[K Defense Industry Analysis] ② 50 Years of Dedication by LIG Nex1, Securing Future Growth Engine through Acquisition of US Robotics Company

Focused Solely on Defense Industry... Vulnerable to Military Budget Reduction Trend
Concentrated on Securing Future Growth Engines in Robotics Sector
Securities Firms Forecast Order Backlog to Surpass 15 Trillion Won by Year-End

Editor's NoteGlobal attention is focusing on Korean weapons, which boast price competitiveness and rapid supply capabilities. The major U.S. investment bank Goldman Sachs has identified K-defense stocks as promising investment destinations this year. Goldman Sachs introduced, "Considering the strong position Korean defense industry stocks hold in the global military market, defense stocks are a good investment to avoid geopolitical risks." Earlier, CNN stated, "Korea has become a major player in the defense industry," and Forbes mentioned, "Korea has quietly become one of the world's largest arms suppliers." Since the outbreak of the Russia-Ukraine war, rapid changes in the global defense industry environment have increased attention on K-defense. Will interest in K-defense end as a 'flash in the pan,' or does it possess sustainable growth competitiveness? We analyzed the strengths, weaknesses, threats, and opportunities of K-defense representative companies Hanwha Aerospace, LIG Nex1, and Hanwha Systems.

50 Years of Defense Industry Focus LIG Nex1... 'Precision Strike' Missiles Account for Over 50% of Sales

LIG Nex1's main focus is precision strike weapons, namely missiles. More than half of the company's annual sales, exceeding 2 trillion KRW, come from the missile sector. Their products include missiles that intercept aircraft (Cheongung), missiles that intercept both aircraft and missiles (Cheongung 2), portable missiles that infantry can carry and fire (Singung), anti-tank missiles (Hyeongung), and coastal defense missiles (Bigung). Recently, the sales proportion of communication systems that collect data for command decisions during combat has also significantly increased. Communication sales accounted for about 10% of total sales in 2021 but rose to the 20% range as of the third quarter of 2023. Additionally, they are engaged in future combat equipment such as surveillance reconnaissance and drones that detect enemy forces. Originally a domestic-focused company supplying weapons within Korea, the export ratio has recently increased significantly. The domestic share was 95.5% in 2021 but shifted to 17.5% exports as of the third quarter of 2023, showing a major adjustment between domestic and export shares.

Since LIG Nex1 specializes in missiles and is not a supplier of tanks or self-propelled artillery, it did not benefit from the Polish defense export boom that started two years ago. This has been a reason for its undervaluation compared to other defense companies. However, exports are increasing mainly in the Middle East and Southeast Asia. The Middle East demands missiles, while Southeast Asia seeks communication equipment. Last year, the United Arab Emirates (UAE) placed an order worth about 4 trillion KRW for LIG Nex1's Cheongung 2 missiles, sharply increasing overseas orders. The recently increased export share of communication equipment is reflected in sales to Indonesia. The company is making efforts to export to countries with rapidly increasing defense budgets such as India, Vietnam, and Brazil. Recently, a new growth path opened by acquiring a robot defense company supplying the U.S. military.

While other K-defense companies like Hyundai Rotem engage in train business and Hanwha Aerospace in satellite business, LIG Nex1 focuses solely on defense. This focus on defense technology is a positive aspect, but having no other business sectors could be a weakness if K-defense popularity wanes or if a global military spending reduction trend begins, despite the significant increase in export share.

Working on Future Growth Engines... Establishing New Growth Drivers through Global M&A

At the end of last year, LIG Nex1 acquired a 60% stake in Ghost Robotics, a robot development and manufacturing company based in Philadelphia, USA, for $240 million (about 315 billion KRW). This marks an important turning point for LIG Nex1, which had only supplied component-like products such as precision-guided weapons and radar, now possessing a clear platform in robotics. Jang Nam-hyun, a researcher at Korea Investment & Securities, analyzed, "The acquisition of Ghost Robotics is positive in two respects." First, it secures future growth engines in the robotics field. Ghost Robotics itself possesses competitive technology, and synergy with LIG Nex1's existing business is also possible. For example, equipping Ghost Robotics' quadruped robots with LIG Nex1's weapon systems or using LIG Nex1's technology to enhance the robots' detection and tactical operation capabilities. Second, it facilitates entry into the U.S. market. The U.S. military has already adopted Ghost Robotics' quadruped robot 'Vision 60' for base patrol purposes. This acquisition could accelerate LIG Nex1's entry into the U.S. weapons system market.

Ghost Robotics' flagship model Vision 60 is evaluated as superior to Boston Dynamics' Spot, one of the leading quadruped robot companies, in terms of top speed, runtime, and battery capacity. It is known as the quadruped robot most suitable for military use. It moves agilely and naturally over rough terrain and obstacles such as rocks, sand, hills, ice, snow, and stairs. It operates in extreme cold of minus 45 degrees Celsius and extreme heat of 55 degrees Celsius. The price per unit is about $165,000 (approximately 213.64 million KRW), and with additional features, the price can rise to around 500 million KRW. Ghost Robotics recorded annual sales of $40 million (about 50 billion KRW) last year. Lee Sang-hyun, a researcher at IBK Investment & Securities, said, "In the future domestic defense multi-legged robot sector, LIG Nex1-Ghost Robotics and Hyundai Rotem-Rainbow Robotics are expected to form a duopoly."

In the securities industry, there is a forecast that LIG Nex1's order backlog will exceed 15 trillion KRW by the end of this year. As of the third quarter of last year, new orders were 370.6 billion KRW, and the cumulative order backlog was 12.1 trillion KRW. Based on 2022 sales, this equates to 5.5 years of work. Considering that two radio projects for the Indonesian National Police announced in December 2022 and the Indonesian helicopter repair parts project announced in April 2023 have not yet been reflected in the order backlog, and that orders tend to concentrate at year-end, the order backlog growth trend is expected to continue. There is also analysis that Bigung, currently being tested in the U.S. as an overseas comparative test project, has a high possibility of export. If successful, it is expected to be the first domestically produced weapon system exported to the U.S. Although the fourth-quarter results of last year have not yet been announced, securities firms' consensus forecasts annual sales of 2.4 trillion KRW and operating profit of 200 billion KRW. There is also a forecast that sales will surpass 3 trillion KRW and operating profit 300 billion KRW by 2025. Interest-bearing debt is on a declining trend, decreasing from 658.8 billion KRW in 2020 to about 366.3 billion KRW in 2022. During the same period, operating profit margin increased from 3.98% to 8.06%.