Financial Products Also Focused on the Defense Market [Yang Nakgyu's Defence Club]

ETF Returns Surge on Focused Investment in Defense Sector
Stock Prices Rise on Expectations for Defense Exports by Companies Like Hyundai Rotem

As uncertainty in the economic market grows, defense-related financial products are being evaluated as relatively stable. In particular, the investment amount is increasing as the returns of asset management company exchange-traded funds (ETFs) that focus on defense-related companies such as shipbuilders are rising.

Yonhap News

According to the financial industry on the 10th, representative ETFs related to shipbuilding include Shinhan Asset Management’s ‘SOL Shipbuilding TOP3 Plus,’ NH-Amundi Asset Management’s ‘HANARO Fn Shipbuilding & Shipping,’ and Mirae Asset Management’s ‘TIGER Shipbuilding TOP10.’

The leading product is Shinhan Asset Management’s ‘SOL Shipbuilding TOP3 Plus.’ The SOL Shipbuilding TOP3 Plus ETF invests more than 80% in shipbuilders, including the three major shipbuilders HD Hyundai Heavy Industries, Samsung Heavy Industries, and Hanwha Ocean, as well as HD Hyundai Mipo Dockyard and HD Hyundai Heavy Industries. It also invests in a total of 13 ship equipment companies such as HD Hyundai Marine Solutions, HD Hyundai Marine Engine, Hanwha Engine, and Korea Carbon.

It has gained popularity among investors since the beginning of the year, increasing its net assets by more than 130 billion KRW. The current total amount has surpassed 600 billion KRW. This is due to its returns. The one-year return of ‘SOL Shipbuilding TOP3 Plus’ is 110.73%. Short-term returns are also good, with 3-month and 6-month returns recorded at 48.85% and 56.29%, respectively. The net purchase amount by individual investors over the past year was 214.9 billion KRW, ranking first.

A common feature of these ETF products is their concentrated investment in Hanwha Ocean. Based on Hanwha Ocean’s solid performance, the outlook is positive due to expectations of orders related to maintenance and repair of U.S. naval vessels amid the U.S.-China arms race, increased demand for LNG vessels driven by U.S. LNG projects, and growing competitiveness in the offshore wind power market. Hanwha Ocean’s order performance is notable not only in naval vessels but also in commercial ships.

On this day, Hanwha Ocean’s stock price showed strength as the possibility of securing an order worth 1.7 trillion KRW for LNG dual-fuel container carriers from a German shipping company was raised. At 9:31 a.m. on the 10th, Hanwha Ocean was trading at 63,800 KRW, up 3.07% from the previous trading day. The early strength in Hanwha Ocean’s stock is analyzed to be due to expectations of securing an order for six LNG dual-fuel container ships worth 1.7 trillion KRW from Hapag-Lloyd, Germany’s fifth-largest shipping company.

Investment in defense companies such as ground defense is also continuing. Representative defense ETFs include Shinhan Asset Management’s ‘SOL K Defense’ and Hanwha Asset Management’s ‘PLUS K Defense.’ Both ETFs commonly include Hanwha Aerospace, Hyundai Rotem, Korea Aerospace Industries, and LIG Nex1 as representative stocks.

The ETF operated by Hanwha Asset Management was also listed on the New York Stock Exchange on the 5th. This came about four months after submitting a listing application to the U.S. Securities and Exchange Commission (SEC) in collaboration with the U.S. local ETF platform operator ETC (Exchange Traded Concepts) in October last year. ETC announced on the 5th (local time) that it had listed Hanwha Asset Management’s ‘PLUS Korea Defense Industry Index’ ETF on the NYSE Arca exchange under the New York Stock Exchange. This ETF benchmarks the ‘PLUS K Defense’ listed on the domestic stock market. According to the Korea Exchange, the ‘PLUS K Defense’ ETF benchmarked by this ETF recorded a return of 101.77% over the past year as of that day.

The company strengthening ground defense is Hyundai Rotem. As of 10:08 a.m. on the 10th, Hyundai Rotem was trading at 78,900 KRW, down 0.88% from the previous trading day. Hyundai Rotem has attracted market attention by recording large-scale performance growth and high profit margins in the fourth quarter of last year. Its fourth-quarter sales amounted to 1.4408 trillion KRW, a 45.7% increase compared to the same period last year, and operating profit rose 131.7% to 161.7 billion KRW.

The main source of performance growth is the defense sector, with the defense sector’s profit contribution estimated to be over 90%. In particular, the expansion of K2 tank exports to Poland and favorable exchange rate effects had a positive impact. The operating profit margin of the defense sector is estimated at 31%, and the export sector’s operating profit margin is expected to reach 41%. Additionally, there is a high possibility of additional orders through negotiations related to the Poland 2-1 contract and Romania’s next-generation tank project, so a positive short-term outlook is expected to continue.

A financial industry official said, “Domestic defense companies such as Hanwha Systems saw a sharp increase in both sales and operating profit last year,” adding, “This trend is expected to continue even with the Trump administration, and investment will continue to increase.”