Power equipment stocks have undergone a correction over the past month, but the industry's fundamentals have not turned downward, according to a brokerage analysis. While overall transformer export indicators have slowed, exports of ultra-large transformers, the core product line of Hyosung Heavy Industries (298040.KS), have continued to grow, and the order flow remains solid, the analysis found.
On Thursday, LS Securities maintained its buy rating on Hyosung Heavy Industries and raised its target price by 6% to 5.3 million won from the previous 5 million won.
Hyosung Heavy Industries' stock surged around the announcement of its first-quarter earnings before undergoing a correction from early May through early June. According to LS Securities, the stock fell about 31% from its early-May high to its early-June low. Amid growing valuation pressure, the slowdown in transformer export growth in April acted as the backdrop for the stock correction.
However, LS Securities assessed that a detailed look at the export indicators showed the concerns were excessive. Based on the Trade Statistics Service (TRASS), total transformer exports rose just 0.2% year-on-year in April and fell 5.4% in May. By contrast, exports of ultra-large transformers rose 41.5% in April and 23.3% in May. Export unit prices were also analyzed to be maintaining an upward trend.
Hyosung Heavy Industries' second-quarter results are expected to meet or slightly fall short of market expectations. LS Securities forecast second-quarter revenue of 1.7803 trillion won and operating profit of 283.2 billion won. While some Middle East volumes were delayed due to the impact of the Middle East war, profit growth from a year earlier is expected to continue as the carryover effect of high-voltage circuit breaker volumes bound for the United States is reflected.
The order outlook is also positive. LS Securities expects Hyosung Heavy Industries' annual orders this year to substantially exceed the company's guidance. Expanded global power infrastructure investment and rising demand for power equipment centered on the North American market are cited as the backdrop for order growth.
LS Securities assessed that Hyosung Heavy Industries is securing both earnings growth and capacity expansion effects while still remaining attractive in terms of valuation. In particular, considering the strong exports centered on ultra-large transformers and the stable order flow, the analysis found that its medium- to long-term growth potential remains valid.
"The recent stock correction in power equipment shares stems from valuation pressure and a short-term slowdown in export indicators, but given ultra-large transformer exports and the order flow, the industry's structural growth story remains valid," said Sung Jong-hwa, an analyst at LS Securities.
