[Into the Stocks] Growing Expectations for New Business at Hanwha Systems... Kim Dong-kwan Leading Space and UAM

Stock Price Rose 5.79% Despite Paid-in Capital Increase Decision on 30th Last Month
Kim Dong-gwan, President of Hanwha Solutions, Actively Promotes Satellite Communication Business and UAM
Uncertainty Remains a Negative Factor... Possibility of Increased Stock Price Volatility

[Asia Economy Reporter Gong Byung-sun] On the 30th of last month, Hanwha Systems announced that it had decided on a paid-in capital increase worth 1.2 trillion KRW. This amount is approximately 52% of Hanwha Systems' current market capitalization of about 2.3 trillion KRW. A paid-in capital increase refers to a company issuing new shares and selling them to shareholders in exchange for money. Unlike bonds or loans, a paid-in capital increase allows a company to raise business funds without worrying about interest or principal repayment. However, it can sometimes have a negative short-term impact on the stock price because an increase in shares reduces earnings per share (EPS), which is net income divided by the number of shares. Generally, a lower EPS indicates poorer business performance.

However, Hanwha Systems was different. According to the stock exchange on the 5th, on the day the paid-in capital increase was decided, the 30th of last month, Hanwha Systems' stock price rose by 5.79%. The upward trend continued thereafter. From the market close on the 30th of last month to the 5th, Hanwha Systems rose 13.42% (2,550 KRW), closing at 21,550 KRW. This trend is steeper than the 2.79% rise in the KOSPI during the same period.

The paid-in capital increase acted as a positive factor for Hanwha Systems due to expectations for new businesses. The market perceived that Hanwha Systems' new businesses could grow based on the funds raised through the capital increase. Recently, Hanwha Systems has been focusing on space-related businesses and Urban Air Mobility (UAM) projects. Although these are costly ventures, they are being led by the new leader, Kim Dong-kwan, President of Hanwha Solutions.

Accelerating New Businesses with Paid-in Capital Increase Funds... Bright Prospects for Both Space and UAM

Hanwha Systems plans to invest 500 billion KRW of the 1.2 trillion KRW raised through this paid-in capital increase into the satellite communication business. Space-related businesses have long been emerging as promising industries overseas. Elon Musk, CEO of Tesla, is preparing SpaceX's low-earth orbit satellite-based internet communication service, Starlink. Jeff Bezos, CEO of Amazon, leads Blue Origin, which is preparing space travel products and is expected to conduct its first trip as early as this month. Accordingly, Bank of America, a major U.S. bank, predicted that space economy-related sales will increase from $424 billion (about 477.212 trillion KRW) in 2019 to $1.4 trillion by 2030.

Hanwha Systems' service, "Leo," is a low-earth orbit satellite communication business similar to Starlink. Hanwha Systems announced plans to deploy about 1,000 satellites between 2023 and 2025. These approximately 1,000 satellites will provide 1Gbps-class communication services to various transportation means, ranging from cruise ships traveling at 40 km/h to passenger planes flying at 950 km/h. Additionally, Setrec Eye, a domestic satellite manufacturer recently acquired by Hanwha Group, will participate directly or indirectly in Hanwha Systems' aerospace business. Setrec Eye possesses liquid rocket engine development technology for Korea's launch vehicle "Nuriho."

The UAM business is also progressing simultaneously. Hanwha Systems plans to invest 450 billion KRW of the paid-in capital increase funds into the UAM business. According to the future growth strategy announced by Hanwha Systems on the 29th of last month, aircraft development is already within sight. In fact, Hanwha Systems holds a 30% stake in Overair, a U.S. personal aircraft company, and is jointly developing UAM aircraft. Hanwha Systems plans to use the paid-in capital increase funds by 2023 for equity investments in UAM-related companies, infrastructure service solutions, and aircraft development.

The outlook for the UAM business is also bright. Morgan Stanley, a major U.S. investment bank, predicted that the UAM market will reach $1.462 trillion by 2030. The government is also proactive in the UAM business. On the 31st of last month, the government finalized the "Korean-style K-UAM Technology Roadmap" at the 32nd Central Economic Countermeasures Headquarters meeting. According to the roadmap, the UAM market ecosystem is expected to be established and enter maturity by 2035.

Accordingly, Choi Jin-myung, a researcher at NH Investment & Securities, said about Hanwha Systems' moves, "The company has shown sincerity and strong will regarding the satellite communication business and UAM business," adding, "It is expected to break away from its past image as a defense electronics company and transform into an aerospace specialized company." Lee Dong-heon, a researcher at Daishin Securities, also explained, "This paid-in capital increase is the first step to fully demonstrate capabilities in the aerospace industry."

Kim Dong-kwan, Emerging as the New Leader of Hanwha... Also Participates as Head of Aerospace Task Force Team

Hanwha Systems' proactive moves were possible because of Kim Dong-kwan, President of Hanwha Solutions, who has emerged as a new leader. Hanwha Group is transforming from the explosives business of the late Chairman Kim Jong-hee and the defense business of Chairman Kim Seung-yeon to an aerospace specialized company under the third-generation Kim president.

President Kim is more active than anyone else in the aerospace field. Last month, Hanwha Group established a dedicated task force (TF) team called the "Space Hub Team" to oversee the aerospace industry, with President Kim directly appointed as the team leader. Furthermore, Hanwha Systems has also entered the U.S. market. At the board meeting held on the 23rd of last month, Hanwha Systems decided to establish a U.S. subsidiary. The purpose of this establishment is to acquire promising companies and technologies in advanced markets. Hanwha Systems had already entered London last June by acquiring Phaser Solutions, a British satellite antenna venture company. This enables President Kim to target both the U.S. and European markets.

It is also a positive factor that Hanwha Group has rallied around President Kim. H Solutions, wholly owned by the three brothers including President Kim, Kim Dong-won, and Kim Dong-sun, decided to participate in Hanwha Systems' paid-in capital increase by investing 157 billion KRW. Notably, President Kim is registered as an inside director of Hanwha Aerospace and as an unpaid registered executive of Setrec Eye mentioned earlier. The entire group is thus positioned to support President Kim's aerospace business. Chairman Kim Seung-yeon also emphasized in this year's New Year's address the need to seize future growth opportunities in the aerospace sector, lending support to President Kim's efforts.

However, Hanwha Systems faces the negative factor of uncertainty. Both businesses that Hanwha Systems is pursuing will only materialize after 2025. While success would be fortunate, failure to produce results would inevitably cause damage. Choi Kwang-sik, a researcher at Hi Investment & Securities, said, "Whether the business outlook will exactly match 10 years from now and whether there will be delays are factors that can affect the stock price," adding, "Additional upward adjustments to the fair value are possible whenever follow-up business structures such as low-earth orbit satellite antenna businesses are confirmed, but stock price volatility may increase during that process."