South Korean defense stocks have ridden the wave of global rearmament over the past two years.
Russia’s invasion of Ukraine accelerated military spending across Europe. South Korean companies attracted buyers with weapons such as tanks, artillery and missile systems that were competitively priced and delivered relatively quickly.
However, that rising market turned into a sharp decline, with the stock prices of several major South Korean defense companies plummeting this year.
According to South Korean broadcaster SBS, the market capitalization of South Korea’s top four defense companies – Hanwha Aerospace, LIG D&A, Hyundai Rotem and Korea Aerospace – has plummeted from a 52-week peak of 170 trillion won to about 62 trillion won ($46.18 billion) as of the end of October.
Is a South Korean company known for exporting tanks and artillery systems well-positioned for the modern battlefield, where drones and anti-drone systems proliferate in Ukraine and Iran?
The Ukraine war has shown how relatively cheap drones can threaten expensive military equipment, with drone attacks from Iran depleting the United States and its Gulf allies’ stocks of expensive air defense missiles.
“Modern wars are fought with non-traditional weapons (tanks, artillery, armored vehicles, etc.), and the Koreans are in such a position. On this front as well, for example, drones are dominated by China, undercutting other potential competitors in Europe, the US and Asia on price,” said Peter Kim, senior managing director at KB Securities.
KJ Hwang, Korea automotive and industry analyst at Bank of America, agreed that procurement priorities are evolving, with a focus on drones, anti-drone systems and air defense.
Short-term economic downturn?
The reversal in defense stocks isn’t all due to new combat platforms.
The decline came as investors weighed several concerns, including disappointing business results, a strong won and delays in export orders.
KB Securities’ Kim said high valuations due to capital inflows into the semiconductor sector and expectations for strong profit growth were also weighing on South Korean defense stocks, adding that governments were slower than expected to convert defense spending commitments into approved budgets and orders.
Those concerns were further amplified by the financial results announcement. Hanwha Aerospace’s third-quarter operating profit fell more than 46% year-on-year due to delivery schedule adjustments and one-time costs. The company’s stock price has fallen more than 28% since the beginning of the year.
Hyundai Rotem, which reported a decline in operating profit of more than 11.1%, saw its stock price fall by nearly 60%.
Korea Aerospace Industries’ third-quarter sales and operating profit improved by about 52% and 32%, respectively, and its stock price fell just over 8% this year.
But experts remain positive on the sector, especially in the long term.
“As South Korean defense companies continue to expand cooperation with partners in Western Europe and the Middle East, including on air defense systems, additional orders for the K9 howitzer suggest that supply constraints and the continued importance of deterrence still support demand for conventional platforms,” BofA’s Hwang said.
Some of the deals made this year include a K9 order from Hanwha Aerospace to Spain worth about 546 million euros and a $922 million order from Norway for the K239 rocket system.
LIG D&A has signed a $94 million contract with Malaysia for the K-SAAM naval surface-to-air guided missile system, marking the first ever export contract for the system.
Countries still rely heavily on conventional weapons to strengthen their defense capabilities, and KB Securities’ Kim said South Korea’s defense sector “remains attractive given that long-term growth prospects are still in the 10% range.”
David Roche, a strategist at Quantum Strategy, told CNBC that as major powers learn the lessons of Ukraine, military orders are placing “more emphasis” on AI and drone technology, but that “drones can’t capture and hold terrain…so infantry, tanks, armor, etc. are essential in a mobile battlefield.”
South Korean defense companies are also actively investing in drones and unmanned systems, and meaningful exports will take time as overseas buyers require a proven operational track record, but Kim is hopeful that more tangible results could emerge in the near future.
