[This Week's Industry Insight] Hanwha Aerospace, a Leading Company in K-Defense Industry

K9 Redback and Other Hot Weapon Exports... Performance and Stock Price 'Charge Forward'
3.15 Trillion KRW Redback Armored Vehicle Export Contract with Australia in December Last Year
Increased Financial Support Limits Due to K-Sure Act Revision
Expecting Second Additional Contract for Chunmoo This Year

Editor's NoteDear individual investors dreaming of successful investments. How well do you know the stocks you invest in with your own money? In the online environment flooded with unrefined information, Asia Economy aims to be your hands and feet, eyes and ears, delivering accurate information about companies. Each week, we focus on companies that ranked high in stock inquiries by the financial information provider FnGuide, providing basic information as well as analysis of related companies such as partners, clients, and investors. We will explain the financial status, performance, and future value of companies in an easy-to-understand manner. We bring you the stocks of the week, also known as ‘Stocks of the Week (I Juui Gwan.Jong).’

Hanwha Aerospace is a representative K-defense company. Hanwha Aerospace is active on the global stage by supplying the premium self-propelled howitzer K9 not only to Korea but also to Turkey, Poland, Finland, Estonia, Norway, and other European countries, as well as India, Australia, and Egypt.

Last December, it secured a $2.4 billion (approximately 3.15 trillion KRW) export contract for the Redback armored vehicle with the Australian Army, which demands world-class standards, surpassing advanced defense countries such as the United States, the United Kingdom, and Germany, once again demonstrating its presence in the global defense market.

Hanwha Aerospace signed export contracts for the K9 self-propelled howitzer and the Chunmoo multiple launch rocket system with Poland, which is expanding its military due to Russia's invasion of Ukraine. The export volume has exceeded 8 trillion KRW. In addition, the second execution contract for Poland's K9 has been completed, and positive results are expected for the second execution contract for Chunmoo as well. This is because the amendment to the Export-Import Bank Act increased the financial support limit.

Accordingly, a green light has been turned on for additional orders. Lee Jaegwang, a researcher at NH Investment & Securities, predicted, "This year, second contracts for Romania's K9 self-propelled howitzers and Poland's Chunmoo are expected. Due to strengthened financial support following the amendment of the Export-Import Bank Act, the possibility of additional orders for weapon systems has increased."

The amendment to the Korea Eximbank Act aims to increase the capital limit of the bank from the existing 15 trillion KRW to 25 trillion KRW. Given the nature of defense contracts, which involve transactions exceeding trillions of KRW and long durations, weapon-selling countries provide financial support measures such as low-interest loans and long-term installment repayments to purchasing countries. However, concerns were raised that the export finance limit based on Korea Eximbank's equity capital was exhausted in the first contract, which could lead to cancellation or reduction of export contracts with Poland. In particular, Hanwha Aerospace had not finalized the second contract volume because of the condition that financial support must be concluded by June this year.

The company stated, "This year, we will expand exports to the global market and become a truly export-oriented global company, with exports surpassing domestic sales on an annual basis for the first time."

Achieved Record High Performance in Q4 Last Year... Securities Firms Raise Target Prices One After Another "Still Going Strong" "A Company That Excels in Everything" "Both Orders and Performance, Two-Pronged Strength"

Securities firms' reports on Hanwha Aerospace mostly show positive outlooks. The company proved its growth potential with its Q4 performance. Hanwha Aerospace recorded consolidated sales of 9.3697 trillion KRW and operating profit of 704.9 billion KRW last year. Compared to the previous year, sales increased by 33% and operating profit by 76%, achieving record high performance. Sales and operating profit in Q4 last year were 3.4424 trillion KRW and 289.5 billion KRW respectively, up approximately 33% and 80% compared to the same period the previous year.

Lee Jaegwang, a researcher at NH Investment & Securities, explained, "As of the end of Q4 last year, the backlog in the ground defense sector increased by 42.4% year-on-year to 28.03 trillion KRW, an increase of 8.4 trillion KRW. This corresponds to about seven years of ground defense sales in 2023, influenced by orders such as Poland's second K9 contract (3.4 trillion KRW) and Australia's Redback armored vehicle (3.2 trillion KRW)."

After the Q4 performance results were released, securities firms raised their target prices for Hanwha Aerospace one after another. At the end of February, NH Investment & Securities raised its target price by 23% to 180,000 KRW, and in the same month, Korea Investment & Securities also raised its target price by 17.6% to 200,000 KRW. Jang Namhyun, a researcher at Korea Investment & Securities, expressed expectations, saying, "A 1 trillion KRW order for Romania's self-propelled howitzer business is expected in 2024, and the UK MFP project aims to select a contractor in 2025. Exports of the K9 self-propelled howitzer to the Middle East, including Saudi Arabia, will also increase due to domestic powerpack localization."

KB Securities raised its target price by 14.7%, from 170,000 KRW to 195,000 KRW, highlighting the diversification of export countries and products. Jeong Dongik, a researcher at KB Securities, pointed out, "The K21 infantry fighting vehicle, which has no previous export cases, is currently participating in Latvia's new armored vehicle procurement project, diversifying export items further."

The performance outlook for this year is also bright. According to FnGuide, Hanwha Aerospace's consolidated sales and operating profit for 2024 are expected to reach 11.0309 trillion KRW and 945.4 billion KRW, respectively.

Earlier this month, Kyobo Securities and Hi Investment & Securities began corporate analysis on Hanwha Aerospace. Kyobo Securities initiated coverage with a buy rating and a target price of 294,000 KRW, explaining the investment points: "Considering only the remaining Polish orders (over 60 K9 units and over 30 Chunmoo units in 2024, and 86 K9 units scheduled for delivery in 2025) and domestic backlog sales recognition, an annual increase of 1 trillion KRW is possible until 2026." They also analyzed that after 2027, sales growth and profitability will continue until 2030 due to the recognition of follow-up orders from Poland, 30 K9 units in Australia, 15 K21 units, 129 Redback armored vehicles, and follow-up projects in Romania and Egypt. An Yudong, a researcher at Kyobo Securities, evaluated Hanwha Aerospace as "a company with no doubt about growth until 2030" considering these factors comprehensively.

Byun Yongjin, a researcher at Hi Investment & Securities, presented a buy rating and a target price of 270,000 KRW, citing investment points such as △a perfect lineup in ground defense △overseas base acquisition and expansion potential △excellent merger and acquisition (M&A) capabilities. Researcher Byun said, "Exports of the flagship product K9 self-propelled howitzer, as well as Chunmoo MLRS and Redback armored vehicle, are expanding. Especially, the Redback armored vehicle, which was the first to be developed and successfully exported under company-led development, symbolically demonstrated Hanwha Aerospace's high business execution power, development capability, technology, capital investment, and sales power."

Focus on Defense Growth After Spin-Off... Subsidiary Values Expected to Be Highlighted

Earlier this month, Hanwha Aerospace announced a portfolio focusing on the defense and aerospace sectors through a spin-off, instantly securing its position as a core affiliate of the Hanwha Group. It separated Hanwha Vision and Hanwha Precision Machinery, which are less related to the main business, to focus on defense and aerospace. Accordingly, the surviving company, Hanwha Aerospace, has transformed into a pure defense company.

The news of Hanwha Aerospace's spin-off received positive evaluations in the securities industry, with expectations that "the value of subsidiaries will be highlighted." Due to the diverse non-defense business groups and the nature of being a mid-tier holding company, Hanwha Aerospace's appropriate price-to-earnings ratio (PER) was evaluated low at 10 times (peer group average 15 times).

Securities firms also raised their target prices one after another. NH Investment & Securities said, "The spin-off is expected to serve as an opportunity to highlight the value of Hanwha Vision and Hanwha Precision Machinery, which were overshadowed by the defense industry, so the combined value may rise from the current level," raising the target price by 22.7% to 270,000 KRW. Researcher Lee Jaegwang said, "Theoretically, the spin-off does not affect shareholder value, but practically, the value of Hanwha Vision and Hanwha Precision Machinery is expected to be highlighted. Since these companies had a small share of performance, it was difficult for Hanwha Aerospace's stock price to gain momentum, but after the spin-off, their values are expected to be emphasized."

Korea Investment & Securities also raised its target price from 200,000 KRW to 258,000 KRW within two months. KB Securities raised it from 195,000 KRW to 245,000 KRW, and Daol Investment & Securities adjusted it upward from 220,000 KRW to 260,000 KRW.

The stock price has also steadily trended upward this year. The stock price, which was 129,700 KRW at the beginning of the year (January 2), surged nearly 70% to 220,000 KRW as of April 22. As the stock price soared, Hanwha Aerospace's market capitalization reached 11.1386 trillion KRW as of the 22nd, entering the 10 trillion KRW market cap club. Although the stock price rise somewhat slowed in April, the possibility of further increases remains open. According to FnGuide, nine securities firms raised their target prices for Hanwha Aerospace this year. The consensus on the appropriate stock price from major securities firms is 257,867 KRW, representing a 17% gap from the current price (220,000 KRW).

Whee Kyungjae, a researcher at Hana Securities, said, "The decision to spin off is the final step to complete the defense business structure," adding, "The focus is on advancing the business of the surviving company rather than evaluating the value of the newly established company through the spin-off." Researcher Whee analyzed that although a reduction in performance scale (sales down 14.85%, operating profit down 19.43%) due to the spin-off is inevitable, attention should be paid to the possibility of removing the valuation discount caused by business mixing rather than downside risk to the stock price.