[Yang Nakgyu's Defence Club] Quarterly Operating Profit of Four Major Defense Firms Set to Surpass 1 Trillion Won for the First Time

Sales Reach 9 Trillion Won... Annual Operating Profit Expected to Surpass 2 Trillion Won This Year
Government's Defense Export Target of $20 Billion Also Within Reach

The combined operating profit of four major domestic defense companies, including Hanwha Aerospace, is expected to surpass 1 trillion won for the first time ever in the second quarter of this year. This surge in operating profit is attributed to the strong performance of K-Defense exports. The annual operating profit of these companies increased from 512.8 billion won in 2021 to 868.5 billion won in 2022, and to 1.335 trillion won in 2023. Last year, it surpassed the 2 trillion won mark for the first time, and now the era of 1 trillion won in quarterly operating profit is considered to be approaching rapidly.

According to financial information provider FnGuide on July 11, the combined market forecast for operating profit of the four major domestic defense companies?Hanwha Aerospace, Hyundai Rotem, Korea Aerospace Industries (KAI), and LIG Nex1?for the second quarter of this year amounts to 1.1049 trillion won. The total sales forecast is 9.6608 trillion won.

Hanwha Aerospace Sees Largest Increase in Operating Profit

Hanwha Aerospace recorded the largest increase in operating profit. Its provisional sales for the second quarter reached 6.4904 trillion won, up 133.0% year-on-year, and provisional operating profit was 718.2 billion won, up 100.2%. The inclusion of Hanwha Ocean as a subsidiary of Hanwha Aerospace in February also had an impact. If Hanwha Ocean wins the contract for the Korean next-generation destroyer (KDDX) project, which has a total project cost of 8 trillion won this year, further sales growth is expected.

Securities analysts estimate that Hyundai Rotem will see sales increase by 27.3% to 1.3928 trillion won and operating profit rise by 108.2% to 234.8 billion won during the same period. The completion of the second K2 tank contract negotiation with the Polish Ministry of Defense earlier this month, worth $6.5 billion (about 8.8 trillion won), had a significant impact. As the localization rate increases, export prospects are also bright. The K2 tank had previously used German engines, but since the fourth production batch last year, it has succeeded in localizing the power pack (engine + transmission). This eliminates the need to comply with German regulations, opening the door to the Middle Eastern market.

LIG Nex1's second-quarter sales are projected to rise by 46.6% to 886.5 billion won, and operating profit is expected to increase by 71.1% to 84.1 billion won. This is largely due to increased domestic deliveries and exports, particularly of guided weapons such as Cheongung II, to countries including the UAE. In 2022, LIG Nex1, together with Hanwha Aerospace, signed a Cheongung II export contract with the UAE. The total contract value was 4.1 trillion won, with LIG Nex1, which was responsible for system development, accounting for 2.34 trillion won of that amount.

KAI Anticipates Recovery in Second Half Due to Concentrated Delivery Schedule

In contrast to other defense companies, KAI's sales are expected to decrease by 0.1% to 891.1 billion won. Operating profit is likely to decrease by 8.8%. The delay in FA-50 exports to Poland is seen as the main factor. However, as the delivery schedule for major finished products is concentrated in the second half of the year, there is strong potential for a performance recovery.

If Defense Export Target of $20 Billion Is Achieved, Korea Will Join the Ranks of the Top Four Global Powers

This year, defense exports are also expected to increase. After peaking at $17.3 billion in 2022, defense exports declined for three consecutive years to $13.5 billion in 2023 and $10 billion last year. However, with Hyundai Rotem's successful second K2 tank contract with Poland, the government's target of $20 billion in defense exports this year is now within reach.

The government has set out plans to elevate South Korea to one of the world's top four defense exporters. According to the Stockholm International Peace Research Institute (SIPRI), South Korea ranked 10th in the global arms export market from 2020 to 2024, with a 2.2% market share. The United States maintained first place with 43%, followed by France (9.6%) and Russia (7.8%) in the top three. The gap in market share between Korea in 10th place and countries ranked 4th to 8th is not large, so there is a strong possibility that Korea will join the top four. In particular, there is growing demand for Korean weapons from countries in Europe, the Middle East, and Asia, and factors such as "European rearmament" in response to concerns about alliance abandonment by the Donald Trump administration in the United States could serve as favorable conditions.

Government Launches All-Out Effort, Including Establishment of Dedicated Defense Secretary

Industry insiders agree that the government's role is crucial for South Korea to become one of the top four defense exporters. The additional K2 tank export contract with Poland would not have been possible without top-level diplomacy and government financial support. The government is pursuing a plan to finance about 80% of the total contract amount through policy finance, with the Korea Trade Insurance Corporation leading the loan guarantees and the Export-Import Bank of Korea participating supplementarily in the range of 20-30%.

President Lee Jaemyung recently presided over a Cabinet meeting and instructed, "Establish a control tower for defense industry development and consider regularizing the 'Defense Export Promotion Strategy Meeting.'" This is seen as a move to create a dedicated defense secretary within the presidential office. The Defense Acquisition Program Administration reportedly informed the National Planning Committee that it would strengthen competitiveness in securing contracts by establishing a dedicated defense secretary to lead intergovernmental collaboration. The defense secretary will serve as a control tower, coordinating cooperation not only among public institutions such as the Defense Acquisition Program Administration, the Agency for Defense Development (ADD), and the Defense Agency for Technology and Quality, but also among government ministries. The position of defense secretary was created during the Moon Jaein administration, but was abolished by the Yoon Sukyeol administration, which assigned the duties to dispatched officials from various ministries.