[Click eStock] "Hyundai Rotem, K2 Overseas Additional Orders Will Determine Performance"

2023 4Q Earnings Surprise
Additional Orders Following Poland 'Jackpot' Are Key to Performance

Korea Investment & Securities analyzed on the 1st that the future additional export of K2 tanks will be a crucial point for Hyundai Rotem's future performance. They maintained a 'Buy' investment rating and a target price of 34,000 KRW.

Researcher Jang Nam-hyun of Korea Investment & Securities stated, "The delivery of K2 tanks to Poland will sharply improve performance until 2025, and additional exports of K2 tanks are essential for further growth." He added, "Currently, they are awaiting additional contracts for 800 K2 tanks destined for Poland, and Romania is preparing a project to introduce 250 tanks, while the Czech Republic is also planning to purchase tanks."

In 2022, Poland signed an agreement with Hyundai Rotem and other South Korean defense companies to procure weapons worth approximately 20 trillion KRW. It was a historic 'jackpot' in the history of defense exports. Among the items in the agreement was Hyundai Rotem's K2, with plans to procure about 1,000 units.

Hyundai Rotem's sales in the fourth quarter of 2023 were 989.2 billion KRW, and operating profit was 69.8 billion KRW. This was an 'earnings surprise,' exceeding market consensus (average forecast) by 14.6% and 76.4%, respectively. Researcher Jang said, "A one-time profit of 15 billion KRW related to overhaul projects occurred, and part of the sales revenue for the K2 tanks destined for Poland, scheduled for delivery in 2024, was recognized based on progress." He added, "The overseas sales revenue of the Defense Solutions division in Q4 is estimated at 200 billion KRW, and the operating profit margin recorded 7.1%, exceeding the market expectation of 4.6%, due to an increase in the proportion of highly profitable overseas defense sales."

The 2024 performance estimates are sales of 3.671 trillion KRW and operating profit of 248 billion KRW. These figures were revised downward by 10.2% and 26.8%, respectively, compared to previous estimates. Researcher Jang explained, "Sales in the Rail Solutions division in 2024 are expected to decrease by 4.5% year-on-year due to poor new orders in 2020 and 2021 and delayed revenue recognition for some projects." He added, "Reflecting the early recognition of sales revenue for the Poland-bound K2 tanks in Q4 2023, the sales estimate for the Defense Solutions division was revised downward by 16.3%, resulting in a 1.5 percentage point decrease in the operating profit margin estimate compared to previous forecasts."

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