Sanil Electric IPO Industry Analysis

• With the development of new and renewable energy, transmission and distribution network bottlenecks are worsening in many countries, and there is a strong demand for new transmission and distribution networks.

• China is virtually excluded from competition for the US market. This situation has resulted in increased new orders for companies such as Sanil Electric.

• Our base case valuation of Sanil Electric is target price of 58,593 won, which is 95% higher than the high end of the IPO price range (30,000 won).

Photo by Iqram-O-dowla Shawon on Unsplash

Global Transformer Market Growth

Strong Demand for Distribution Transformers Globally - The distribution transformer market has grown mainly due to the surging demand from both the residential and industrial/commercial sectors. In recent years, rapid urbanization and industrialization have led to an exponential increase in the construction of residential complexes, commercial buildings, and infrastructure projects around the world. This surge in construction activity has led to the need for efficient and reliable power distribution systems, including distribution transformers.

According to Global Market Insight, the global distribution transformer market size is estimated at $30.4 billion in 2023. According to Business Research Insight, the global transformer market size was $26 billion in 2021, which is expected to grow by 6.31% to reach $48 billion by 2030. Renewable energy power generation amounted to 19.8% of total in 2020, mainly led by hydroelectric and wind power generation, and the share of renewable energy generation is expected to increase to 35% in 2030, driven by wind and solar energy.

In the past two decades, renewable energy other than hydropower has increased significantly, expanding its share of power generation from less than 1% in 2005 to more than 12.5% ​​by the end of 2020. The continued upgrades of aging power infrastructure and increasing demand for renewable energy are expected to be positive factors for market growth.

Additionally, efforts to modernize existing power infrastructure and integration of smart grid technologies are further fueling the market growth, while factors such as increasing electricity consumption, growing population in urban areas, and adoption of renewable energy are driving the growth of residential and commercial applications have contributed to the increasing demand for distribution transformers.

In particular, in recent years, the global electric power industry has mostly relied on concentrated production based on thermal and nuclear power generation, but due to technological advancements, the yield of new and renewable energy generation has gradually increased, and the production paradigm has changed due to the expansion of investment in new and renewable energy by utility companies and the increase in the proportion of power generation.

Unlike traditional power generation methods, new and renewable energy focuses on small-scale, distributed power generation, which causes issues in most global national power grids that are currently designed centrally. With the development of new and renewable energy in the form of distributed power, transmission and distribution network bottlenecks are worsening in many countries, including the United States, and there is a strong demand for new transmission and distribution networks.

The global transformer demand growth is driven by the following three major factors:

• New demand for building new and renewable energy power grids

• Demand for replacing old power grids in the United States

• Higher global demand due to increasing reshoring policies and supply shock of transformers

New and renewable energy such as solar power and wind power have the characteristics of small-scale and distributed power generation, resulting in a mismatch between power generation and consumption within the existing power grid. In response to this, in January 2022, the U.S. Department of Energy announced BBG (Building a Better Grid). Through the initiative, the U.S. announced plans to expand the transmission and distribution network by 60% by 2030 (annual average increase of 5.4%).

In addition, the transformers and transmission lines in the United States have a lifespan of more than 25 years and nearly 70% of them have aging problems. The U.S. Congress has established a budget for replacing aging power transmission facilities through legislation such as the Infrastructure Act and the Inflation Reduction Act. It is expected that demand for power equipment such as transformers will increase due to investment in transmission and distribution networks.

Additionally, factors such as rising global energy consumption, rising demand for electric vehicles, and integration of smart grid technologies are expected to fuel the higher demand for utility transformer market.

Furthermore, price increases are also occurring, along with reshoring policies after COVID-19. There have been withdrawal of numerous production bases of transformers in the United States and due to the resulting resulting global transformer supply shock, the current transformer producer price index has been rising for 10 consecutive quarters, starting from the second quarter of 2020.

The industrial transformer market is showing strong growth due to the increasing demand for ultra-high voltage networks in the industrial sector along with the integration of extensive frequency distribution links to ensure energy efficiency.

In addition, investments from private and government agencies in developing countries are leading to support for the expansion of electrification programs, driving the growth of related industries, and advances in transformer technology, such as the development of smart transformers capable of real-time monitoring and diagnosis, are further driving demand. In particular, regulatory policies focused on improving energy efficiency and reducing carbon emissions are driving industrial organizations to upgrade their infrastructure, including distribution transformers, to comply with environmental standards.

Source: Distribution Transformer Market Report 2024, Global Market Insight

Furthermore, the European Union and the United States are seeking to completely electrify the energy system, and this energy transition and large-scale electrification requires securing infrastructure that can accommodate it, especially the rapidly increasing clean energy and renewable energy. Expansion and improvement of transmission and distribution networks that can enable stable operation of the power system according to power demand are essential elements.

Meanwhile, according to the International Energy Agency, a global effort is needed to achieve climate goals and respond to power demand by 2040. There is a need to build or replace nearly 50 million miles of power transmission system. This scale is similar to the total length of the current global power transmission network built over 100 years, and significant system changes and innovation are required for this expansion of power transmission infrastructure to be realized.

According to projections presented by the International Energy Agency, , more than $600 billion in annual investment will be needed to expand the electricity transmission grid by 2030, more than doubling current global investment levels.

Competition

Sanil Electric's larger competitors include HD Hyundai Electric and LS Electric. Other smaller competitors in Korea include KP Electric, IEN Hanchang, and L Powertech. One of the key differences between Sanil Electric and other smaller local competitors is the fact that Sanil generates more than 80% of its sales overseas whereas other local smaller competitors generate most of their sales in Korea from KEPCO.

Sanil Electric has been reducing the number of orders received from KEPCO in Korea in order to produce exports given its limited production capacity. Competition in the global market involves competing with Chinese and Central and South American transformer companies for the US market.

In the case of Chinese transformer companies, competition was focused on price, but due to the ongoing conflict between the US and China over global hegemony, China is virtually excluded from competition for the US market. This situation has resulted in increased new orders for companies such as Sanil Electric.