Hanwha Enhances Earnings Visibility Through Defense Business Contributions

NH Investment & Securities Report
Expectations for Base Effect in Defense Sector and Growth in Renewable Energy Business

[Asia Economy Reporter Minji Lee] Considering the performance stability of the defense industry and the growth potential of the renewable energy business, opinions have emerged that Hanwha's earnings visibility has increased. On the 15th, NH Investment & Securities issued a buy rating on Hanwha and raised the target price by 18% from the previous level to 32,000 KRW.

In the second quarter, Hanwha recorded sales of 11.0041 trillion KRW, down 14% compared to the same period last year. Operating profit was 501.3 billion KRW, up 38% from the same period last year. Although an earnings surprise was recorded due to the reversal of 160 billion KRW in variable guarantee reserves of Hanwha Life following the stock market rebound, the overall strong performance of affiliates also had an impact.

Despite the impact of the novel coronavirus disease (COVID-19), Hanwha showed favorable earnings visibility due to contributions from its own defense sector and defense businesses such as Hanwha Aerospace. Dongyang Kim, a researcher at NH Investment & Securities, said, “Operating profit from the defense sector is expected to grow 70% this year due to the base effect from last year's accident and additional deferred sales,” adding, “Improvement in solar power business profits at Hanwha Solutions, investments in Nikola shares by Hanwha Energy and Hanwha Total Petrochemical, affiliates of H Solutions, and potential opportunities in hydrogen power generation for transportation all point to expected growth in the renewable energy business.”

In the second quarter, Hanwha's standalone operating profit was 58.5 billion KRW, up 22% from the same period last year. Despite continued losses in the trade sector, the defense sector showed strength due to the base effect. Hanwha Construction posted a profit of 88.6 billion KRW, growing 18% compared to the same period last year. Despite delays in the Iraq housing project, the operating profit margin exceeded 10% for the first time in eight quarters due to the reflection of settlements from domestic and overseas completed projects.

Although concerns about delays in Hanwha Construction's Iraq housing project persist in the third quarter, operating profit is expected to reach 398.5 billion KRW, a 3% increase from the same period last year. Researcher Dongyang Kim said, “Performance is expected to improve due to recovery in the trade sector, base effects in the defense sector, and additional reversals of variable guarantee reserves at Hanwha Life,” and analyzed, “The target price has been raised reflecting stock price fluctuations of listed companies, stability in defense business performance, and growth in the renewable energy business.”