The combined market value of the top four South Korean defense companies, Hanwha Aerospace, LIG D&A, Hyundai Rotem and Korea Aerospace Industries, had plunged to about 62 trillion won ($46.18 billion) by the end of October from their 52-week peak of 170 trillion won, according to South Korean broadcaster SBS. Hanwha Aerospace’s third-quarter operating profit fell over 46% from a year earlier, with the company citing delivery-schedule adjustments and one-off costs. Its shares are down more than 28% so far this year. Hyundai Rotem, which reported a more than 11.1% decline in operating profit, has seen its stock drop almost 60%. Korea Aerospace Industries’ third-quarter sales and operating profit improved about 52% and 32% respectively, limiting its share decline to just over 8% this year.
The war in Ukraine has shown how relatively inexpensive drones can threaten expensive military equipment, and drone strikes from Iran have depleted stocks of costly air defense missiles of the U.S. and its Gulf allies. Peter Kim, senior managing director at KB Securities, said modern warfare is being fought with less traditional weaponry such as tanks, cannons and armored vehicles, which Korean firms are positioned for, and that drones are dominated by China, pricing out potential competitors from Europe, the U.S. and Asia. KJ Hwang, Korea autos & industrials analyst at Bank of America, agreed that procurement priorities were evolving, with more focus on drones, counter-drone systems and air defense.
Kim said the declines also stem from fund flows into the semiconductor sector, high valuations built on earnings-growth expectations, and governments moving slower than expected to convert defense spending pledges into approved budgets and orders. David Roche, strategist at Quantum Strategy, told CNBC there is greater emphasis on AI and drone technology in military orders as major powers learn the lessons of Ukraine, but that drones cannot capture and hold terrain, so in any mobile battlefield infantry, tanks and armor are essential.
Several deals were made this year. Hanwha Aerospace received K9 howitzer orders from Spain valued at about 546 million euros, as well as a $922 million order for K239 rocket systems from Norway. LIG D&A made a $94 million deal with Malaysia for its K-SAAM naval surface-to-air guided missile system, the first export deal for that system. Hwang said South Korean defense companies have continued to expand cooperation with partners in Western Europe and the Middle East, including in air-defense systems, and that additional K9 orders suggest supply constraints and the continued importance of deterrence remain supportive of demand for conventional platforms. Kim said the Korean defense sector remains attractive, given a long-term growth outlook still in the teens. South Korean defense companies are also actively investing in drones and unmanned systems, and while meaningful exports will take time as overseas buyers require a proven operational track record, Kim expects more tangible results potentially emerging in the near future.