Five South Korean defense stocks—Hanwha Aerospace, LIG Defence & Aerospace (LIG D&A), Hanwha Systems, Hyundai Rotem, and Korea Aerospace Industries (KAI)—received maintained 'Buy' ratings from DS Investment & Securities despite recent underperformance, as the brokerage anticipates a second-half rebound driven by overseas contract awards. The stocks delivered a combined 12% return year-to-date while the KOSPI rose 56%, attributed to prolonged contract delays, Canada's submarine program loss to a German competitor, and Middle East contract postponements. Kang Tae-ho, a DS Investment & Securities analyst, stated that multiple export pipelines are expected to resume normal operation from the second half, dispelling first-half concerns.
DS Investment & Securities Adjusts Target Prices for Three Defense Stocks
DS Investment & Securities maintained target prices of 1.25 million won for LIG D&A and 270,000 won for Hyundai Rotem. The brokerage lowered target prices for Hanwha Aerospace to 1.62 million won, Hanwha Systems to 94,000 won, and KAI to 204,000 won. Kang diagnosed the underperformance as stemming from continued large contract delays, concerns over strengthened NATO entry barriers following the Canada submarine contract failure, and worries about Middle East contract postponements due to prolonged regional conflict. The analyst noted that ground weapons such as K9 self-propelled howitzers and Chunmoo rocket systems remain urgently needed within NATO as Russia's security threat to Poland intensifies, suggesting collaborative development approaches will strengthen rather than weaken market entry.
Hanwha Aerospace Awaits US Army MTC Program Results in July
Hanwha Aerospace expects the US Army's Mounted Tactical Complex (MTC) wheeled self-propelled howitzer modernization program prototype competition results in July, with the project estimated at 10 trillion won. Spain's K9 self-propelled howitzer program is approaching contract finalization as legal disputes between local companies near resolution, with a joint development contract with Spanish defense firm Indra anticipated between July and August. A third implementation contract with Poland for K9 systems is expected by year-end. Kang stated that ground weapons maintain strong competitiveness in the NATO market and that uncertainty surrounding large contracts awaited by the market will be resolved again in the second half.
Hyundai Rotem and KAI Target Peru and Indonesia Contracts
Hyundai Rotem is preparing to sign a comprehensive agreement worth approximately 3 trillion won with Peru's army and local arsenals between July and August for K2 tank and K808 wheeled armored vehicle exports. A potential contract with Iraq for K2 tank exports may materialize in Q4. Korea Aerospace Industries faces a pivotal second half with anticipated orders related to Indonesia's KF-21 program in Q4, alongside FA-50 light attack aircraft exports to Peru and Egypt that will determine major orders and earnings.
LIG D&A Pursues Cheongung-2 Exports to Qatar and Kuwait
LIG D&A is expected to finalize Cheongung-2 exports worth 1.5 trillion won each to Qatar and Kuwait during the second half. The United Arab Emirates and Saudi Arabia, which already operate Cheongung-2 systems, are considering orders for long-range surface-to-air missiles (L-SAM) with higher intercept altitudes, creating additional export opportunities. Hanwha Systems is expected to achieve accompanying export results in the defense sector, including multifunctional radars, in alignment with these contracts.
Q2 Earnings Expected Below Forecasts Across Four Companies
DS Investment & Securities projected that the five defense companies will show generally sluggish Q2 performance. Hanwha Aerospace's Q2 revenue is forecast at 7 trillion won with operating profit of 950 billion won, below expectations, but concentrated deliveries of K9 and Chunmoo systems to Poland from the second half are projected to generate annual ground defense operating profit of 2.2432 trillion won. LIG D&A is expected to exceed Q2 operating profit forecasts (104.9 billion won) with 115 billion won as UAE-bound Cheongung sales are smoothly recognized. Hyundai Rotem, Korea Aerospace Industries, and Hanwha Systems are anticipated to post Q2 results below forecasts but show improvement moving into the second half.
FAQ
Why did South Korean defense stocks underperform the KOSPI in the first half?
The stocks delivered a combined 12% return year-to-date while the KOSPI rose 56%, due to prolonged large contract delays, Canada's submarine program loss to a German competitor raising NATO entry barrier concerns, and Middle East contract postponements from prolonged regional conflict.
What major contracts are South Korean defense companies expecting from July onward?
Hanwha Aerospace awaits US Army MTC program results in July and Spain K9 contract finalization between July and August. Hyundai Rotem is preparing a 3 trillion won agreement with Peru between July and August. LIG D&A pursues 1.5 trillion won Cheongung-2 exports each to Qatar and Kuwait during the second half.
