Electric Equipment (Overweight)

Regional Industry Focus

Refer to important disclosures at the end of this report DBS Group Research . Equity 22 Aug 2018

Opportunities for ESS market and KOSPI: 2,247.9 electric equipment players KOSDAQ: 769.8

 Korea’s ESS market saw 20-fold growth in 1H18 Analyst Regional Research Team  Further growth to be spurred by PV-based ESS [email protected]  Eyes on PCS manufacturers in ESS value chain Top pick  Top pick: LS Industrial Systems 12-mth Company Price Rating Mkt Cap Target 20 Aug (KRW bn) Price Renewable energy-connected ESS to drive ESS market growth. (KRW) In 1H18, Korea’s energy storage system (ESS) market grew 20- (KRW) fold y-o-y to 1.8GWh (1.13GWh for peak-load shifting or peak- LS Industrial 71,300 2,139 90,000 BUY cut ESS, 0.68GWh for renewable energy source (RES)-connected Systems (010120 KS) ESS). We estimate new ESS capacity to be 0.75GWh (0.34GWh for peak-cut, 0.41GWh for RES-connected) in 2H18 and to reach Our coverage / companies on our radar 2.56GWh in 2018 (+333% y-o-y). With most discount benefits Hyundai Electric regarding ESS set to be rolled back in 2021, peak-cut ESS & Energy System 64,900 662 77,000 BUY demand is likely to decline going forward. However, the RES- (267260 KS) connected ESS market should see growth, driven by photovoltaic RS Automation (PV)-connected ESS. For 2018, supply of PV-connected ESS is 14,150 129 N/A Not rated estimated at 1.1GWh representing 43% of total new ESS (140670 KS) installations. With the Renewable Energy Certificate (REC) weighting on PV installations in woodlands being reduced, there Source: Bloomberg Finance L.P., DBS Bank should be fewer small-scale PV projects but more large-scale ones. This should boost the ESS market, as large PV projects tend to adopt high-capacity ESS. Against this backdrop, new ESS installations in Korea are projected to be above 2GWh per annum over the long term.

Focus on power conditioning system (PCS) companies in ESS value chain. PCS is a core component for renewable power generation systems and ESS. It accounts for the second largest portion of total ESS building costs after batteries. Although battery prices dropped sharply in the past few years, PCS prices have declined marginally. We expect this price trend to continue for PCS going forward.

European peers point future direction for Korean players. We can draw a mid/long-term growth outlook for Korea’s renewable energy and ESS industries from cases in Europe, which saw an expansion of renewable energy and ESS a few years before Korea. Against this backdrop, Europe’s major electric equipment players (Siemens, Schneider Electric, ABB) enhanced their future growth potential, resulting in significant stock outperformance vs. General Electric in the US which was behind them in investments in new growth areas.

LSIS to be key beneficiary of ESS market growth. LS Industrial Systems (LSIS) is our top pick for the sector. While there are concerns over a q-o-q profit decline, due to sharp growth in 2Q18, we believe that it is time to accumulate the shares, given strong growth potential of the ESS market and subsequent benefits for the company. We also recommend keeping an eye on Hyundai Electric & Energy System and RS Automation and waiting for earnings growth factors to materialise.

ed: CK/ sa: LEY, CS

Industry Focus Electric Equipment

T able of Contents

I. Summary & focus charts 3

II. Check on Korean/overseas ESS markets 7 II-1. Acceleration of global trends towards renewable energy after adoption of Paris agreement II-2. Why the spotlight on ESS? II-3. Analysis of Korea’s rapidly-growing ESS market

III. ESS value chain 15 III-1. Various players in ESS value chain III-2. Why PCS is attractive in ESS value chain

IV . Overseas electric equipment companies 17 IV -1. Sharp share price gap between US General Electric and European companies IV -2. European electric equipment players leading Industry 4.0 revolution

IV. Company profiles 20 LS Industrial Systems – Top pick 20 Hyundai Electric & Energy System 26 RS Automation 31

Page 2 Company Focus Electric Equipment

I. Summary & focus charts. ESS can address duck curve problems in power grid However, there are critical problems in PV power generation Korean ESS market grew 20-fold y-o-y in 1H18 equipment. Not only are power generation costs high, but PV Interest is high in the domestic ESS market. According to a power generation causes instability to power grids. A higher press release from the Ministry of Trade, Industry and Energy portion of PV power generation could cause the ‘duck curve’. (MOTIE) on 17 Jul, 1.8GWh of new ESS capacity was added in The duck curve, which was discovered and coined by the 1H18 (20-fold increase y-o-y). There was widespread doubt California Independent System Operator (CAISO) in 2013, about the economic feasibility of the ESS market but this was refers to net load dropping sharply between sunrise and sunset dispelled by strong government policy support in 2017. upon an increase in PV power generation, forming a graph that looks like a duck’s belly. ESS can help resolve several In early 2017, the Korean government introduced aggressive problems caused by the duck curve. incentives to expand the penetration of peak-cut ESS, including expansion of basic tariff discounts by three times and a 50% As such, the RES-connected ESS market grows together with charging tariff discounts for light-load hours. As a result, the the expansion of solar PV power generation. Increasing the use average payback period for ESS investments has decreased of renewable energy (including solar PV) has been the global from 10 to 5 years. With most discounts set to decrease from trend since the adoption of the Paris Agreement in Dec 2015. 2021, demand for peak-cut ESS should weaken over time. This has also led to sharp growth for the industries related to However, potential demand for peak-cut ESS is estimated to be renewable power generation, such as ESS and electric over 10GWh, indicating strong growth potential and an equipment. The Korean government and companies have no accelerated penetration, depending on government policies. choice but to join the trend.

Grow th of renewable energy-connected ESS to move in sync Mark ed growth likely for PCS w ith expansion of solar PV system installations in Korea Growth of the ESS value chain should boost growth of other As for ESS connected with renewable energy source (RES), the areas. First of all, we expect sharp growth of the battery market should move in line with the penetration of solar PV industry, considering that batteries account for the largest power generation system in Korea. According to the 8th Basic proportion of ESS costs. Significant growth is also projected for Plan for Electricity Supply and Demand released at end-2017, power conditioning systems (PCS), which represents the the government plans to add solar PV power generation second largest portion of ESS building costs. PCS is a core capacity of 30.8GW between 2018 and 2030. The target is component for renewable power generation and the ESS increasing accumulated capacity fivefold or more by 2030 from ecosystem. While battery prices have dropped sharply over the 5.7GW at end-2017. past few years, PCS prices have shown only a limited decline. PCS is a kind of inverter, which has been used for industrial automation equipment for decades. As such, we see limited downside room for PCS prices, compared to battery prices.

Page 3 Industry Focus Electric Equipment

A nnual supply of power generation equipment (wind power/ A nnual supply of power generation equipment (wind power / solar PV) globally solar PV) in Korea : Efforts to increase use of renewable energy continue : Notable growth of solar PV power generation equipment

Wind power (Korea) PV (Korea) Wind power (global) PV (global) (MW) (MW) 120,000 1,500 100,000 1,200 80,000 900 60,000 600 40,000 20,000 300

0 0

Problems of ‘Duck Curve’ and positive effects of ESS adoption

• Renewable power generation (especially solar PV) lacks in the morning and evening when power demand is high. Therefore additional conventional power supply (nuclear, oil, coal, gas, etc.) is required. • Gas power plants are widely used, as they can be easily started and stopped. However, this could Duck curve cause an increase in gas prices. problems • Frequently turning on and off nuclear/oil/coal power generation could increase costs, and weaken power grid stability. • A sharp net load rise at a certain time requires construction of additional power plants and transmission/distribution networks. • ESS can store energy during midday when solar PV power generation is high and discharge it in the Effects of ESS morning and evening, thus lowering net load effectively. adoption • This removes the necessity to start/stop other power sources frequently, improving costs and system stability as a result. Source: Scottma dde n Mana ge me nt Consul ta nts, DBS Bank

Outlook for Korea’s ESS market Solar PV-connected ESS likely to grow substantially : Cumulative supply of 12.5GWh by 2022 Cumulative ESS supply in Korea (LHS) Supply of new wind power-connected ESS New ESS supply in Korea (RHS) Supply of new solar PV-connected ESS (GWh) (GWh) Supply of new peak-cut ESS 15 3.0 2.6 (GWh) 2.2 2.3 2.3 3.0 2.6 12 2.4 2.0 2.5 0.0 2.2 2.3 2.3 2.0 9 1.8 0.1 0.2 0.2 2.0 1.1 0.1 6 1.2 1.5 1.7 2.0 2.0 0.6 1.0 1.7 3 0.3 0.6 1.5 0.5 0.5 1.1 3.7 5.9 7.9 10.1 12.5 0.4 0 0.0 0.0 0.1 0.1 0.1 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2017E 2018E 2019E 2020E 2021E 2022E Source: Ministry of Trade, Industry, and Energy (MOTI E), DBS Bank’ Source: MOTIE , DBS Bank’ forecas ts forecas ts

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Company Focus Electric Equipment

ESS and renewable energy value chain

Source: DBS Bank

Companies in ESS value chain Break down of ESS installation costs

Description Related companies Battery System EPC PCS - Samsung SDI (006400 KS) - A core component that accounts for 50- - LG Chem (051910 KS) (%) 70% of total ESS production cost Battery - SK Innovation (096770 KS) - Most batteries used in ESS currently are - Ecopro (086520 KS) 40 lithium-ion batteries 38 - L&F (066970) - LS Industrial Systems (010120 KS) 32 - RS Automation (140670 KS) 30 - Power Conditioning System, also known - LG Electronics (066570 KS) as inverter. Its main functions are DC-AC - Hyosung Heavy Industries (298040 KS) 24 PCS conversion and voltage/frequency control 23 - Hyundai Heavy Industries Green Energy - It makes up 15-20% of total ESS 20 20 (Hyundai Heavy Industries' wholly-owned production cost 16 16 non-listed subsidiary) 13 14 - Destin Power (non-listed) - LS Industrial Systems (010120 KS) 8 - Hyundai Electric (267260 KS) Energy Management System. It means - LG CNS (non-listed) EMS software/hardware that control and 0 - Samsung SDI (006400 KS) manage ESS - Hyosung Heavy Industries (298040 KS) 2016 2020E 2025E - Doosan Heavy Industries (034020 KS) Source: Respecti ve compa ni es , DBS Bank’ foreca s ts Source: BNEF, DBS Bank’ forecas ts

Sharp share price gap between US General Electric and European players (Siemens, Schneider Electric, ABB) GE Siemens ABB (2000.01=100) Schneider Electric S&P 500 Euro Stoxx 50 400

300

200

100

0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Source: Bloombe rg Finance L.P., DBS Bank

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Industry Focus Electric Equipment

Siemens: Digital factory (factory automation solution)

Source: Siemens , DBS Bank

Schneider Electric: Smart grid solution ‘EcoStruxure’

Source: Schnei de r Electric, DBS Bank

Siemens: Earnings trend and outlook Schneider Electric: Earnings trend and outlook Schneider revenue (LHS) Siemens revenue (LHS) Siemens OP (RHS) Schneider OP (RHS) (EUR bn) (EUR bn) (EUR bn) (EUR bn) 100 10.0 30 5

80 7.5 24 4

60 5.0 18 3

40 2.5 12 2

20 0.0 6 1

0 (2.5) 0 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18E 19E 18E 19E Source: Bloombe rg Finance L.P., DBS Bank Source: Bloombe rg Finance L.P., DBS Bank

Page 6 Company Focus Electric Equipment

II. Check on Korean/overseas ESS markets II-1. Acceleration of global trends towards renewable energy With the Paris Agreement set to take effect in 2020, the work after adoption of Paris Agreement programme for each country will be finalised in Poland in Dec 2018. Despite US withdrawal from the agreement, renewable In Dec 2015, 195 states signed the Paris Agreement to reduce energy penetration has accelerated around the world. In greenhouse gas emissions. The Paris Agreement is very particular, China has expanded its renewable power significant in that its signatories include both dev eloped and generation capacity amid a growing air pollution crisis. Europe, developing countries, while the 1998 Kyoto Protocol the US, Japan and Korea are also expanding power generation committed only developed countries. Despite US withdrawal from renewable energy sources suitable for their own from the Paris Agreement in Jun 2017, efforts to expand conditions. Backed by its abundant wind resources, Europe renewable power generation have continued to reduce (especially northern Europe) has focused on wind power. In greenhouse gas emissions. In the US, California Governor Jerry contrast, Asian countries including Korea have expanded solar Brown and former New York City Mayor Michael Bloomberg PV power generation capacity. have led voluntary efforts to cut greenhouse gas emissions.

A nnual supply of power generation equipment (wind power A nnual supply of power generation equipment (wind power / solar PV) globally: Efforts to increase use of renewable / solar PV) in Korea: Notable growth of photovoltaic power energy continue generation equipment

Wind power (Korea) PV (Korea) Wind power (global) PV (global) (MW) (MW) 120,000 1,500 100,000 1,200 80,000 900 60,000 600 40,000 20,000 300 0 0

Source: GWEC (Global Wind Energy Council), British Petroleum Statistical Source: Korea Energy Agency Renewable Energy Center, The 8 th Basic Plan Revie w, DBS Bank for Electrici ty Supply and Demand, DBS Bank A nnual supply of power generation equipment (wind power) A nnual supply of power generation equipment (solar PV) in in major countries: European countries increasing wind major countries: Asian countries focusing more on solar PV power generation proactively than wind power Europe Germany Europe Germany (MW) US China (MW) US China 35,000 Japan Korea Japan Korea 60,000 30,000 50,000 25,000 40,000 20,000 30,000 15,000 10,000 20,000 5,000 10,000 0 0

Source: GWEC (Global Wind Energy Council ), DBS Bank Source: British Petrole um Statistical Revie w, DBS Bank

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Industry Focus Electric Equipment

II-2. Why the spotlight on ESS?

ESS can be an effective solution to the duck curve problem. It The recent spotlight on the ESS market is highly related to the can store energy during midday when solar PV power global expansion of solar PV power generation. A higher generation is high and discharge it in the morning and evening, portion of PV power generation in the energy mix could cause lowering net load effectively. The CAISO has established the the ‘duck curve’. The duck curve, which was discovered and entire energy storage mandate (1.3GWh by 2024) for coined by the CAISO in 2013, refers to net load dropping California’s three biggest utility providers – PG&E, SCE and sharply between sunrise and sunset upon an increase in PV SDG&E. It also requires other power companies to secure power generation, forming a graph that looks like a duck’s energy storage equivalent to 1% of peak demand by 2020. belly. The net load curve increases sharply in the morning and The importance of ESS is expected to grow in Korea as well, evening when power demand is high but renewable power with its solar PV equipment penetration likely to rise under the generation is low (especially solar PV). To meet pow er demand, country’s ‘Renewable Energy 3020’ goal. power generation from conventional sources (nuclear, oil, coal, and natural gas) needs to be increased temporarily. This could cause cost increases and instability to power grids.

Duck Curve T erms related to Duck Curve

Term Description • Total load regardless of source. It increases during midday when power demand is high. Total Load • Sources include nuclear energy, oil, coal, natural gas, renewable energy, and self power generation.

• Total load – load served by BTM systems System Load •BTM (Behind-the-meter system): Power generation sources (e.g. rooftop solar PV) that do not sell into wholesale markets

• System load - load served by utility-scale variable generation (wind, solar PV, and solar thermal) • Power demand met by conventional power generation (nuclear, Net Load oil, coal, gas, etc.) • Net load increases in the morning and evening when power demand is high but renewable power generation is in short (duck curve)

Source: Scottma dde n Mana ge me nt Consul ta nts, DBS Bank Source: Scottma dde n Mana ge me nt Consul ta nts, DBS Bank

Problems of ‘Duck Curve’ and benefits of ESS adoption

Source: Scottma dde n Mana ge me nt Consul ta nts, DBS Bank

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Company Focus Electric Equipment

II-3. Analysis of Korea’s rapidly-growing ESS market the MOTIE estimates ESS installation costs at KRW540m (per MWh), we assume that the ESS market expanded by The global ESS market has recently shown strong growth, KRW978.5bn in 1H18. This is a remarkable growth, given that which we expect to continue for some time. Korea’s ESS several years before the market was estimated to reach only market has also expanded rapidly , backed by government KRW500bn in 2018. support. According to the MOTIE, 1.8GWh of new ESS capacity was added in 1H18 (20-fold increase y-o-y). By type, peak-cut We attribute this strong growth to: i) the strengthening of ESS capacity increased by 226 times to 1,129MWh, while RES- government support since 2017; and ii) a continued decrease connected ESS capacity expanded by 16 times to 683MWh. As in battery prices over the past few years.

Cumulative ESS installations vs. new installations expected Korea’s ESS market grew sharply in 1H18 to KRW978.5bn globally Cumulative ESS installations globally Supply of new peak-cut ESS (GWh) New ESS installations globally (MWh) Supply of new ESS for renewable energy 90 1,200 1129 75 2017~2024 CAGR 33% 1,000 60 800 683 45 600 30 15 400 0 200 5 42 0 1H17 1H18

Source: Ernst & Young, Bloombe rg New Energy Finance , DBS Bank Source: MOTIE , DBS Bank

Prev ious outlook for Korea’s ESS market: The market is growing fast, far outpacing past forecasts

(KRW bn) Outlook for Korea's ESS market 1,000

800

600

400

200

0 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: MOTIE (2013 -2014) Outlook for Korea’s Energy Technol ogy Mark e t, DBS Bank

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Industry Focus Electric Equipment

The Korean government has expanded its support for Benefits of ESS adoption come from different tariff rates for renewable energy and ESS expansion since early 2017. This light-load hours (late-night) and peak hours (afternoon). includes an expansion of basic tariff discounts by three times Companies can charge the ESS during late-night hours (at low and a 50% charging tariff discounts for light-load hours. In rates) and use it during midday hours (at high rates). They can May 2017, additional discounts were provided for the addition benefit from tariff reduction during midday and basic tariff of renewable power generation equipment. Backed by active discounts from peak power cut. support, the domestic peak-cut ESS market began to grow sharply from 2H17 onwards. The current discounts for peak- Recently there was controversy over whether to raise industrial- cut ESS will be effective until end-2020 and rolled back use overnight electricity tariffs. Fortunately, there should be no subsequently. As such, it is more advantageous for companies hike in 2018. Any tariff hike in 2019 or later would make ESS to adopt ESS as soon as possible. adoption less attractive for companies. We advise investors to monitor such policy changes when looking at the peak-cut ESS market.

Government support for peak-cut ESS (electricity-customer side) Main targets Electricity customers with high power consumption during midday (power supplied from KEPCO)

1. Basic tariff discount - 3 times the average peak demand cut of ESS x basic tariff - 3x cut is applied from 1 Jan 2017 until 31 Dec 2020. Before then, 1x cut is applied. - 1x cut is applied from 1 Jan 2021 until 31 Mar 2026.

2. Charging tariff discount - 50% charging tariff discount for light-load hours (11 p.m. – 9 a.m.) Benefits (applied from 1 Jan 2017 until 31 Dec 2020; 10% discount before then)

3. Differential discount based on ratio of ESS battery capacity to contract power - The discounts (described above) are applied differentially, depending on the ratio of ESS capacity to contract power (applied from 1 Jan 2017 until 31 Dec 2020), as follows: - Less than 5%: 0.8x discount amount - 5-10%: 1x discount amount - 10% or higher: 1.2x discount amount

Additional discount for industrial/residential electricity customers who consume electricity that they produced from renewable energy sources (applied from 1 May 2017 until 31 Dec 2020)

1. 50% discount to the amount of self-consumption (kWh) of renewable energy multiplied by the Additional discounts for average selling price for peak and off-peak hours for the previous year renewable power generation equipment 2. Additional discount to the discount amount above based on ratio of ESS battery capacity to installation contract power - Less than 5%: No additional discount - 5-10%: Additional 20% of discount amount above (1.) - 10% or higher: 50% of discount amount above (1.)

Source: KEPC O, MOTIE , DBS Bank

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Company Focus Electric Equipment

With regards to government support for renewable power weight for ESS has been delayed to 2020. As for solar PV producers, the adjustment of weight applied to Renewable power generation in woodlands, the government also plans to Energy Certificate (REC) is most important. The government require restoration of the sites to their original state after 20 used to apply a high weight to RES-connected ESS. However, years of use. This should give rise to large-scale renewable the REC weight adjustments were announced on 18 May and energy projects led by government agencies, rather than small took effect on 26 Jun 2018. The key features of the solar PV projects flooding the woodlands. Such large-scale adjustments include: i) lower weight on solar PV power projects show high ESS adoption rates, and should have a generators installed in woodlands; ii) lower weight on positive impact on the RES-connected ESS market. bio/waste-fueled power generation; and iii) weight retention Furthermore, as woodland PV power producers can also for offshore solar PV power generators and RES-connected benefit from ESS adoption, the outlook for the RES-connected ESS. It is encouraging that the downward adjustment to ESS market is bright.

Government support for RES-connected ESS (electricity-supplier side) Main target Renewable power producers (solar PV, wind, etc.)

Electricity sales (power generation x SMP) + REC profit (power generation x REC price x weight) Profit * Land SMP of KRW89.22/kWh (as of Jun 2018), REC price (recent closing price) of structure KRW104.5/kWh

- REC weight for solar PV-connected ESS: 5.0 (to be lowered to 4.0 from 2020) - REC weight for wind power-connected ESS: 4.5 (to be lowered to 4.0 from 2020) - Weighted values of 5.0 (solar PV) and 4.5 (wind power) for ESS charging between 10 a.m. and Notes 4 p.m. and discharging for other hours. - 5.0 weight newly established for solar PV-connected ESS in Sep 2016 - Wind power-connected ESS weight lowered from 5.5 in 2015 to 5.0 in 2016 and 4.5 in 2017

Source: KEPC O, MOTIE , KPX, DBS Bank Ov erview of adjustments to weight applied for Renewable Energy Certificate (REC) effective 26 Jun 2018 Energy sources and criteria REC weight Power source Notes Energy Detailed criteria Current Revised Woodland 0.7~1.2 0.7 Grace period set Solar PV Offshore 1.5 To remain as it is - Connection less than 5km 1.5 2.0 Connection 5-10km 2.5 (complex) Wind power Offshore Effective immediately Connection 10-15km 2.0 3.0 (complex) Connection over 15km 3.5 (complex) Co-firing with coal 1.0 Weight no longer applied Effective immediately Wood chips, Facility to convert to single material firing 1.0 0.5 Effective immediately wood pellets Phase 1 1.0 Single material firing 1.5 Grace period set Phase 2 0.5 Co-firing with coal 1.0 Weight no longer applied Effective immediately Facility to convert to single material firing 1.0 0.3 Effective immediately Biomass energy Bio-SRF Phase 1 0.5 Single material firing 1.5 Grace period set Phase 2 0.25 Co-firing with coal 1.0 1.5 Unused Facility to convert to single material firing 1.0 2.0 Effective immediately biomass Single material firing 1.5 2.0 General waste 0.5 Waste RDF single material firing 0.25 Grace period set 1.0 Waste gas-fired power generation Connected to wind power generators 4.5 (Jun 2018) 4.0 (2020) - ESS Connected to solar PV power generators 5.0 (Jun 2018) 4.0 (2020) - Source: KEPC O, MOTIE , DBS Bank

Page 11

Industry Focus Electric Equipment

For Korea, the new and accumulated ESS capacity is estimated Energy 3020’ goal. We have estimated future ESS penetration at 2.6GWh and 3.7GWh respectively in 2018. This is by multiplying solar PV and wind power generation equipment attributable to sharp growth in the peak-cut and RES- capacity with a fair ESS adoption rate. We applied 1MWh of connected ESS markets. However, new capacity is likely to ESS capacity for every 1MW of solar power generation decrease slightly in 2019-2020. With tariff discounts for peak- equipment and 0.2MWh of ESS capacity for every 1MW of cut ESS set to be rolled back or overturned in 2020, peak-cut wind power generation equipment. Fair ESS capacity per 1MW ESS adoption will become less attractive. However, this outlook of solar PV power generation is known to be 2-3MWh. This may seem conservative, considering that there is considerable applies to large-scale ESS projects connected with solar PV potential demand for peak-cut ESS. The Korean government power generation. However, new RES-connected ESS capacity currently requires public agencies having electricity amounted to 683MWh in 1H18, which was equivalent to only procurement contracts for 1,000kw per day or above to install 0.76x of solar PV systems installed (900MW). Downward ESS capacity equivalent to 5% or more of the contracted adjustments to REC weight should lead to reduction of small- power. This should result in new ESS capacity installation of scale solar PV projects in woodlands and expansion of large- 244MWh or more per annum until 2020. Considering that the scale projects led by government agencies. While we expect a total contracted power should be similar to the total power rise in the average ESS adoption rate, we have conservatively generation equipment capacity (118GW as of May 2018), we applied the 1:1 ratio to drive our estimates. In its press release estimate potential demand for peak-cut ESS in Korea at 6- on 16 Jul, Korea Southern Power (KOSPO) said that power 12GWh, assuming target penetration at 5-10%. The domestic storage capacity of 0.6MWh is needed for one unit of wind peak-cut ESS market has strong growth potential, as its power generator (3MW). Reflecting this, we have applied ESS accumulated installed capacity is less than 2GWh. However, capacity of 0.2MWh for every1MW of wind power generation the pace of the ESS market expansion will depend on capacity. The necessary ESS capacity should differ for each government policies. renewable power generation projects, depending on each project’s characteristics (climate conditions, power transmission The RES-connected ESS market is highly related to the distance/time, power demand patterns for surrounding areas, renewable energy equipment plan of the 8th Basic Plan for etc.). For convenience of analysis, however, we have applied Electricity Supply and Demand. The government has set yearly the average ESS adoption rate, which is known to be the most renewable energy equipment plans under the ‘Renewable efficient level under the current government support.

Outlook for Korea’s ESS market Solar PV-connected ESS likely to grow substantially : Cumulative supply of 12.5GWh by 2022 Cumulative ESS supply in Korea (LHS) Supply of new wind power-connected ESS New ESS supply in Korea (RHS) Supply of new solar PV-connected ESS (GWh) (GWh) Supply of new peak-cut ESS 15 3.0 2.6 (GWh) 2.2 2.3 2.3 3.0 2.6 12 2.4 2.0 2.5 0.0 2.2 2.3 2.3 2.0 9 1.8 0.1 0.2 0.2 2.0 1.1 0.1 6 1.2 1.5 1.7 2.0 2.0 0.6 1.0 1.7 3 0.3 0.6 1.5 0.5 0.5 1.1 3.7 5.9 7.9 10.1 12.5 0.4 0 0.0 0.0 0.1 0.1 0.1 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2017E 2018E 2019E 2020E 2021E 2022E Source: MOTIE , DBS Bank’ forecas ts Source: MOTIE , DBS Bank’ forecas ts

Page 12 Company Focus Electric Equipment

In terms of capacity, RES-connected ESS supply was 0.76x PV Outlook for PV installations and PV -connected ESS (assuming installations in Korea in 1H18 that they will be supplied at a ratio of 1:1)

1H18 New solar PV power generation equipment supply (LHS) New solar PV-connected ESS supply (RHS) 1,000 899.9 (GW) (GWh) 800 683 2.5 2.5 2.0 2.0 600 2.0 1.7 1.7 2.0 400 1.5 1.5 200 72.1 1.1 0 1.0 1.0 New solar PV power New wind power New renewable generation generation energy ESS supply in 0.5 0.5 equipment supply in equipment supply in Korea (MWh) 1.4 1.7 1.7 2.0 2.0 Korea (MW) Korea (MW) 0.0 0.0 2018E 2019E 2020E 2021E 2022E Source: MOTIE , The 8th Basic Plan for Electrici ty Supply and Dema nd, DBS Source: MOTIE , Korea Energy Agency Rene wa ble Energy Cente r, DBS Bank Bank Note: Typicall y, a PV-connected ESS can store 2-3 times of electri ci ty genera te d by the PV facility

2018-2030 renewable energy supply targets: 30.8GW for PV, 16.5GW for wind power, 1.4GW for other sources with 28.8GW out of the total target to be supplied through large-scale projects

Self-consumption by residential/commercial Large projects, buildings, 2.4GW, 5% 28.8GW, 59%

Solar PV for Small businesses (co- farms, 10GW, operatives), 7.5GW, 21% 15%

Source: MOTIE (Rene wa bl e energy 3020 Imple me nta ti o n Plan) DBS Bank Prime examples of PV-connected ESS: ESS capacity is 17.x-3.6x higher than PV generation capacity.

Report date Operator Description 2018-07-27 Korea Industrial Complex Corporation 0.5MW solar PV, ESS 1MWh on factory rooftops 2018-07-25 Topsun 70MW solar PV, ESS 200MWh in Haenam, South Jeolla province 2018-07-19 Korea Western Power 13.9MW solar PV, ESS 23.9MWh on idle land and rooftops of a power plant 2018-07-10 Doosan Heavy Industries 1.5MW solar PV, ESS 3MWh at a car park in its Changwon HQ 2018-04-12 LS Industrial Systems-Busan City 1MW solar PV, ESS 3MWh in water treatment facilities and factories To supply battery modules for the Hawaii Kauai Island project (28MW solar PV, 2018-03-05 Samsung SDI ESS 100MWh)

Source: Media reports, DBS Bank

Page 13 Industry Focus Electric Equipment

Battery prices are also important, considering that they years. Battery prices should continue to decline, considering account for a large share of ESS installation costs. Along with the recent price downtrend for key raw materials (cobalt, the government’s tariff discounts, initial installation costs are nickel, etc.). If battery prices continue to decrease, the payback one of the most critical factors for the investment payback period would remain at around five years even after the period. In the early 2010s, the payback period was about 20 rollback of the discount policy after 2020. The government is years for ESS projects. In 2016, it shortened to six years for highly likely to extend or strengthen ESS support if battery peak-cut ESS, backed by battery price drops and tariff prices do not drop enough. If the payback period can remain discounts. From 2017, further expansion of tariff discount at five years, ESS projects seem attractive investments, programmes helped reduce the period to five years. Prices of considering the average life of 15 years for ESS lithium-ion lithium-ion batteries, which are most widely used for ESS, have batteries. continued to decline on economies of scale for the past few

Global price of lithium-ion battery and costs to build ESS in Break down of ESS installation cost: The proportion of battery Korea cost is currently high but likely to fall gradually. Global lithium-ion battery price (LHS) Battery System EPC PCS ESS installation cost in Korea (RHS) (%) (US$/KWh) (KRW bn/MWh) 40 400 1.0 38 32 320 0.8 30

24 23 240 0.6 20 20 16 16 160 0.4 13 14 8 80 0.2 0 0 0.0 2016 2020E 2025E 2015 2016 2017 2018E2019E2020E2021E2022E Source: Bloombe rg New Energy Finance , media reports, DBS Bank Source: Bloombe rg New Energy Finance , media reports, DBS Bank

Outlook for Korea’s ESS market Prices of cobalt and nickel dropped recently

ESS market size (in terms of value, LHS) LME cobalt price (LHS) LME nickel price (RHS) ESS market size (in terms of capacity, RHS) (US$/MT) (US$/MT) (KRW bn) (MWh) 100,000 35,000 1,500 3,000 80,000 28,000 1,200 2,400 60,000 21,000 900 1,800 40,000 14,000 600 1,200 20,000 7,000 300 600 0 0 0 0 2011.01 2011.06 2011.11 2012.04 2012.09 2013.02 2013.07 2013.12 2014.05 2014.10 2015.03 2015.08 2016.01 2016.06 2016.11 2017.04 2017.09 2018.03

Source: MOTIE , BNEF, DBS Bank Source: Bloombe rg Finance L.P., DBS Bank

Page 14 Company Focus Electric Equipment

III. ESS value chain software and hardware system that controls ESS. The EMS III-1. Various players in ESS value chain market is led by large companies that provide ESS total solutions. The battery and PCS markets are dominated by a The ESS value chain can be divided into battery, power small number of companies, due to technology barriers and conditioning system (PCS) and energy management system high level of manufacturing capability requirements. As such, (EMS) companies. Batteries and PCS account for the largest further expansion of the ESS market should benefit battery and and second largest proportions of ESS costs. EMS is the PCS companies more than any other players.

ESS and renewable energy value chain

Source: DBS Bank

Companies in ESS value chain: Battery and PCS players to Companies in ESS value chain: Competition to be stiffer for benefit power transmission/distribution players Description Related companies Solar PV: - OCI (010060 KS) - Hanwha Chemical (009830 KS) - Woongjin Energy (103130 KS) - LS Industrial Systems (010120 KS) Description Related companies - Shinsung E&G (011930 KS) - Polysilicon, ingot, - Samsung SDI (006400 KS) - S-Energy (095910 KS) - A core component that accounts for 50- wafer, solar cell, - LG Chem (051910 KS) - LG Electronics (066570 KS) 70% of total ESS production cost Renewable module, Battery - SK Innovation (096770 KS) - Hanwha Q-Cell (non-listed) - Most batteries used in ESS currently are energy power solar PV EPC/power - Ecopro (086520 KS) - Hyundai Heavy Industries Green Energy lithium-ion batteries generation generation business - L&F (066970) (Hyundai Heavy Industries' wholly-owned non- equipment - Wind power listed subsidiary) - LS Industrial Systems (010120 KS) generation turbine, - RS Automation (140670 KS) - Power Conditioning System, also known wind power tower - LG Electronics (066570 KS) Wind power: as inverter. Its main functions are DC-AC - Hyosung Heavy Industries (298040 KS) - Doosan Heavy Industries (034020 KS) PCS conversion and voltage/frequency control - Hyundai Heavy Industries Green Energy - Hyosung Heavy Industries (298040 KS) - It makes up 15-20% of total ESS - CS Wind (112610 KS) (Hyundai Heavy Industries' wholly-owned production cost - Unison (018000 KS) non-listed subsidiary) - Dongkuk S&C (100130 KS) - Destin Power (non-listed) - LS Industrial Systems (010120 KS) - LS Industrial Systems (010120 KS) - Hyundai Electric (267260 KS) - Hyundai Electric (267260 KS) Energy Management System. It means - LG CNS (non-listed) - Hyosung Heavy Industries (298040 KS) EMS software/hardware that control and - Samsung SDI (006400 KS) Power - LS (006260 KS) manage ESS - Hyosung Heavy Industries (298040 KS) distribution Circuit breakers, - Taihan Electric Wire (001440 KS) - Doosan Heavy Industries (034020 KS) board / switchgears, meters, - Iljin Electric (103590 KS), Kwang Myung transmission electric wires, Electric (017040 KS), Daewon Cable (006340 system transformers, etc. KS), Gaon Cable (000500 KS), Semyung Electric Machinery (017510 KS), Cheryong Electric (033100 KS), PS TEC (002230 KS), Omnisystem (057540 KS), VitzroSys (054220 KS), I&C Technology (052860 KS)

Source: Respecti ve compa ni es , DBS Bank Source: Respecti ve compa ni es , DBS Bank

Page 15

Industry Focus Electric Equipment

III-2. Why PCS is attractive in ESS value chain functions for AC motor operations. As such, PCS (renewable- ESS value chain) and inverters (automation equipment) share The share of PCS in ESS installation costs seems relatively low if many components. Electric equipment companies that produce we also include EPC (engineering, procurement, and inverters for automation equipment have a competitive edge in construction) and monitoring/control system costs. However, if terms of cost reduction and quality control in the PCS market. we only look at ESS hardware costs, PCS accounts for the second largest portion of costs, after batteries. PCS is also In the ESS value chain, PCS is more attractive than batteries, called an inverter (used for automation equipment), as they considering the limited downside risk to PCS prices. While have almost the same functions. PCS’s main functions are DC- batteries’ share in ESS installation costs is likely to decrease AC conversion and voltage/frequency control. As renewable with continued price drops, PCS’s share should remain at power generation equipment and ESS batteries store energy as current levels as inverters have been used in the industrial DC power, PCS (inverter) is required to connect them to the automation sector for several decades. If ESS penetration AC power grid and equipment. PCS can also control voltage increases upon drops in battery prices, PCS manufacturers and frequency to maintain power quality. Inverters used for would benefit from sales expansion. automation equipment have similar voltage/frequency control

Break down of ESS installation cost: The proportion of PCS LS Industrial Systems: Inverters price trend (price drops are cost to change little (a price decline as steep as the one seen limited for inverters, unlike batteries) for batteries is not likely)

Battery System EPC PCS LS Industrial System's avg. inverter price (domestic market) (%) 40 (KRW'000) 38 320 309 300 300 32 30 300 280 280 282 277 24 23 280 20 20 16 16 260 13 14 8 240 220 0 2016 2020E 2025E 200 2012 2013 2014 2015 2016 2017 1Q18 Source: Bloombe rg New Energy Finance , media reports, DBS Bank Source: LS Industri al Syste ms , DBS Bank

Major Korean players’ PCS

Source: DBS Bank Note: From the left, LS Industrial Syste ms ’, LG Electroni cs ’, and Hyosun g Heavy Industrie s’

Page 16

Company Focus Electric Equipment

IV . Overseas electric equipment companies 2010, especially with Siemens and Schneider. GE, once the IV -1. Sharp share price gap between US General symbol of American manufacturing might, was hit hard when Electric and European companies was kicked out of the Dow Jones Industrial Average in Jun 2018. Global top-tier electric equipment manufacturers include General Electric (US), Siemens (Germany), Schneider Electric (France), and ABB (Switzerland). Our analysis of these We believe that the share price gap is the result of the companies in terms of their share price trends for the past two emergence of new growth industries since 2010, including decades shows a sharp share price gap between European renewable energy, smart grid, and factory automation. companies and GE. The gap has significantly widened since

Sharp share price gap between US General Electric and European players (Siemens, Schneider Electric, ABB) GE Siemens ABB (2000.01=100) Schneider Electric S&P 500 Euro Stoxx 50 400

300

200

100

0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: Bloombe rg Finance L.P., DBS Bank

GE pushed out of Down Jones industrial average, replaced by Walgreens

Source: Googl e, DBS Bank

Page 17 Industry Focus Electric Equipment

IV -2. European electric equipment players leading investments in fossil fuel power generation projects (Europe) Industry 4.0 revolution and oil field projects since 2010 turned out to be strategic failures. Against the backdrop of its rapidly worsening earnings, At first glance, electric equipment does not seem a new growth GE recently announced its plan to divest its financial service, industry. However, European electric equipment companies are healthcare and oil field service units to focus on its airplane recognised as leaders of the Industry 4.0 revolution based on engine and power generation equipment businesses. The their advanced investments in new growth areas. They are company also plans to strengthen its wind power business. leading the renewable energy, smart grid and factory However, such a move seems belated. Its European peers have automation sectors, although there might be marginal been focusing on this segment since the early 2010s. This differences by company. In contrast, GE lags behind its should serve as a lesson for Korean electric equipment European peers in terms of investments in new growth manufacturers to invest in the future despite low near-term industries. GE also made investments in such industries, but its profit prospects, and not to follow the path of GE.

Different business environment/strategies for US GE and European peers Siemens Schneider Electric ABB General Electric Key markets Europe US • The renewable energy, supergrid and factory automation trends strengthened around 2010. • Despite Trump’s dismissal of the Paris Agreement in Jun 2017, the private sector has made active efforts to • Major power infrastructure companies in Europe (AREVA, Siemens, Prysmian) initiated the expand solar PV energy and ESS penetration. Business “Friends of the Supergrid” project in Mar 2010. environment • The Northern Europe Supergrid project aims to secure 25-30GW capacity for the first phase by • The tax reform from 2018 (under which 2020 (three phases until 2050 with total goal of 500GW). machinery/equipment purchase costs are exempt from tax base) will help expand automation equipment adoption. • Factory automation has also expanded, including Adidas's smart factory. Strong areas Strong areas • ABB operates similar businesses to Siemens and Schneider; however, its • GE is suffering from the lingering impact of 2008 • Renewable energy (wind • Renewable energy business capabilities are regarded weaker. financial crisis on its financial service unit. power, etc.) • It lags behind European peers, in terms of investments • Big data-based smart • It has strengthened smart factory in renewable energy and smart factory. • Digital factory (total grid solution business capabilities by recruiting talented Current status • It acquired France’s Alstom in 2015 to strengthen its automation solution) personnel from Siemens in 2016 and fossil fuel power generation; however, its competitiveness acquiring an industrial automation weakened, due to renewable energy price drops. • Medical diagnostic company in Austria in 2017. • It strengthened its oil field business in the early 2010s; equipment however, global oil price declines expanded its loss.

• It plans to sell/divest its financial service, medical diagnostic equipment, and oil field business units. • Its margin should improve, backed by • Their margin should improve further on strengthening • It plans to focus on airplane engine and power Future outlook its recent investments in industrial of effects of investments in new growth industries. generation equipment businesses. automation business. • It plans to strengthen its capabilities related to wind power. Source: Respecti ve compa ni es , media reports, DBS Bank

Siemens: Digital factory (factory automation solution) Schneider Electric: Smart grid solution ‘EcoStruxure’

Source: Siemens , DBS Bank Source: Schnei de r Electric, DBS Bank

Page 18 Company Focus Electric Equipment

80 7.5 24 4

60 5.0 18 3

40 2.5 12 2

20 0.0 6 1

GE revenue (LHS) GE OP (RHS) ABB revenue (LHS) ABB OP (RHS) (US$ bn) (US$ bn) (EUR bn) (EUR bn) 200 30 40 5 160 20 32 4

24 3 120 10

16 2 80 0

8 1 40 (10)

0 0 0 (20) 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18E 19E 18E 19E Source: Bloombe rg Finance L.P., DBS Bank Source: Bloombe rg Finance L.P., DBS Bank

Super Grid plan for Europe presents opportunities for European electric equipment players

Source: DNV GL, DBS Bank

Page 19 Regional Company Focus LS Industrial Systems Bloomberg: 010120 KS, Reuters: 010120.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 22 Aug 2018

BUY, KRW71,300 KOSPI: 2,247.9 Well-positioned for renewable (Closing price as of 20/8/18) energy era Price Target 12-mth: KRW90,000 (prev. KRW85,000)  Strong earnings growth driven by sharp growth Reason for Report: Update of domestic ESS sales Potential catalyst: Rapid growth of the domestic ESS market  2018 to start seeing new businesses come to Where we differ: We are more optimistic on growth of the automation fruition, with abundant growth potential ahead and convergence divisions  Reiterate BUY, TP raised to KRW90,000 Analyst Beneficiary of ESS market growth. The energy storage system Regional Research Team [email protected] (ESS) business drove earnings growth of LS Industrial Systems (LSIS) in 1H18. ESS represented most of smart grid sales (KRW71.9bn), with order intake from LS-Nikko Copper and Price Relative Samyang Group. Accordingly, the company’s 2Q18 earnings 90,000 130 were above our/consensus estimates, with revenue of 80,000 120 70,000 110 KRW660.5bn (+12.3% y-o-y, +11.7% q-o-q) and OP of 60,000 50,000 100 KRW65.3bn (+49.3% y-o-y, +17.9% q-o-q). 40,000 90 30,000 Bright outlook for 2H18, even better mid/long-term growth 80 20,000 10,000 70 potential. We expect growth of the company’s power 0 60 infrastructure division to decelerate in 2H18, due to the Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) slowdown of capex growth in Korea’s IT industry. However, this Forecasts and Valuation should be offset by robust growth in its automation and FY Dec (KRW bn) 2017A 2018F 2019F 2020F convergence divisions. In particular, stronger-than-expected Revenue 2,343.7 2,538.8 2,737.4 2,887.2 results are expected for its ESS business. Recently the company EBITDA 246.3 314.7 329.4 342.6 also clinched an order for the largest ever domestic ESS project Operating profit 158.4 231.0 249.1 264.1 (battery 175MWh, PCS 34MW) consisting of five plants from the Pre-tax Profit 138.5 217.0 251.9 266.2 Net Profit 106.0 164.6 192.4 203.2 SeAH Group. Over the past few years, LSIS has continued to Net Pft (Pre Ex.) 107.6 164.6 192.4 203.2 invest in new growth areas that have not generated profits such Net Pft Attributable to as renewable energy and high-voltage direct current (HVDC). Controlling Interest 105.1 163.3 190.8 201.5 2018 should mark a start to profit generation by these new EPS (KRW) 3,503 5,442 6,358 6,716 growth areas. EPS Pre Ex. (KRW) 3,586 5,485 6,413 6,773 EPS Gth (%) 30.2 55.3 16.8 5.6 Korean ESS market, especially solar PV-connected ESS, to EPS Gth Pre Ex (%) 34.0 53.0 16.9 5.6 continue strong growth. The downward adjustment to the Diluted EPS (KRW) 3,503 5,442 6,358 6,716 Net DPS (KRW) 1,100 1,100 1,100 1,100 renewable energy certificate (REC) weighting on photovoltaic (PV) BV Per Share (KRW) 38,191 42,595 47,853 53,469 installations in woodlands should reduce small solar PV projects PE (X) 18.6 13.1 11.2 10.6 and expand large-scale projects led by government agencies. This PE Pre Ex. (X) 18.2 13.0 11.1 10.5 should translate to growth of the ESS market, considering that P/Cash Flow (X) 7.1 5.4 7.9 7.6 EV/EBITDA (X) 8.9 7.0 6.5 5.8 large-scale solar PV projects usually install 2-3MWh ESS systems Net Div Yield (%) 1.7 1.5 1.5 1.5 per 1MW of power generation capacity. P/Book Value (X) 1.7 1.7 1.5 1.3 Our sector top-pick. We raise our TP for LSIS to KRW90,000, Net Debt/Equity (X) 0.2 0.0 CASH CASH ROE (%) 9.5 13.5 14.1 13.3 which is pegged to a 12-month forward target P/BV of 2.0x. Our target P/BV is based on 2018-2019F P/BV levels (vs. ROE) of its Earnings Rev (%): 3.2 7.1 1.9 global peers. Consensus EPS (KRW): 5,069 5,915 6,721 Other Broker Recs: B : 9 S : 0 H : 0 At A Glance ICB Industry: Electrical Equipment Issued Capital (m shrs) 30.00 ICB Sector: Industrials Mkt. Cap (KRWbn/US$m) 2,139/1,906 Principal Business: LS Industrial Systems develops, manufactures, Major Shareholders and maintains a variety of electric and industrial equipment. The LS (%) 46.0 company's major products include power transmission and Free Float (%) 51.75 distribution equipment as well as industrial automation equipment. Avg. Daily Vol. (‘000) 94 Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ed: CK/ sa: LEY, CS Company Focus LS Industrial Systems

Earnings forecasts Unit: KRW bn, % 2015 2016 2017 2018F 2019F 2020F 2021F Revenue 2,202 2,214 2,344 2,539 2,737 2,887 2,979 OP 154 124 158 231 249 264 270 EBITDA 244 214 246 315 329 343 347 NP 71 81 106 165 192 203 210 Net debt 461 311 240 62 (2) (157) (301) Revenue growth (3.9) 0.5 5.9 8.3 7.8 5.5 3.2 OP margin 7.0 5.6 6.8 9.1 9.1 9.1 9.1 Net margin 3.2 3.6 4.5 6.5 7.0 7.0 7.1 EPS growth (34.2) 14.8 30.2 55.3 16.8 5.6 3.6 ROE 7.0 7.8 9.5 13.5 14.1 13.3 12.3

Note: Based on consolidated K-IFRS Source: DBS Bank

Page 21 Company Focus LS Industrial Systems

LS Industrial Systems: Earnings estimates (KRW bn) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18F 4Q18F 2017 2018F 2019F Revenue 559.4 588.4 591.4 604.6 591.6 660.5 638.3 648.3 2,343.7 2,538.8 2,737.4 YoY (%) 11.7 12.0 12.9 (8.9) 5.8 12.3 7.9 7.2 5.9 8.3 7.8

Revenue by division Electric equipment 173.4 171.9 165.3 154.7 163.1 163.3 166.7 162.2 665.3 655.4 681.7 YoY (%) 10.8 5.3 5.2 (1.5) (6.0) (5.0) 0.9 4.9 4.9 (1.5) 4.0 % in revenue 31.0 29.2 28.0 25.6 27.6 24.7 26.1 25.0 28.4 25.8 24.9 Power infrastructure 130.5 146.5 169.1 174.9 163.5 158.6 175.5 168.1 621.0 665.7 687.3 YoY (%) 30.7 28.3 35.5 (6.6) 25.3 8.2 3.8 (3.9) 18.0 7.2 3.2 % in revenue 23.3 24.9 28.6 28.9 27.6 24.0 27.5 25.9 26.5 26.2 25.1 Automation 72.3 73.2 77.4 64.2 80.0 77.9 80.8 77.7 287.1 316.4 343.7 YoY (%) 0.1 3.1 17.4 (1.1) 10.6 6.4 4.5 20.9 4.8 10.2 8.6 % in revenue 12.9 12.4 13.1 10.6 13.5 11.8 12.7 12.0 12.3 12.5 12.6 Convergence 48.3 62.7 55.3 67.7 48.1 117.0 72.2 87.2 234.0 324.5 394.2 YoY (%) (13.5) (0.4) (9.9) (30.8) (0.4) 86.7 30.5 28.8 (15.8) 38.7 21.5 % in revenue 8.6 10.7 9.4 11.2 8.1 17.7 11.3 13.4 10.0 12.8 14.4 Subsidiaries 138.2 142.6 135.4 148.6 144.8 182.3 152.7 159.8 564.8 639.6 670.8 YoY (%) 7.4 11.5 15.9 2.0 4.8 27.8 12.8 7.6 8.8 13.2 4.9 % in revenue 24.7 24.2 22.9 24.6 24.5 27.6 23.9 24.7 24.1 25.2 24.5 Consolidation adjustment (3.3) (8.6) (11.2) (5.4) (7.9) (38.6) (9.7) (6.6) (28.5) (62.8) (40.3)

OP by division Electric equipment 39.9 35.9 36.8 26.0 33.6 32.0 36.8 29.1 138.7 131.5 137.6 YoY (%) 10.9 0.4 0.1 (21.8) (15.8) (10.9) (0.1) 11.8 (2.2) (5.2) 4.6 OPM (%) 23.0 20.9 22.3 16.8 20.6 19.6 22.1 17.9 20.9 20.1 20.2 Power infrastructure 0.0 1.9 13.1 13.6 13.6 10.4 8.8 5.0 28.5 37.8 37.9 YoY (%) TTB 832.4 TTB 78.8 189,031.2 457.7 (32.9) (62.9) TTB 32.5 0.2 OPM (%) 0.0 1.3 7.7 7.8 8.3 6.6 5.0 3.0 4.6 5.7 5.5 Automation 8.1 10.0 11.8 5.7 11.1 11.6 11.9 7.3 35.7 42.0 46.6 YoY (%) (10.4) 82.5 87.9 (4.3) 37.5 15.6 1.1 27.7 33.1 17.7 11.1 OPM (%) 11.2 13.7 15.3 8.9 13.9 14.9 14.8 9.4 12.4 13.3 13.6 Convergence (14.4) (9.5) (8.3) (27.6) (8.0) 1.5 0.1 0.5 (59.8) (5.9) 3.6 YoY (%) RR RR RR RR RR TTB TTB TTB RR RR TTB OPM (%) (29.9) (15.1) (15.0) (40.8) (16.6) 1.3 0.2 0.6 (25.6) (1.8) 0.9 Subsidiaries 2.1 5.6 0.8 4.3 2.8 11.7 1.8 4.2 12.8 20.6 18.2 YoY (%) (58.9) 5.7 (78.4) 19.4 33.3 108.9 135.9 (1.6) (27.4) 60.9 (11.4) OPM (%) 1.5 3.9 0.6 2.9 1.9 6.4 1.2 2.6 2.3 3.2 2.7 Consolidation adjustment 0.2 (0.2) 1.2 1.4 2.3 (1.9) 0.7 3.9 2.5 5.0 5.1

OP 35.9 43.7 55.4 23.4 55.4 65.3 60.2 50.1 158.4 231.0 249.1 YoY (%) 2.8 37.3 84.2 (15.2) 54.4 49.3 8.7 114.0 27.3 45.8 7.8 OPM (%) 6.4 7.4 9.4 3.9 9.4 9.9 9.4 7.7 6.8 9.1 9.1

Controlling-interest NP 19.2 32.7 37.7 15.5 42.5 39.7 44.4 36.6 105.1 163.2 190.6 YoY (%) 11.4 60.8 73.6 (27.6) 121.2 21.4 17.7 136.2 30.2 55.3 16.8 NPM (%) 3.4 5.6 6.4 2.6 7.2 6.0 6.9 5.6 4.5 6.4 7.0

Source: LS Industrial Systems, DBS Bank

Page 22 Company Focus LS Industrial Systems

LSIS: Earnings outlook for its convergence division Smart grid revenue Solar PV revenue Automotive electronics revenue (KRW bn) (KRW bn) Railway system revenue 480 15 Operating losses from the convergence division (RHS) 400 4 0 (6) 320 42 (15) (18) 195 240 62 152 (30) 169 68 160 122 109 (45) 19 76 93 80 31 45 (60) (60) 110 (67) 45 59 63 45 0 34 31 (75) 2015 2016 2017 2018E 2019E

Source: LS Industrial Systems, DBS Bank

LSIS: Solar PV and ESS projects LSIS: New module-type PCS launched in Jan 2018

Project description Bidding for Ireland's Electricity Supply Board's two 200MW solar 2H18 plants (worth KRW200bn; Hanwha Energy and LSIS to partake in the (expected) bid as a consortium. If they win, LSIS is likely to supply ESS) Constructed then-Korea's largest floating solar plant on Cheongpung Dec 2017 Lake (3MW, construction cost at KRW9bn) Completed construction of Japan's first ESS-connected 28MW solar Oct 2017 plant in Chitose (total construction cost at KRW112bn, EPC project by LSIS) Won an EPC project for 18MW 'Hanamizuki Solar Plant' in Ishikawa, Sep 2017 Honshu, Japan (total cost at KRW46bn, project duration Jan 2018-Jan 2019) Supplied solar PV modules, switchboards, transformers to 'Mito Feb 2015 Newtown Mega Solar Park' project in Mito, Ibaraki Constructed Korea's first floating solar farms in Hapcheon Dam in 2013 cooperation with K-water Source: LS Industrial Systems, DBS Bank Source: LS Industrial Systems, DBS Bank LSIS: Completed construction of Japan’s first MW-scale LS Group: HVDC projects in Korea and overseas ESS-connected solar plant (28MW) in Chitose in Oct 2017

Performed by Description

2H18 Expected to clinch West Coast 2nd HVDC conversion LSIS (expected) facility project Signed contract with KAPES for East Coast-Shin Gapyeong HVDC conversion facility construction project (226km, 2018.01 LSIS contract value at KRW176.5bn, project duration until 31 Dec 2021) Signed HVDC cable supply contract for 'North Dangjin- Godeok Underground Power Transmission System 2016.12 LSCS Construction‘, Korea's first onshore HVDC project (34km, contract value at KRW124.3bn) North Dangjin-Godeok HVDC conversion facility 2014.05 LSIS construction contract (34km, contract value at KRW67.1bn) Supplied 285kV underwater HVDC cable to Denmark 2013 LSCS Energy Agency (24.5km). This was Korea's first HVDC cable export Installed 250kV underwater HVDC cable for Jeju-Jindo grid 2013 LSCS connection (105km, contract value at KRW330bn) KAPES, which was established for domestic production of 2013 LSIS HVDC, selected LSIS for transfer of HVDC manufacturing technology First Korean company to produce 250kV HVDC 2012 LSCS underwater cable Source: LS Industrial Systems, DBS Bank Source: LS Industrial Systems, DBS Bank Note: LSCS (LS Cable & System)

Page 23 Company Focus LS Industrial Systems

Global peers’ valuations

Market cap PE (x) P/BV (x) EV/EBITDA (x) ROE (%) OPM (%) Company Stock code Country (US$ m) 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019

General Electric GE US US 106,900 13.1 11.7 2.5 2.7 13.3 11.3 12.8 9.5 11.9 12.5

Siemens SIE GR Germany 108,298 15.0 14.0 2.0 1.8 11.0 9.6 13.3 13.3 9.0 10.5

ABB ABBN SW Switzerland 49,540 17.0 14.8 3.1 2.9 10.0 8.8 18.1 20.1 11.7 12.4

Schneider Electric SU FP France 45,657 15.1 13.7 1.9 1.8 10.2 9.1 12.2 13.0 14.5 15.1

Mitsubishi Electric 6503 JP Japan 28,728 12.0 11.1 1.3 1.2 5.4 4.8 11.2 11.2 7.4 7.8

Shanghai Electric 601727 CH China 9,411 30.7 28.9 1.3 1.3 9.0 8.9 4.4 4.6 4.9 5.2

TBEA 600089 CH China 3,548 9.7 8.2 0.8 0.7 8.3 7.2 8.1 9.1 8.6 9.1

China XD Electric 601179 CH China 2,556 20.0 17.1 0.9 0.9 14.1 13.2 1.9 1.8 - -

LS Industrial Systems 010120 KS Korea 1,917 14.2 12.6 1.7 1.5 7.8 7.1 12.6 12.9 8.4 8.6

Hyundai Electric 267260 KS Korea 593 53.4 12.7 0.6 0.6 20.5 6.8 1.2 4.9 0.9 4.1 Global peers' average 16.6 15.0 1.7 1.7 10.2 9.1 10.2 10.3 9.7 10.4 (ex. Korean companies)

Source: Bloomberg Finance L.P., DBS Bank

Global electric equipment players’ P/BV and ROE LSIS: P/BV band

(P/BV, X) (KRW) 3.5 150,000 ABB 3.0 General Electric 120,000 2.5 2.5x Schneider 2.0 Siemens 90,000 Shanghai Electric 2.0x Electric 1.5 China XD LS Industrial Systems 60,000 1.5x Electric Mitsubishi Electric 1.0 1.0x 30,000 0.5 TBEA Hyundai Electric (ROE, %) 0.0 0 0 5 10 15 20 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: Bloomberg Finance L.P., DBS Bank Source: Dataguide, DBS Bank

Page 24 Company Focus LS Industrial Systems

BALANCE SHEET INCOME STATEMENT

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRWbn) 2016 2017 2018F 2019F 2020F Current Assets 1,417.5 1,416.1 1,585.4 1,825.6 2,013.9 Revenue 2,213.6 2,343.7 2,538.8 2,737.4 2,887.2 Cash & Short-term 393.6 410.4 594.2 657.9 812.9 Growth (%) 0.5 5.9 8.3 7.8 5.5 investment Accounts Receivable 825.6 782.1 738.9 878.0 904.0 Operating Profit 124.4 158.4 231.0 249.1 264.1 Inventories 146.8 166.9 195.0 231.8 238.6 Growth (%) (19.4) 27.3 45.8 7.8 6.0 Fixed assets 844.3 839.7 817.3 806.8 801.3 EBITDA 213.7 246.3 314.7 329.4 342.6 Non-operating Investment Assets 103.6 146.5 141.7 147.5 153.5 (22.4) (20.0) (14.0) 2.9 2.1 Gains/Losses Tangible Assets 610.5 577.4 563.2 554.3 549.0 Net Interest Income (16.8) (12.0) (9.6) (7.0) (4.5) Intangible Assets 130.2 115.8 112.3 105.0 98.8 Foreign Currency Gains 5.5 (38.2) 1.1 0.0 0.0 Total Assets 2,261.8 2,255.8 2,402.7 2,632.4 2,815.3 Equity Method Gains (0.3) 0.2 0.4 0.4 0.5 Current Liabilities 680.6 649.8 663.3 734.9 748.9 Pre-tax Profit 102.0 138.5 217.0 251.9 266.2 Accounts Payable 363.3 369.4 375.8 446.6 459.8 Net Profit 80.7 106.0 164.6 192.4 203.2 Net profit attributable to Short-term Debts 199.5 200.9 207.2 207.2 207.2 80.7 105.1 163.3 190.8 201.5 controlling interest Non-current Liabilities 515.1 457.9 458.9 459.2 459.7 Growth (%) 14.4 31.3 55.2 16.9 5.6 Long-term Debts 505.5 449.0 449.1 449.1 449.1 NOPLAT 97.9 123.1 175.2 190.2 201.6 Total Liabilities 1,195.7 1,107.7 1,122.2 1,194.2 1,208.6 (+) Dep 89.3 87.9 83.7 80.4 78.5 Capital Stock 150.0 150.0 150.0 150.0 150.0 (-) Wc (122.5) 14.0 (21.8) 104.9 19.4 Capital Surplus 1.2 1.2 1.2 1.2 1.2 (-) Capex 43.1 45.6 51.9 53.3 56.2 Earned Surplus 940.2 1,026.7 1,154.9 1,312.7 1,481.1 OpFCF 266.6 151.3 228.8 112.4 204.5 Capital Adjustment (26.8) (32.2) (28.2) (28.2) (28.2) 3 Yr CAGR & Margins Treasury Stock (25.5) (25.5) (25.5) (25.5) (25.5) Revenue growth(3Yr) (2.0) 0.8 4.9 7.3 7.2 Total Equity 1,066.1 1,148.1 1,280.5 1,438.2 1,606.7 OP growth(3Yr) (10.7) (0.8) 14.4 26.0 18.6 Invested capital 1,356.5 1,350.8 1,326.8 1,420.1 1,432.9 EBITDA growth(3Yr) (5.9) (0.4) 8.8 15.5 11.6 Net debt / (cash) 311.5 239.6 62.1 (1.6) (156.6) NP growth(3Yr) (10.9) 0.3 32.6 33.6 24.2 ROA 3.6 4.7 7.1 7.6 7.5 OP margin (%) 5.6 6.8 9.1 9.1 9.1 ROE 7.8 9.5 13.5 14.1 13.3 EBITDA margin (%) 9.7 10.5 12.4 12.0 11.9 ROIC 7.0 9.1 13.1 13.8 14.1 NP margin (%) 3.6 4.5 6.5 7.0 7.0

CASH FLOW KEY INDICATOR

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRW,x,%) 2016 2017 2018F 2019F 2020F Operating cash flow 242.2 144.6 414.6 166.3 260.6 Per share Data (w) Net Profit 80.3 107.6 164.6 192.4 203.2 EPS 2,690 3,503 5,442 6,358 6,716 Depr. & Amort. 89.3 87.9 83.7 80.4 78.5 BPS 35,486 38,191 42,595 47,853 53,469 Chg in Working Capital (0.8) (80.2) 17.3 (104.9) (19.4) DPS 800 1,100 1,100 1,100 1,100 Chg in Accounts 27.4 (9.2) (134.4) (139.2) (25.9) Valuation (x,%) Receivable Chg in inventories 5.2 (29.9) (26.7) (36.7) (6.8) PER 14.8 18.6 13.1 11.2 10.6 Chg in Accounts Payable 15.7 (1.9) 56.0 70.8 13.2 PBR 1.1 1.7 1.7 1.5 1.3 Investing cash flow (102.0) (163.8) (79.0) (70.8) (74.0) EV/EBITDA 7.0 8.9 7.0 6.5 5.8 Chg in Short-term 0.0 0.0 (0.9) (1.3) (1.4) Dividend yield 2.0 1.7 1.5 1.5 1.5 Investments Chg in Long-term (2.6) (14.3) (0.1) (0.3) (0.2) PCR 4.2 7.1 5.4 7.9 7.6 Investment Securities Capex (43.1) (45.6) (51.9) (53.3) (56.2) PSR 0.5 0.8 0.8 0.8 0.7 Disposal of Tangible & (10.3) (8.2) (9.8) (10.9) (10.9) Stabilities (%) Intangible Assets Financing cash flow (87.3) (54.1) (35.4) (33.0) (33.0) Liabilities Ratio 112.2 96.5 87.6 83.0 75.2 Chg in debt (58.3) (32.0) (6.3) 0.0 0.0 Net debt/Equity 29.2 20.9 4.9 CASH CASH Chg in Equity (29.3) (23.5) (29.0) (33.0) (33.0) Net debt/EBITDA 145.8 97.3 19.7 CASH CASH Dividend Payout 29.3 23.5 33.0 33.0 33.0 Current ratio 208.3 217.9 239.0 248.4 268.9 Chg in Cash 54.1 (78.6) 300.2 62.4 153.6 Interest coverage ratio 7.4 13.2 24.2 35.7 59.2 Gross cash flow 285.4 275.9 397.3 271.1 280.0 Interest/revenue 1.0 0.8 0.7 0.6 0.5 (-) Chg in WC (122.5) 14.0 (21.8) 104.9 19.4 Asset Structure (-) Capex 43.1 45.6 51.9 53.3 56.2 IC 73.2 70.8 64.3 63.8 59.7 (+) Disposal of Assets (10.3) (8.2) (9.8) (10.9) (10.9) Cash + IC(%) 26.8 29.2 35.7 36.2 40.3 Free Cash Flow 354.5 208.1 357.4 102.1 193.5 Capital Structure (-) Other Investments 2.6 14.3 0.1 0.3 0.2 Debt/Asset 39.8 36.1 33.9 31.3 29.0 Free Cash 351.9 193.8 357.3 101.8 193.3 Equity/Asset 60.2 63.9 66.1 68.7 71.0 Source:Source: KTBDBS Investment Bank & Securities *Asset = Equity + Debt, P/E is derived by using diluted EPS. Note:Note: ResultsResults are are consolidated consolidated This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date *Assetbased on =information Equity +and Debt, data obtained P/E is fromderived sources by we using consider diluted reliable. EPS.However, KTB Investment & Securities does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of KTB Investment & Securities Co. and thus, it may not be reproduced, distributed or modified without the prior consent of KTB Investment & Securities Co. This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, DBS Bank does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of DBS Bank and thus, it may not be reproduced, distributed or modified without the prior consent of DBS Bank.

Page 25 Regional Company Focus Hyundai Electric & Energy System Bloomberg: 267260 KS, Reuters: 267260.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 22 Aug 2018

BUY, KRW64,900 KOSPI: 2,247.9 Potential earnings rebound (Closing price as of 20/8/18)  Strong bargaining power and expansion of ESS Price Target 12-mth: KRW77,000 market to boost ESS margins  Sales to Middle East may recover with more Reason for Report: Update construction projects in the region Potential catalyst: Increase in construction projects in the Middle East Where we differ: We are more positive on a likely recovery of sales to  Retain BUY, KRW77,000 TP the Middle East and shipbuilders in 2019/2020 More room for ESS margin improvement. Hyundai Electric posted Analyst energy storage system (ESS) sales of KRW62.8bn in 1Q18 and Regional Research Team KRW39.4bn in 2Q18. Although sales declined q-o-q in 2Q18, the [email protected] ICT Solution division that used to hover near breakeven point recorded OPM of 4% in 2Q18, on the back of its selective ESS Price Relative orders. The company sources power conditioning systems (PCS), a key component of ESS, from Hyundai Heavy Industries Green 180,000 130 160,000 120 Energy and RS Automation, instead of producing them on its 140,000 110 120,000 100 own. Nonetheless, we think it could further improve its ESS 100,000 90 margins by reducing battery and PCS costs through high-volume 80,000 80 60,000 70 purchases, unlike small ESS companies. 40,000 60 20,000 50 Further margin improvement on growth of Korea’s ESS market. 0 40 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 The domestic ESS market should continue to grow rapidly from Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) 2018 onwards. Against this backdrop, the company should be Forecasts and Valuation able to meet its order intake goals, focusing on high-margin FY Dec (KRW bn) 2017A 2018F 2019F 2020F projects. It targets to clinch domestic orders worth KRW100bn in Revenue 1,449.6 1,979.8 2,221.1 2,357.0 2H18. As of end-2Q18, its ESS order backlog amounted to EBITDA 94.1 52.7 161.7 199.3 Operating profit 62.4 -3.4 101.9 137.9 US$82m (c.KRW91.7bn). Pre-tax Profit 22.4 11.1 94.6 131.3 Sales to shipbuilders and the Middle East could rebound in 2019. Net Profit 14.3 11.2 73.8 102.4 Net Pft (Pre Ex.) 14.3 11.2 73.8 102.4 Revenue from the Middle East and shipbuilders has shown no clear signs of recovery. However, earnings growth seems likely Net Pft Attributable to Controlling Interest 14.3 11.2 73.8 102.4 for 2019, considering: i) a steady increase in order backlog at EPS (KRW) 1,615 1,095 7,230 10,033 Hyundai Heavy Industries Group’s three shipbuilders; and ii) a EPS Pre Ex. (KRW) 1,615 1,095 7,230 10,033 likely increase in construction projects in the Middle East. EPS Gth (%) n/a -32.2 560.2 38.8 EPS Gth Pre Ex (%) n/a -32.2 560.4 38.8 Discounted against peers due to near-term uncertainty. Our TP Diluted EPS (KRW) 1,615 1,095 7,230 10,033 of KRW77,000 for Hyundai Electric is pegged to a target 2019F Net DPS (KRW) 0 0 0 0 P/BV of 0.7x, to which we applied a 20% discount to our initial BV Per Share (KRW) 101,885 103,092 110,323 120,355 PE (X) 70.6 59.3 9.0 6.5 target multiple of 0.9x that considered P/BV levels of global peers PE Pre Ex. (X) 70.6 59.3 9.0 6.5 (vs. ROE), in view of the company’s short-term earnings P/Cash Flow (X) 9.4 7.8 4.7 3.9 uncertainty. For future improvement in earnings, the company EV/EBITDA (X) 15.2 18.7 6.4 5.0 needs to see: i) a recovery in electric equipment sales to the Net Div Yield (%) n/a n/a n/a n/a P/Book Value (X) 1.1 0.6 0.6 0.5 Middle East; ii) a sales recovery from the three shipbuilders under Net Debt/Equity (X) 0.3 0.3 0.3 0.3 Hyundai Heavy Industries Group; and iii) margin improvement in ROE (%) 0.0 1.1 6.8 8.7 the Korean ESS market.

Earnings Rev (%): n/a (16.7) (3.8) Consensus EPS (KRW): 1,293 5,600 7,197 At A Glance Other Broker Recs: B : 6 S : 0 H : 4 Issued Capital (m shrs) 10.21 Mkt. Cap (KRWbn/US$m) 662/590 ICB Industry: Electrical Equipment Major Shareholders ICB Sector: Industrials Hyundai Heavy Industries Holdings and 3 others (%) 37.7 Principal Business: Hyundai Electric & Energy Systems Co., Ltd. Free Float (%) 56.57 manufactures electrical power equipments. The company offers Avg. Daily Vol. (‘000) 24 electric motors, generators, converters, switchgears, AC drivers, and other electrical equipments.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ed: CK/ sa: LEY, CS Company Focus Hyundai Electric & Energy System

Earnings forecasts (Unit: KRW bn, %) 2017 2018F 2019F 2020F 2021F 2022F Revenue 1,450 1,980 2,221 2,357 2,475 2,524 OP 62 (3) 102 138 167 191 EBITDA 94 53 162 199 231 256 NP 14 11 74 102 126 144 Net debt 271 324 375 333 288 182 Revenue growth n/a 36.6 12.2 6.1 5.0 2.0 OP margin 4.3 (0.2) 4.6 5.9 6.8 7.6 Net margin 1.0 0.6 3.3 4.3 5.1 5.7 EPS growth n/a (32.2) 560.2 38.8 23.0 14.5 ROE n/a 1.1 6.8 8.7 9.8 10.1

Note: Based on consolidated K-IFRS Source: DBS Bank

Page 27

Company Focus Hyundai Electric & Energy System

Hyundai Electric: Earnings estimates (KRW bn) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18F 4Q18F 2017 2018F 2019F Revenue 458.7 491.2 469.1 489.3 430.1 507.5 502.2 540.0 1,908.3 1,979.8 2,221.1 YoY (%) (12.9) (14.1) (5.0) (18.3) (6.2) 3.3 7.1 10.4 (12.9) 3.7 12.2 Domestic sales 201.6 170.6 252.6 243.1 249.9 294.4 287.1 283.3 867.9 1,114.6 1,226.1 YoY (%) (3.7) (23.1) 29.2 (17.7) 24.0 72.6 13.6 16.5 (5.9) 28.4 10.0 % in revenue 44.0 34.7 53.8 49.7 58.1 58.0 57.2 52.5 45.5 56.3 55.2 Overseas sales 257.1 320.6 216.5 246.3 180.2 213.2 215.1 256.7 1,040.4 865.2 995.0 YoY (%) (18.9) (8.4) (27.4) (18.9) (29.9) (33.5) (0.6) 4.2 (18.0) (16.8) 15.0 % in revenue 56.0 65.3 46.1 50.3 41.9 42.0 42.8 47.5 54.5 43.7 44.8

Revenue by division Electric equipment 239.8 263.6 221.6 263.1 151.0 206.0 175.0 214.5 988.1 746.5 843.7 YoY (%) 2.4 (12.0) (17.2) (19.5) (37.0) (21.9) (21.0) (18.5) (12.4) (24.5) 13.0 % in revenue 52.3 53.7 47.2 53.8 35.1 40.6 34.8 39.7 51.8 37.7 38.0 Motor-generators 86.4 92.4 88.6 81.4 77.2 83.9 86.6 91.2 348.8 338.9 377.9 YoY (%) (30.9) (22.9) 1.3 (19.1) (10.6) (9.2) (2.3) 12.0 (19.4) (2.8) 11.5 % in revenue 18.8 18.8 18.9 16.6 17.9 16.5 17.2 16.9 18.3 17.1 17.0 Power distribution 132.5 135.2 158.9 144.8 187.5 153.0 185.2 181.0 571.4 706.6 770.8 YoY (%) (20.9) (11.2) 14.6 (15.6) 41.5 13.2 16.5 25.0 (9.3) 23.7 9.1 % in revenue 28.9 27.5 33.9 29.6 43.6 30.1 36.9 33.5 29.9 35.7 34.7 Overseas subsidiaries 26.3 86.5 73.2 74.6 260.6 312.8 YoY (%) 20.0 % in revenue 6.1 17.0 14.6 13.8 13.2 14.1 Consolidation adjustment (11.9) (21.9) (17.8) (21.2) (72.8) (84.2)

OP 43.4 30.6 30.3 1.5 (30.8) 3.7 7.5 16.2 105.8 (3.4) 101.9 YoY (%) (26.6) (5.6) (6.5) (96.5) TTR (87.9) (75.1) 980.0 (36.4) TTR TTB OPM (%) 9.5 6.2 6.5 0.3 (7.2) 0.7 1.5 3.0 5.5 (0.2) 4.6

Controlling-interest NP 11.7 21.7 22.7 (30.1) (27.6) 23.3 4.2 11.2 26.0 11.1 73.8 YoY (%) 17.0 13.6 2,170.0 TTR TTR 7.4 (81.3) TTB (63.6) (57.3) 565.3 NPM (%) 2.6 4.4 4.8 (6.2) (6.4) 4.6 0.8 2.1 1.4 0.6 3.3

Source: Hyundai Electric, DBS Bank Note: Companies under consolidated statements – Research institutes in Shanghai, Hungary and Switzerland, Bulgaria subsidiary, Yangzhong subsidiary, Middle East subsidiary, US Alabama subsidiary

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