DS Investment & Securities researcher Kang Tae-ho recommended current timing as a buying opportunity for Korean defense stocks, which have shown weakness against the KOSPI index, citing expected contract momentum resuming from July. Kang stated the current valuation has entered an attractive range and recommended buying before contract momentum becomes visible. The weakness in five major defense companies - Hanwha Aerospace, LIG Defense & Aerospace, Hanwha Systems, Hyundai Rotem, and Korea Aerospace Industries - stems from continued large contract gaps, concerns over NATO entry barriers following Canada's submarine contract failure, and Middle East contract delays due to prolonged regional conflict, according to the analyst.
Expected Contracts This Month Include K9 Howitzer US Negotiations and Spain Joint Development
Kang forecasted major contracts concentrated in the second half, with several expected this month. These include K9 wheeled self-propelled howitzer US preferred negotiator selection, Spain K9 self-propelled howitzer joint development contract signing, and Peru K2 tank main contract signing. The analyst noted the Spain K9 project already has a joint development MOU signed, and Spain faces pressure for additional defense spending, suggesting the main contract will proceed quickly.
Poland-Russia Tensions Support NATO Ground Weapons Demand
Kang assessed that Russia's continued threats against Poland and the intensifying Russia-Ukraine war mean ground weapons like K9 and Chunmoo are urgently needed within NATO. The analyst forecasted that rather than entry barriers increasing, cooperation methods such as joint development will be strengthened.
Middle East Missile Defense Interest Expected to Continue After Inventory Depletion
Adding the Middle East pipeline, Kang projected that uncertainty around major second-half contracts will be somewhat resolved. The analyst estimated that major Middle Eastern countries' ballistic missile interceptor inventory depletion will be substantial, forecasting continued interest in Korean air defense networks and interceptor missiles. After Middle East situation stabilization, Kang judged that negotiations for major Middle East contracts including Saudi Arabia's MNG project and Iraq K2 will re-accelerate.
LIG D&A Forecast to Exceed Q2 Consensus on UAE Cheongung Sales
While expecting some companies' results to fall below market expectations, Kang mentioned that defense industry stock direction will likely be determined by contract outcomes rather than current results. For LIG D&A, the analyst forecasted strong results supported by UAE-bound Cheongung sales recognition, projecting Q2 operating profit of 114 billion won, exceeding the market consensus of 104.9 billion won.
For Hanwha Aerospace, Kang estimated Q2 operating profit below consensus, but analyzed that concentrated second-half deliveries of Poland-bound K9, Chunmoo, and missiles, plus accelerated Australia and Egypt-bound K9 sales recognition, will produce annual ground defense operating profit of 2.3 trillion won with excellent results. The analyst added that Hyundai Rotem, Korea Aerospace Industries, and Hanwha Systems are expected to post below-consensus Q2 results, but results improvement is anticipated heading into the second half.
FAQ
Why are Korean defense stocks currently weak despite expected contract momentum?
According to DS Investment & Securities researcher Kang Tae-ho, the weakness stems from continued large contract gaps, concerns over NATO entry barriers following Canada's submarine contract failure, and Middle East contract delays due to prolonged regional conflict.
What major defense contracts are expected this month?
Kang forecasted several contracts expected this month, including K9 wheeled self-propelled howitzer US preferred negotiator selection, Spain K9 self-propelled howitzer joint development contract signing, and Peru K2 tank main contract signing.
