Performance and Momentum as Twin Engines... Defense Stocks Soaring High

Korea Aerospace Up 31% This Year, Hanwha Aerospace Up 87%
Momentum Gained from Missile Range Limit Removal and Space Industry Expansion

[Asia Economy Reporter Park Ji-hwan] Domestic defense companies are expected to see a positive business outlook in the second half of the year due to the dual benefits of stable performance trends and momentum related to future growth drivers such as missile range expansion and space industry development.

According to the Korea Exchange on the 6th, Korea Aerospace Industries' stock price rose 31.2% this year up to the previous day. During this period, other defense companies such as LIG Nex1 (45.4%), Hanwha Aerospace (87.7%), and Hanwha Systems (16.4%) also showed a clear upward trend in their stock prices.

In particular, the stock price rise of defense stocks became more pronounced after mid-May. Korea Aerospace Industries' stock price increased by 9.54%, from 30,900 KRW on May 13 to 33,850 KRW as of the previous day. Hanwha Aerospace (26.6%), LIG Nex1 (14.7%), and Hanwha Systems (6.5%) also rose.

It is analyzed that the agreement between South Korea and the United States at the summit to end missile guidelines after 42 years stimulated investor sentiment. With South Korea now able to develop medium- and long-range ballistic missiles regardless of range, expectations that defense stocks will benefit have been reflected.

Especially from this year, it is expected that the impact of COVID-19 will be fully overcome, leading to noticeable performance improvements. According to Daishin Securities, Korea Aerospace Industries' second-quarter sales are forecasted at 734.7 billion KRW, a 2% increase year-on-year, and operating profit at 63.6 billion KRW, a 3% increase. Although the year-on-year growth rate is not high, sales are expected to exceed market expectations by 4%, and operating profit by 46%. This suggests a faster-than-expected recovery in the business environment recently. Lee Dong-heon, a researcher at Daishin Securities, said, "Korea Aerospace Industries' annual order target is 2.9 trillion KRW. Although orders were sluggish until the first half, it is expected that the target will be achieved with increased orders in the second half. Exports of complete aircraft are expected to decrease, while airframe parts will increase."

The long-term growth vision is also a factor brightening the stock price trend. Korea Aerospace Industries plans to double the number of product types by 2030. Choi Jin-myung, a researcher at NH Investment & Securities, said, "While existing businesses maintain stability, the launch of new products is approaching. A small armed helicopter is scheduled for release in 2023, an export low-earth orbit satellite in 2025, and a Korean fighter jet in 2026." Additionally, based on R&D capabilities for flying vehicles, the company is exploring entry into the Urban Air Mobility (UAM) business and plans to launch a civilian space launch vehicle by 2030.

According to FnGuide, Hanwha Systems' second-quarter sales this year are expected to increase by 21.82% year-on-year to 393.6 billion KRW, and operating profit by 24.73% to 22.7 billion KRW. Along with strong performance, efforts to secure future growth drivers are also active. Lee Bong-jin, a researcher at Hanwha Investment & Securities, said, "Hanwha Systems is expected to lead new business investments within the group for the time being. In particular, investments related to satellite antennas and services, which are part of the satellite business being promoted alongside the Urban Air Mobility business, will be prioritized."

In the case of LIG Nex1, it is cited as the biggest beneficiary of the end of the Korea-US missile guidelines. According to the agreement between South Korea and the United States, missile development exceeding a range of 800 km and the introduction of solid fuel will be possible in the future. Researcher Choi Jin-myung said, "With the lifting of the Korea-US missile guidelines, long-range missile development projects are expected to be promoted. For LIG Nex1, which has traditionally secured missile development projects, this is seen as the emergence of new business opportunities." In particular, since missile-related business accounts for more than 70% of total sales, it is analyzed that the company will emerge as the biggest beneficiary.