China and India. According to the Korea IR Association Corporate Research Center, DY Power’s sales this year are projected to increase 10% year-on-year to 462.6 billion KRW, with operating profit rising 27.7% to 34.4 billion KRW. The Chinese subsidiary’s performance is expected to recover due to large-scale infrastructure investment by the Chinese government, and the Indian subsidiary is expected to turn profitable for the first time in nine years since its establishment.

DY Power’s sales have historically correlated with demand from major customers producing construction machinery, such as HD Hyundai Infracore, HD Hyundai Construction Equipment, and Terex, a US-based aerial work platform specialist. Therefore, the market outlook and recent performance of these customers serve as a direct indicator of DY Power’s performance.

Among customers, HD Hyundai Infracore is the largest, accounting for 30-40% of DY Power’s consolidated sales. The construction machinery segment, which makes up 80% of HD Hyundai Infracore’s sales, moves in a similar direction to DY Power’s sales each year. Since HD Hyundai Infracore’s construction machinery sales growth is forecasted at 9% this year, DY Power is expected to grow at a similar rate.

Following HD Hyundai Infracore, HD Hyundai Construction Equipment is the second-largest domestic customer, with a sales target of 3.9 trillion KRW this year, representing an 11.4% increase from the previous year according to its guidance. By business segment, the construction machinery segment, which accounts for 82% of sales, is expected to grow 10.3% year-on-year to 3.2 trillion KRW.

DY Power established a local production subsidiary in Pune, India, in 2014, entering the market alongside HD Hyundai Construction Equipment. The performance of HD Hyundai Construction Equipment’s Indian subsidiary directly affects DY Power’s Indian subsidiary. DY Power’s Chinese subsidiary, established in 2001, has built 20 years of experience and maintains profitability with net profit margins of 10-15%. In contrast, the Indian subsidiary had low sales volume and high cost ratios, resulting in no profits. Encouragingly, HD Hyundai Construction Equipment’s Indian subsidiary is operating at over 100% capacity, boosting both the scale and profits of DY Power’s Indian subsidiary. It recorded net profit for two consecutive quarters from Q4 last year to Q1 this year. Overseas customer Terex also recently raised its annual sales guidance from 4.6-4.8 billion USD to 4.8-5.0 billion USD, reflecting improved market conditions.

Positive Factors: China’s Infrastructure Investment, Saudi NEOM City Project, and More

The Chinese government plans to invest 12.2 trillion yuan (approximately 2,339 trillion KRW) in infrastructure this year to stimulate the economy. This is a 17% increase from last year, with investment focused mainly on transportation, energy, power generation facilities, and industrial complexes. After lifting the zero-COVID policy, the Chinese government expects consumer spending to lead economic growth, but with a slower-than-expected recovery, it plans to expand employment through infrastructure investment to boost consumption.

According to customs export statistics, excavator exports to China in Q1 this year reached 22 million USD, a 155.3% increase year-on-year. This exceeds half of last year’s total annual export of 41 million USD. DY Power’s Chinese subsidiary experienced poor performance last year but is showing improvement this year, with Q1 net profit rising 53.3% year-on-year to 4.6 billion KRW.

DY Power’s stock price has the potential to escape undervaluation as construction machinery market conditions rebound. Following the end of the COVID-19 endemic and improved construction machinery markets in Korea, North America, and Europe, the previously sluggish Chinese market is expected to see increased demand due to the lifting of zero-COVID policies and government infrastructure investment. Additionally, infrastructure investment demand is rising in emerging markets such as India, the Middle East, and Latin America. Locally, reconstruction after the T?rkiye earthquake, the Saudi NEOM City project, and mineral demand in Indonesia, Latin America, and Australia are expected to improve construction machinery market conditions, which is a positive factor.

Uncertainties in China’s Economic Recovery but Investment Planned for Chinese Subsidiary

Risks have not completely disappeared. DY Power’s main product, hydraulic cylinders, is greatly affected by demand fluctuations in upstream industries such as construction. Recent concerns about a global economic downturn and weak construction markets have negatively impacted DY Power’s performance. There are also concerns about infrastructure investment funding due to China’s growing fiscal deficit. Whether the Chinese government’s planned infrastructure investments will be executed is crucial. Although uncertainty remains about China’s domestic economic recovery, DY Power plans to invest in expanding its Chinese subsidiary this year.

Han Kyung-yeol, a researcher at Kiwoom Securities, said, “We expect continued favorable market conditions due to North American infrastructure investment and expanded mining development in emerging countries. While the rebound in China, DY Power’s traditional main market, remains uncertain, export volumes from major customers centered on North America, emerging countries, and the Middle East are expanding, leading to expected performance growth.”

Meanwhile, DY Power’s sales were 304.8 billion KRW in 2020, 437.2 billion KRW in 2021, and 419 billion KRW in 2022. Operating profits during the same period were approximately 35.5 billion KRW, 42.2 billion KRW, and 27 billion KRW, respectively. Capital expenditures have been steadily made at 8.5 billion KRW, 11.9 billion KRW, and 10.8 billion KRW. The debt ratio gradually decreased from 52.23% in 2020 to 51.37% in 2021 and 36.26% in 2022.