"Hyundai Rotem, K2 Tank's Golden Era Approaching"[Click e-Stock]

4Q Results Expected to Fall Short of Expectations
Second-Phase Production Costs for Poland Reflected
Anticipation for Expanded Orders in the Middle East and Africa This Year

Hyundai Rotem's fourth-quarter results last year are expected to fall short of market expectations (consensus). Nevertheless, as the company is in discussions to export K2 tanks to several countries including Peru, Iraq, and Romania, diversification of order regions and expansion of exports are anticipated this year.

On January 22, Kiwoom Securities maintained its target price for Hyundai Rotem at 3 million won and its "Buy" investment rating, citing these factors. The previous day's closing price was 2,155,000 won.

Last year's fourth-quarter results are estimated at 1.5487 trillion won in revenue and 279.1 billion won in operating profit. These figures represent increases of 7.5% and 72.6%, respectively, compared to the same period last year. However, the results are expected to fall somewhat short of the consensus, which was 1.7361 trillion won in revenue and 320.4 billion won in operating profit.

Kiwoom Securities viewed this quarter as a transitional period, during which the production volume for the first K2 tank contract was completed by the third quarter of last year, and production shifted to the second contract. The company interpreted the temporary decline in production volume and increased costs during the initial production phase of the second contract as factors that slowed the pace of improvement in the Defense Solutions division's performance. Profitability is expected to improve in the second half of this year as the production volume for the second contract increases. The continued recovery of the Rail Solutions division and the solid growth of the Eco Plant division were also cited as positive factors.

Above all, this year, the company expects to diversify its orders beyond Poland. Hyundai Rotem is currently in discussions to export K2 tanks to several countries, including Iraq, Peru, Romania, and Saudi Arabia. In December last year, the company signed a framework agreement with Peru to supply 54 K2 tanks and 141 wheeled armored vehicles, a deal worth approximately 2 billion dollars (about 2.9355 trillion won). The implementation contract is expected to be signed as early as the first half of this year.

Iraq is considering introducing 250 K2 tanks to replace its aging tanks. It is understood that a high-level delegation visited Hyundai Rotem's production facilities last summer. A contract worth about 6.5 billion dollars is expected to be signed within this year. In addition, the K2 tank is being cited as a strong candidate for Romania's next-generation tank procurement project. In the second half of last year, Romania allocated a budget of approximately 6.5 billion euros (11.15 trillion won) for the next-generation tank project and decided to introduce a total of 216 tanks. Negotiations are reportedly underway to meet Romania's requirements, including local production. A contract could be signed as early as the second half of this year. In addition, discussions on a third contract with Poland are expected to begin.

Han-Gyeol Lee, a researcher at Kiwoom Securities, stated, "With the gradual increase in production volume for the second contract of K2 tanks for Poland, performance is expected to follow a low-to-high trend throughout the year," adding, "The trial evaluation of the K2ME, the Middle East variant of the K2, will take place in the Middle East this summer. Depending on the results, large-scale tank replacement projects in the Middle East and Africa could begin in earnest."

On the 2nd, Hyundai Rotem's K2 tank was exhibited at the "Korea International Defense Industry Exhibition" held at Gyeryongdae, Chungnam. Photo by Kang Jinhyung aymsdream@