[Into the Stocks] LIG Nex1 Soars Thanks to the Korea-US Summit, Will It Fly Even Higher?

Rising for 3 Consecutive Trading Days Since the 24th of Last Month... Then Falling for 3 Consecutive Trading Days Again
LIG Nex1 Emerges as a Beneficiary of the End of South Korea-US Missile Guidelines
Concerns Over Profit Generation from Long-Term Projects, but Securities Firms Say "Sufficient Growth Drivers"

[Asia Economy Reporter Gong Byung-sun] Although LIG Nex1's stock price rose after the Korea-US summit, concerns remain that profits will be generated from long-term projects. However, securities analysts say that the company has entered a phase where orders worth more than 7 trillion won are being converted into sales, indicating significant growth potential.

According to the Korea Exchange, on the 31st of last month, LIG Nex1 closed at 44,250 won, down 1.67% from the previous trading day. On the 24th of last month, it rose 9.75% compared to the previous day, and on the 25th, it increased by 8.65%, marking three consecutive days of gains. However, since the 27th, it has been on a three-day consecutive decline.

19.49% Increase Over 3 Trading Days After Korea-US Summit...Emerges as a Beneficiary of Missile Guidelines Termination

[Image source=Yonhap News]

The reason for the 19.49% increase over three trading days starting from the 24th of last month is the Korea-US summit. During the four-day summit held from the 19th of last month, Korea achieved results in various fields including security, technology, and health. In particular, the summit was widely regarded as an opportunity to establish a technological alliance beyond a simple military alliance.

The most notable aspect was the termination of the missile guidelines. The missile guidelines were established in October 1979 during President Park Chung-hee's administration when missile technology was transferred from the US to Korea, limiting the maximum range to 180 km and warhead weight to under 500 kg. Since then, the range and warhead weight restrictions have been gradually eased, with two revisions under the Moon Jae-in administration. In November 2017, the ballistic missile range was extended to 800 km and the warhead weight limit was removed, and in July last year, the restriction on the use of solid fuel for space launch vehicles was lifted. Solid fuel has the advantages of a simple structure and low cost, making it mainly used in military rockets. By completely abolishing the missile guidelines this time, a path has opened to more boldly develop the missile sector.

As a result, LIG Nex1 emerged as a beneficiary of the missile guidelines termination. Choi Jin-myung, a researcher at NH Investment & Securities, explained, "With the lifting of the Korea-US missile guidelines, long-range missile development projects will be promoted in the future," adding, "LIG Nex1, whose missile-related business accounts for more than 70% of total sales, will stand out as the biggest beneficiary."

Especially if North Korea's provocations continue, further stock price increases for LIG Nex1, a defense industry company, are expected. Researcher Choi said, "Historically, North Korea's provocative actions have positively affected the stock prices of defense companies," and "there have been precedents where this led to the expansion of air defense weapons and surveillance reconnaissance system development projects." In fact, on the 31st of last month, North Korea criticized, under the name of Kim Myung-chul, International Affairs Commentator, stating, "The termination of the missile guidelines is a blatant reminder of the US's aggressive policy toward North Korea and their shameful double standards," and "The end of the missile guidelines clearly shows who is behind the heightened tensions on the Korean Peninsula."

Profits Arising from Long-Term Projects...Nevertheless, Increasing Order Backlog is 'Welcome News'

[Image source=Yonhap News]

Nevertheless, LIG Nex1 faces a critical risk: profits are generated from very long-term projects. Previously, in 2012, LIG Nex1 won a contract for a small unit radio system development project but failed to meet the required performance by 2017, leading to the project's suspension. As a result, it was fined by the Defense Acquisition Program Administration in April. If profits rely excessively on long-term projects, such risks may recur.

In fact, LIG Nex1's performance in the first quarter of this year fell short of expectations. First-quarter sales were 350.5 billion won, and operating profit was 12.8 billion won, which were 9% and 34% below market consensus, respectively. Han Young-soo, a researcher at Samsung Securities, explained, "Some development projects ended, and the start of follow-up projects was delayed more than expected," adding, "Exports also recovered slowly as additional customer requirements were reflected."

Nevertheless, the consensus in the securities industry is that LIG Nex1 is still undervalued because the increase in order backlog is being converted into sales. Lee Dong-heon, a researcher at Daishin Securities, explained, "The order backlog has increased to 7 trillion won, and project recognition is being deferred," adding, "Orders this year are also expected to exceed 2 trillion won."

Especially from next year, the order backlog is expected to increase. The development of the Long-range Surface-to-Air Missile (L-SAM) will reach its final stage next year, and due to the characteristics of the domestic defense industry, this is effectively the point when mass production decisions are made. In 2025, orders for the first domestically produced fighter jet KF-21's avionics equipment are expected, and in 2027, orders for long-range air-to-ground missiles are anticipated.

Secured sales growth and increased overseas orders are also expected. Lee Bong-jin, a researcher at Hanwha Investment & Securities, said, "Although exports decreased in the first quarter this year, lowering the export ratio from 10% last year to 8.4%, annual exports are expected to be higher than last year," adding, "Exports of communication equipment are increasing, driving overall exports, and mass production of precision strike products for export is scheduled to begin in earnest from next year."

Other circumstances are also positive. The Moon Jae-in administration actively invested in the defense sector. Since the administration's launch in 2017, the defense budget increased from the 40 trillion won range to the 50 trillion won range, showing an approximate 7% growth rate. This increase is faster than during the Lee Myung-bak administration (5.2%) and the Park Geun-hye administration (4.1%). In particular, a significant amount of the defense budget was spent on purchasing weapon systems and establishing Korea's independent surveillance, reconnaissance, and precision strike capabilities. This structure benefits LIG Nex1, which operates in the defense industry. According to the mid-term defense plan, defense spending is expected to expand at an average annual rate of 6.1% until 2025.