[K Defense Industry Analysis] ③ Hanwha Systems, Unrivaled Technology... Stock Slump Amid New Business Losses

Defense accounts for 70% of sales... Over 45 years of experience
AESA radar and other defense orders continue
New business sector in deficit... Stock price also 'disappointing'

Editor's NoteThe world is paying attention to Korean weapons equipped with price competitiveness and rapid supply capabilities. The major U.S. investment bank Goldman Sachs has identified K-defense stocks as promising investment destinations this year. Goldman Sachs introduced, "Considering the strong position Korean defense stocks hold in the global defense market, defense stocks are a good investment to avoid geopolitical risks." Earlier, CNN stated, "Korea has become a major player in the defense industry," and Forbes mentioned, "Korea has quietly become one of the world's largest arms suppliers." Since the outbreak of the Russia-Ukraine war, rapid changes in the global defense industry environment have increased attention on K-defense. Will interest in K-defense end as a 'flash in the pan,' or does it have sustainable growth competitiveness? We analyzed the strengths, weaknesses, threats, and opportunities of K-defense leading companies Hanwha Aerospace, LIG Nex1, and Hanwha Systems.

Hanwha Systems, a subsidiary of Hanwha Aerospace at the forefront of the K-defense industry, boasts over 45 years of experience in the defense sector. It started as Samsung Precision in 1977 and was designated a 'first-class defense company' the following year. It adopted its current name after being incorporated into the Hanwha Group in 2015.

The business structure is broadly divided into three pillars: defense projects, ICT business, and new businesses. Among these, the defense sector accounts for about 70% of total sales. Based on core technologies in defense electronics, it mainly develops and sells advanced products such as △ aviation and aerospace △ surveillance and reconnaissance △ command, control, and communication △ maritime and ground systems tailored to the needs of the Republic of Korea Armed Forces.

Its unparalleled defense technology has been the foundation for solid performance. In 2021, defense sector sales and operating profit were KRW 1.514 trillion and KRW 93 billion, respectively. The following year, sales reached KRW 1.641 trillion with an operating profit of KRW 90 billion. Last year's estimated sales were KRW 1.799 trillion, and operating profit was KRW 108 billion, indicating a stable growth trend. Half of the sales came from the Defense Acquisition Program Administration, the main client. The defense sector's order backlog was KRW 5.256 trillion in 2021 and KRW 5.622 trillion in 2022. The estimated order backlog for last year is KRW 6.541 trillion, and it is expected to reach KRW 7.754 trillion this year.

K-Defense Status Accelerates Performance... "KRW 1.3 Trillion Defense Orders at End of Last Year"

Recently, the status of K-defense has strengthened, and growing geopolitical uncertainties have been favorable factors. Lee Dong-heon, a researcher at Shinhan Investment Corp., said, "In December alone last year, a total of seven defense orders amounting to KRW 1.3 trillion were placed," adding, "Future contracts include the KF-21 initial mass production project, LAH second mass production, FFX batch 4, Saudi Arabia M-SAM, Poland K2 tank, and K9 self-propelled howitzer. These projects align with the overall growth of defense companies."

The multi-phase array (AESA) radar developed for the KF-21 has also established itself as a growth engine. Jang Nam-hyun, a researcher at Korea Investment & Securities, said, "As weapon systems become more advanced, the proportion of Hanwha Systems' products is increasing. The most notable is the AESA radar," and added, "With the start of the KF-21 mass production project, Hanwha Systems' sales will also increase." It is estimated that Hanwha Systems' equipment, including the AESA radar, accounts for about 10-20% of the total KF-21 project value. The AESA radar is installed not only on the KF-21 but also on air defense and guided weapon systems.

The communication and observation satellite business is also expected to experience high growth. Researchers Lee Jae-kwang and Lee Seung-young from NH Investment & Securities said, "In December last year, a contract was signed to develop a military space internet. By 2026, using the low Earth orbit satellite network of the affiliated company Eutelsat OneWeb, a communication network suitable for the military will be established, and a secure mobile electronic beam steering antenna (ESA) satellite terminal for vehicles and ships will be developed." They analyzed, "With the adoption of the OneWeb satellite constellation for military communication satellite systems using not only observation satellites but also civilian low Earth orbit satellites, the company has expansion potential not only in defense but also in future civilian satellite communication businesses."

On December 4 last year, Hanwha Systems also launched a small synthetic aperture radar (SAR) satellite developed and manufactured in-house. It successfully communicated with the ground station. Military reconnaissance satellites SAR 2 and 3 are scheduled to be launched in April and November, respectively. SAR is a system that sequentially emits radar waves to the ground and sea from the air, synthesizes the slight time differences of the reflected waves from curved surfaces in order, and creates ground topographic maps. Hanwha Systems explained, "This achievement proves domestic technological capabilities in satellite manufacturing and launching, a field heavily dependent on overseas technology. It is significant as the first domestically produced satellite in a sector where space powers have controlled exports to maintain technological supremacy."

"Disappointing Stock Price, Profit Needed from New Business Sector"

However, despite such outstanding technological capabilities, Hanwha Systems' stock price has not rebounded significantly in recent years. Hanwha Systems was listed on the Korea Exchange in 2019. The closing price on the first day of listing was KRW 11,100, lower than the public offering price of KRW 12,250. It took 10 months after listing, in September the following year, for the closing price to surpass the offering price. However, the stock price remained sluggish. After reaching a closing price of KRW 22,100 on March 31, 2021, the stock price declined, falling to KRW 10,250 on October 13, 2022.

One of the main reasons for the stock price slump is losses in the new business sector rather than defense. Hanwha Systems continues to invest in satellite business, urban air mobility (UAM), blockchain platforms, and other ventures, but profit generation is difficult, and development costs are burdensome. Researcher Jang said, "Hanwha Systems' return on equity (ROE) is expected to be 4.4% this year and 6.5% next year. However, this is below the cost of equity (COE) of 17.1%," adding, "Concerns about recovering profits from future new business investments have raised the COE and limited the rise in ROE estimates."

He continued, "Ultimately, recovering investment amounts in the new business sector is crucial. The new business sector recorded operating losses of KRW 23.7 billion and KRW 69.7 billion in 2021 and 2022, respectively. Also, the cumulative operating loss for the third quarter this year was KRW 33.6 billion," and pointed out, "The timing for turning profits in the new business sector is expected after 2026, but due to the nature of development projects, uncertainties exist. If losses continue beyond the expected period, it will lead to a decline in investor sentiment."

However, Hanwha Systems' stock price has been rebounding since October last year. The stock price, which was KRW 11,720 on October 6 last year, gradually rose and closed at KRW 18,560 the day before. The recent three-month return is about 52%. Kiwoom Securities researcher Lee Han-gyeol said, "A rapid pilot project agreement was signed to build a military low Earth orbit satellite communication network using civilian low Earth orbit communication satellites. The prototype of the Overair UAM is expected to be completed by the end of the year, with a pilot flight scheduled for early next year," adding, "Key new industries are progressing steadily."

This content was produced with the assistance of AI translation services.