[This Week's Aviation] Korea Aerospace Industries, Waiting for Takeoff at Runway End

Growth in scale and profitability through FA-50 fighter jet exports
Unlimited expansion with KF-21 Korean fighter jet
Contract delays pose a burden on stock prices

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While defense industry stocks such as Hanwha Aerospace, Hyundai Rotem, and LIG Nex1 have surged significantly thanks to increased exports of ground weapon systems like the K2 tank, K9 self-propelled howitzer, Cheongung-II, and Chunmoo, Korea Aerospace Industries (KAI), which had been relatively overlooked, has begun a strong upward movement in stock price this month. It is analyzed that the FA-50 fighter jet, KF-21 Korean fighter jet, and Surion utility helicopter are driving the improvement in performance.

KAI is engaged in the design, manufacturing, sales, and maintenance of aircraft, spacecraft, satellites, launch vehicles, and related components. It mainly produces the T-50 advanced trainer, Surion utility helicopter, Songgolmae unmanned aerial vehicle, and KT-1 basic trainer. It is also developing the KF-21 Korean fighter jet and light armed helicopter (LAH) and civilian helicopter (LCH). KAI is also pushing forward the country's first next-generation medium satellite and defense satellite development projects led by a private company. Since 2014, it has been responsible for the final assembly of the Korean launch vehicle system. The company is focusing on securing technological capabilities across the space business, including manufacturing the first-stage propellant tank, a core component.

As of the third quarter of this year, cumulative sales reached KRW 2.5389 trillion, and operating profit was KRW 198.6 billion, representing increases of 9.9% and 113.2%, respectively, compared to the same period last year.

Full-Scale Growth from Next Year... Fighter Jets Going Overseas

Yeouido securities firms forecast that KAI will achieve full-scale external growth and profitability improvement starting next year. The defense budget, which has the greatest impact on domestic defense companies' performance, is steadily increasing. According to the '2023?2027 Defense Mid-Term Plan,' the defense budget is expected to grow at an average annual rate of 6.8%. The defense capability improvement budget will increase to a total of KRW 107.4 trillion. The Ministry of National Defense has plans for mass production and deployment of the Surion (KUH) utility helicopter and FA-50 fighter jet to enhance defense capabilities. Considering KAI's order backlog and the military's mid- to long-term plans, stable growth in defense projects is highly likely.

While the domestic sector is growing steadily, exports are increasing significantly. Considering only the supply contracts signed with Poland and Malaysia for the FA-50, sales are expected to increase by more than KRW 1 trillion. Additional export contracts for the FA-50 and initial mass production of the KF-21 could also lead to increased sales. Han-gyeol Lee, a researcher at Kiwoom Securities, stated, "The Uzbekistan FA-50 project is working to shorten U.S. approval for additional armaments," and "If approval is obtained within this year, negotiations can be quickly finalized." He added, "Negotiations for additional FA-50 procurement by the Philippines, targeting next year's orders, are progressing faster than expected," and "Considering the ongoing negotiations for complete aircraft export projects, achieving the expected level of new orders this year is possible."

KAI explained that since the Russia-Ukraine war, Eastern European countries are considering moving away from Russian weapon systems. It is expected that export opportunities will expand, such as the Polish Air Force's decision to purchase 48 FA-50s.

The Korean fighter jet project is one of the growth drivers that can elevate KAI's sales scale to the next level. The government is developing a multipurpose Korean fighter jet (KF-21) with performance that meets future battlefield operational concepts through international joint research with Indonesia. The plan is to invest about KRW 8 trillion from 2015 to 2026. KAI signed a system development contract for the KF-X with the Defense Acquisition Program Administration in December 2015. The first flight was successfully completed in July 2022, and through flight tests including supersonic flight, night flight, gun firing, and weapon separation, it received a "provisional combat suitability" rating on May 15 last year. Additional tests and verifications will be completed by June 2026. It is expected to be exported to countries that cannot purchase the latest models like the fifth-generation F-35 due to budget constraints or political and diplomatic issues.

Jae-kwang Lee, a researcher at NH Investment & Securities, analyzed, "The KF-21 is a 4.5-generation fighter jet currently in mass production for the Republic of Korea Air Force," and "It has the appeal of potential expansion to a fifth-generation stealth fighter, so it is likely to be exported to several countries in the future."

Kyung-jae Wi, a researcher at Hana Securities, also explained, "While ground defense has led the stock market so far, aerospace and maritime sectors will soon stand shoulder to shoulder," adding, "The supply volume of KAI's FA-50, KF-21, and Surion is likely to increase gradually."

Prepared Aerospace Value Chain... Securing Competitiveness

The outlook for the space business division is also bright. There are expectations that U.S. President Donald Trump will take the lead in fostering the space industry. Jisoo Jung, a researcher at Meritz Securities, explained, "The 'Space Policy Directive-2' announced by the first Trump administration in May 2018 specified deregulation for the commercialization of space," adding, "The goal is to simplify space regulations to promote rapid innovation and growth in the private space industry." He further noted, "This aligns with the comprehensive deregulation demands raised by Elon Musk, CEO of Tesla," and "Subsidies for users of SpaceX's low Earth orbit satellite internet service 'Starlink' and budget allocations for the Broadband Equity, Access, and Deployment (BEAD) program could become a reality."

KAI is preparing for commercialization across the entire space mobility business, including satellite development, space launch vehicles, and spacecraft, in anticipation of the 'New Space' era. On the 7th, it announced the acquisition of a 37.95% stake in satellite communication component manufacturer Genoco for KRW 54.5 billion. This investment aims to strengthen capabilities in manufacturing communication satellite payloads and stable satellite ground station operations. Dongheon Lee, a researcher at Shinhan Investment Corp., said, "KAI showed its intention to expand business by acquiring Genoco," and "It will create synergies such as vertical integration of component systems, material cost reduction, technology internalization, and development capability enhancement in the satellite and avionics fields."

Nam-hyun Jang, a researcher at Korea Investment & Securities, introduced, "There is growing demand for numerous military satellites," and "KAI is already the lead company for the military reconnaissance satellite procurement project 425 and is developing a verification satellite for the microsatellite system project." He added, "By acquiring Genoco, KAI is strengthening its capabilities in manufacturing microscale synthetic aperture radar (SAR) satellite payloads and securing competitiveness for project orders."

Despite optimistic forecasts, recent stock prices have broken through the upper range of the trading box, but contract delays remain a concern. Young-soo Han, a researcher at Samsung Securities, cautioned, "As of the third quarter this year, KAI's complete aircraft export orders are virtually non-existent," and "Large export projects expected by the market have not been finalized into contracts." Contracts for the export of Surion helicopters to the United Arab Emirates (UAE), valued at KRW 600 billion to 700 billion, and exports to Iraq worth about KRW 1 trillion, expected in the first half of this year, have yet to be confirmed. The KRW 1 trillion FA-50 export contract to Uzbekistan is stalled due to U.S. export approval. However, since this is a matter of contract timing and not cancellation, it is not a negative factor severe enough to revise the external growth scenario. Nonetheless, it could affect stock prices. The stock price has been sluggish through the third quarter this year as awaited order news has not yet been delivered.

Due to the defense industry's high dependence on the government, the defense capability improvement budget among defense spending items has a significant impact on performance. If government defense policies change rapidly, the size of the defense market could also change. Last year, 51.74% of total sales on a separate basis, amounting to KRW 1.9653 trillion, were concentrated in domestic sales to agencies such as the Defense Acquisition Program Administration.