Defense-themed stock 'BigTech', Revealed to Have Substantial 'Growth'

[Asia Economy Reporter Yoo Hyun-seok] Victech is considered a representative defense industry theme stock. Its stock price reacts sensitively whenever situations related to North Korea arise. However, regardless of stock price volatility, it has shown steady performance and solid growth based on its electronic warfare system direction-finding devices.

Victech was listed on the KOSDAQ market in February 2003. Its main business areas include electronic warfare system direction-finding devices primarily installed on naval vessels, power supply devices, Identification Friend or Foe (IFF) equipment, other defense products, TICN devices, and electrical construction. It also produces public bicycle unmanned rental systems.

Victech has established its image as a defense theme stock in the domestic stock market. Its stock price has moved whenever the situation on the Korean Peninsula became urgent or North Korea took military actions. Recently, the stock price surged when rumors about North Korean Supreme Leader Kim Jong-un’s health issues spread, and on the 16th, it hit the upper limit in after-hours trading following news that North Korea had blown up the Kaesong Inter-Korean Joint Liaison Office.

Contrary to its reputation as a theme stock, Victech is a relatively sound company familiar to the general public. It generates stable sales and has secured contracts related to Seoul’s public bicycle project, "Ddareungi." Victech holds patents related to public bicycle unmanned rental systems based on its radio frequency (RF) technology. Leveraging this, it started the "Tashu" project in Daejeon in 2013 and has supplied public bicycle systems to Seoul, Sejong, and Yeosu cities.

Its performance is also stable. In 2016, Victech recorded sales of 38.4 billion KRW and an operating loss of 900 million KRW, and in 2017, sales were 40.8 billion KRW with an operating loss of 1.6 billion KRW, marking two consecutive years of losses. However, in 2018, sales rose to 48.8 billion KRW with an operating profit of 1.5 billion KRW, and last year, sales reached 49 billion KRW with an operating profit of 2.6 billion KRW, showing steady growth. However, the first quarter performance this year was weak. First-quarter sales were 11.7 billion KRW with an operating profit of 300 million KRW, down 6% in sales and 55% in operating profit compared to the same period last year. Although TICN device sales increased, performance declined in electronic warfare system direction-finding devices and power supply devices.

Despite the weak first-quarter results, concerns about future performance are low. Victech holds a substantial order backlog. In February, Victech signed two supply contracts with Hanwha Systems. The first-quarter order backlog was 152.4 billion KRW, up 12.32% from the end of last year and 198.26% compared to the same period last year.

However, sales related to the public bicycle unmanned rental system, once expected to be a new growth engine, are declining. Sales in electrical construction and public bicycle unmanned rental systems decreased from 5.3 billion KRW in 2017 to 4 billion KRW in 2018 and 2.6 billion KRW last year. The related order backlog was only 1.4 billion KRW as of the first quarter. Additionally, the recent rise in debt ratio is somewhat concerning. The debt ratio was 75.4% in 2016, 133.5% last year, and 137.8% in the first quarter this year. However, short-term borrowings dependence decreased from 10.3% in 2016 to 2.6% in the first quarter this year.

Victech emphasizes that although its stock price fluctuates sharply due to North Korea-related issues, the most important factor is the Ministry of National Defense’s budget plan. As a defense contractor, its performance can vary depending on how the defense budget is decided. An industry insider explained, "The biggest factor affecting the performance of defense companies is the defense budget. Since performance can change depending on increases or decreases in the defense budget, it is important to check this part."