Powering the next decade

A tag-along play on global AI semiconductor growth: The advancement of artificial technology (AI) and multiple types of large language models (LLM) requires large sets of data for training and significant amounts of power to operate. Power infrastructure, grids, and transformers are prerequisites to complete the AI ecosystem, and it seems logical to play quality power transformer stocks along with global leading AI stocks. TSMC (covered by Charlie Chan) in Taiwan is the largest semiconductor manufacturer in the world, whereas Samsung Electronics and SK Hynix (both covered by Shawn Kim) in Korea are global leaders in memory semiconductors. As Asia is the global hub for semiconductor production, power transformers in Asia should continue to benefit from rising AI demand. According to a report from Wood MacKenzie, demand for transformers has spiked worldwide, and so the wait time to get a new transformer has doubled from 50 weeks in 2021 to nearly two years now. The wait for the more specialized large power transformers (LPTs), which step up voltage from power stations to transmission lines, is up to four years. Costs have also climbed by 60-80% since 2020. In India, the wait for 220kV transformers has increased from 8 to 14 months, potentially holding up nearly 150GW of new solar developments. The transformer shortage not only touches renewables, but also utilities, homeowners, business, rail systems, and EV charging stations in both developing and emerging economies. An industry with 30+ years of history and traditional cycles typically has a 'history may repeat itself' narrative, but looking at the magnitude of the capex trend and replacement demand, we think this time could be different. In the case of the US, most transmission grids and power transformers are over 25 years old, and some are even beyond their lifespan of 50 years. Given the extended lead time, lack of sufficient global supplies, and countless number of energy projects by corporates and governments, some high-voltage transformer manufacturers are now receiving orders for 2028-29 with up-front paychecks. The US Producer Price Index (PPI) for transformers is now at historical highs and unlikely to fall anytime soon, which indicates solid demand and a favorable ASP outlook. In our view, the most attractive aspects of Korean transformer manufacturers are: 1) higher US exposure than regional peers - the US is the largest and most lucrative market, 2) attractive valuation at 17x P/E on average (based on consensus 2025e estimates) that offers the most favorable risk-reward among global peers (average at 27x P/E), and 3) superior earnings growth outlook (29% YoY EPS growth on average for the next three years), vs. peer average at 16%, which could lead to higher alpha generation. Additionally,based on our checks with suppliers, Korean manufacturers deliver products 30% faster than many global peers. The Korean manufacturers offer 4) shorter lead times to customers, 5) high-quality production standards and timely maintenance/after-sales service to ensure compliance with stringent US and European regulations. Korean manufacturers are actively participating in renewable energy projects, particularly offshore wind and solar installations in high-growth regions like Europe and the US, which helps to 6) capture renewable energy growth.