[This Week's Industry Insight] HD Hyundai Electric's 5 Years of Backlogged Orders... 60x 'Stock Spark' in 4 Years

AI Revolution and Power Equipment Boom... 'Super Cycle'
Wise Investments Looking to the Future, Sweet Rewards
Copper Rise and Exchange Rate Pressure, No Impact on the Main Trend

Editor's NoteDear individual investors dreaming of successful investments. How well do you know the stocks you invest in with your own money? In the online environment flooded with unrefined information, Asia Economy aims to be your hands, feet, eyes, and ears by 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, clients, and investors. We will explain companies' financial conditions, performance status, and future value in an easy-to-understand manner. We meet you every week under the name of "This Week's Hot Stock," also known as "This Week's Gwan.Jong."

HD Hyundai Electric, the 'leader' in power equipment, is currently known among individual investors as a 'money-copying stock.' This is thanks to its relentless record-high rally. HD Hyundai Electric has risen 263% this year, from 80,100 KRW to 291,000 KRW (as of the 3rd), ranking 5th in annual growth rate among 953 stocks listed on the KOSPI market. Compared to its historical low of 4,840 KRW in March 2020, the stock price has surged by 5,912%. This far exceeds the dream return of stock investors known as a 'ten-bagger' (1000%·ten-bagger·10x). If you had bought 10 million KRW worth of shares four years ago, it would now be worth 601.2 million KRW (principal 10 million KRW + profit 591.2 million KRW).

HD Hyundai Electric is a power equipment and energy solutions affiliate of HD Hyundai Group. It was spun off in 2017 from the electrical and electronic systems division of HD Hyundai Heavy Industries. Its main products include power transformers, high-voltage circuit breakers, distribution panels, medium and low-voltage circuit breakers, and rotating machines including electric motors.

The younger sibling, which has grown rapidly over seven years, is now even challenging the eldest. As of the 3rd, its market capitalization stands at 10.4897 trillion KRW, closely chasing HD Hyundai Heavy Industries' 11.7002 trillion KRW, the largest in the group. The explosive growth has kept the market busy analyzing it. Securities firms have repeatedly raised HD Hyundai Electric's target price several times this year alone. Despite raising expectations, the stock price continues to hit new highs daily as if 'breaking stamps.' Unlike some secondary battery stocks that gave up issuing reports last year, it is still considered an "explainable area (Samsung Securities)." Shinyoung Securities has set a target price of 365,000 KRW, and several other securities firms have set target prices above 300,000 KRW. Additionally, it was recently newly included in the Morgan Stanley Capital International (MSCI) Korea Index. Inflows of global passive (index-tracking) funds following the MSCI index are also expected.

Direct Hit from AI Revolution... Unprecedented 'Super Cycle'

HD Hyundai Electric's unstoppable run is thanks to an unprecedented boom in the power equipment industry. Terms like 'super cycle' and 'unseen boom' are being used. The AI revolution has led big tech companies to race to expand data centers, causing a surge in demand for electrical wires and transformers that supply electricity. Google, Meta, Amazon, and others are contacting HD Hyundai Electric due to transformer shortages. As the boom continues, a supplier-dominant market seems to be sustained.

AI data centers consume tens of times more electricity than conventional data centers, making ultra-high voltage transformers essential. HD Hyundai Electric is the manufacturer of these products. The power equipment segment, including transformers, accounts for 48.3% of HD Hyundai Electric's sales (as of Q4 2023). Lee Min-jae, a researcher at NH Investment & Securities, said, "Considering the increasing demand for power equipment such as data centers and electric vehicles, supply shortages are expected to continue."

Nam Min-sik, a researcher at SK Securities, said, "As the power equipment boom cycle continues, order backlog, sales, and operating profit are all growing." HD Hyundai Electric's performance is rising sharply. After suffering a loss of 156.7 billion KRW in 2019 due to industry downturns, operating profit grew nearly fourfold from 72.7 billion KRW in 2020 to 315.2 billion KRW last year. Last year's sales also hit a record high of 2.7028 trillion KRW since becoming an independent corporation. Operating profit for this year is expected to be around 500 billion KRW. The order backlog is also 'record-breaking.' It surged from 2.4204 trillion KRW in 2021 to 3.5269 trillion KRW in 2022, and 5.476 trillion KRW last year.

North America and Middle East Pull Together, 5 Years of Orders Backlogged

The reason HD Hyundai Electric shows differentiated performance compared to other power equipment companies is due to proactive investments. In 2010, it established a transformer factory in Alabama, USA. It was the first domestic company to enter the US market. Even in 2019, when it posted losses, it expanded the factory, increasing production capacity by about 50%. Even after 14 years, few companies have a local production system in the US. The investments made despite difficult circumstances are now bearing fruit. The US leads HD Hyundai Electric's performance. Last year, 26.7% of sales were generated in the US. Jeon Hye-young, a researcher at Daol Investment & Securities, said, "Demand for power equipment is surging, but suppliers' expansions are generally conservative, so high prices and profitability are expected to be maintained long-term."

The US is the world's largest transformer market. Demand is particularly high. Besides demand from AI data centers, the time has come to replace aging industrial transformers with new ones. Currently, over 33% of industrial transformers in the US have been in use for more than 30 years and need replacement considering their lifespan. This means about one-third of the total needs to be replaced. Thanks to this, HD Hyundai Electric's US factory is running non-stop. The US order backlog stood at 2.39 billion USD (about 3.25 trillion KRW) as of the end of last year, roughly five years' worth of orders. HD Hyundai Electric plans to expand assembly space at its Alabama factory to meet the surging demand.

HD Hyundai Electric exports transformers to over 70 countries worldwide, with about 70% of sales coming from overseas. Another major overseas customer is the Middle East. HD Hyundai Electric has been tapping into the Middle East market early since its days as a division of HD Hyundai Heavy Industries. Thanks to this, it holds the number one market share in the ultra-high voltage transformer segment in Saudi Arabia, with 20.9% of sales coming from the Middle East. However, concerns have arisen that Saudi Arabia may scale back the new city project 'Neom City' due to recent financial difficulties, and geopolitical conflicts could reduce power equipment demand in the region, posing risks.

Risks from Rising Copper Prices and Exchange Rates

Even the thriving HD Hyundai Electric has concerns. The unstoppable rise in copper prices is one. Copper is a key raw material for HD Hyundai Electric's products. Copper prices have risen about 20% this year and are expected to quadruple within the next four years due to global supply shortages. The rising copper price is the most threatening factor that could deteriorate HD Hyundai Electric's profitability. Regarding this, Lee Jae-woong, HD Hyundai Electric's CFO, said during the Q1 earnings announcement and conference call, "We have already secured quantities before copper prices rose," but added, "There is some impact."

Exchange rates are also directly linked to HD Hyundai Electric's profitability due to its high export ratio. One reason for the 178% year-on-year growth in Q1 operating profit to 128.8 billion KRW was the high exchange rate. This was also the first time Q1 results were better than the previous quarter (Q4 of the previous year). HD Hyundai Electric expects that if interest rates are cut in the second half, the won-dollar exchange rate may fall, leading to a 'high first half, low second half' performance pattern. The US Department of Commerce's anti-dumping duties, imposed for over 10 years on Korean products for being sold below fair value, are also a negative factor. HD Hyundai Electric is subject to a 14.95% tariff, with other Korean companies also facing tariffs above 10%.

However, since demand for power equipment itself is expected to remain robust, the overall boom trend is unlikely to be affected. Sung Jong-hwa, a researcher at Ebest Investment & Securities, said, "Based on the strong North American and Middle Eastern markets, Q1 orders grew 81% year-on-year," adding, "Even if there is a high first half and low second half trend this year, Q1 orders were so strong that it is highly likely the company will exceed its own guidance for this year."