[Click eStock] "Hanwha Aerospace, Increasing Uncertainty in Core Business"

[Asia Economy Reporter Oh Ju-yeon] NH Investment & Securities on the 24th noted that the results of the defense cost-sharing negotiations with the US Forces Korea could negatively impact Hanwha Systems and its growth, while maintaining a 'Buy' rating on Hanwha Aerospace and lowering the target price to 41,000 KRW.

Hanwha Aerospace is a precision machinery specialized company launched after Samsung Techwin, acquired by Hanwha Group in June 2015, changed its company name. In 2019, it recorded consolidated sales of 5.2641 trillion KRW and an operating profit of 165.2 billion KRW (operating margin 3.1%).

The sales composition by business segment consisted of defense electronics & ICT (28%), self-propelled artillery & armored vehicles (27%), aircraft engines and parts (23%), CCTV (11%), power systems (4%), and precision machinery (7%). The parent company Hanwha Aerospace operates the aircraft engine and parts business, and has subsidiaries including Hanwha Systems, Hanwha Defense, Hanwha Techwin, Hanwha Power Systems, and Hanwha Precision Machinery.

NH Investment & Securities adjusted its earnings forecast and lowered the target price-to-book ratio (PBR) from 0.9x to 0.8x considering the increased uncertainty in the defense and ICT businesses.

Researcher Choi Jin-myung stated, "We focus on the fact that the results of the defense cost-sharing negotiations with the US Forces Korea could negatively affect Hanwha Systems and its growth," adding, "The 7th round of negotiations is scheduled for this week, and resolving uncertainties regarding defense budget allocation is necessary for a quick stock price recovery."

In the fourth quarter of 2019, Hanwha Aerospace's sales were 1.6 trillion KRW and operating profit was 35.1 billion KRW, falling short of market expectations. The decline in profits of Hanwha Systems and Hanwha Defense, which serve as cash cows, is analyzed as the main cause of the poor performance. In particular, with the confirmation of growth stagnation in Hanwha Defense, the future outcome of large-scale overseas project orders (such as the export of the Biho complex) is expected to be a variable.

Researcher Choi said, "Although Hanwha Systems and Hanwha Defense, which account for 55% of 2019 sales (simple sum basis), showed below-expectation performance, the other four businesses demonstrated better-than-expected results, confirming new possibilities," adding, "Hanwha Aerospace (individual) reduced its deficit by two-thirds, indicating that the profit recovery period for the RSP business is approaching." He continued, "Hanwha Techwin's sales scale grew by 23% in the Americas alone, proving through its performance that it is a beneficiary company related to the China spy chip issue," and diagnosed, "Hanwha Power Systems and Hanwha Precision Machinery, which were deficit companies, are also transforming into profitable companies through restructuring and acquisition of the machine tool business."