Five major Korean defense stocks averaged an 11.68% gain year-to-date as of the 22nd, significantly underperforming the KOSPI index's 56.58% rise over the same period, despite ongoing Middle East conflict since February 28. The underperformance stems from concerns over delayed new contract signings in the Middle East export market and weaker-than-expected second-quarter earnings, according to securities analysts. Defense stocks typically strengthen during geopolitical tensions due to increased demand for missile and drone defense systems, but the five companies—Hanwha Aerospace, LIG Nex1, Hyundai Rotem, Korea Aerospace Industries, and Hanwha Systems—have declined 30-60% from their 52-week peaks reached in March and April.
Korean Defense Stocks Post Mixed Performance Against KOSPI Benchmark
According to Korea Exchange data as of the 22nd, the five major defense companies showed divergent performance year-to-date. Hanwha Aerospace declined 4.87%, closing at 899,000 won compared to its January 2 closing price of 945,000 won. The stock fell 47.52% from its 52-week high of 1,713,000 won recorded on March 4.
LIG Nex1 surged 52.04% over the same period but declined 39.89% from its 52-week high of 1,118,000 won reached on April 22. Hyundai Rotem dropped 20.76% year-to-date and fell 45.71% from its April 30 peak of 282,000 won.
Korea Aerospace Industries gained 21.90% year-to-date but declined 33.87% from its March 3 high of 215,000 won. Hanwha Systems rose 10.09% year-to-date but fell 67.07% from its March 4 peak of 184,000 won.
The KOSPI index rose from 4,309.63 on January 2 to 6,747.95 as of the 22nd, representing a 56.58% increase. The defense stocks' average gain of 11.68% lagged the benchmark by approximately 44 percentage points.
Analysts Cite Q2 Earnings and Contract Delays as Key Factors
Kiwoom Securities forecasts that major companies including Hanwha Aerospace and Korea Aerospace Industries will report second-quarter operating profits significantly below consensus estimates. The timing of large projects such as Hyundai Rotem's Iraq and Peru tank contracts has become uncertain.
Kang Tae-ho, researcher at DS Investment & Securities, stated: "The weakness in the five defense stocks reflects a combination of factors: a prolonged gap in large-scale orders, failure to win the Canadian submarine project, and concerns over contract delays due to the prolonged Middle East war. The market's primary concern is delayed new orders, and continuous order acquisition is necessary to maintain long-term performance."
Kim Yong-min, researcher at Yuanta Securities, noted: "When war breaks out in a peaceful state, defense-related stock prices surge and show overshooting, but it is difficult to continue accepting a prolonged war as a new positive factor."
Second-Half Recovery Tied to Poland Exports and European Demand
Hanwha Aerospace is expected to see full-scale earnings growth starting in the second half due to expanded domestic mass production and overseas export volumes including Poland.
Kang stated: "The company can provide competitively priced self-propelled howitzers, multiple rocket launchers, and air defense weapons (L-SAM) that Europe urgently needs, and is in the most favorable position regarding recent NATO entry barrier concerns. Preparations for local production requirements emphasized by Europe, such as establishing a Chunmoo missile JV in Poland and a K9 production plant in Romania, are well advanced. Once orders resume, the strengths of Hanwha Aerospace's ground defense weapon portfolio will be further highlighted."
Jang Nam-hyun, researcher at Korea Investment & Securities, stated: "New orders are the key to Korea Aerospace Industries' stock rebound. While the pace of profit improvement is expected to fall short of previous estimates, new order momentum centered on KF-21 will expand."
Choi Gwang-sik, researcher at Daol Investment & Securities, said regarding LIG Nex1: "Expectations remain for new Cheongung-2 purchasing countries in the Middle East, the U.S. Biho system, and dual L-SAM purchases in the Middle East, while pipelines for Malaysia's Haeseong and Indonesia's Cheongung-2 could be added within three months."
FAQ
Why did Korean defense stocks underperform the KOSPI index despite the Middle East conflict?
The five major Korean defense stocks gained an average of 11.68% year-to-date as of the 22nd, underperforming the KOSPI's 56.58% rise by approximately 44 percentage points. Securities analysts attribute the underperformance to concerns over delayed new contract signings in the Middle East export market and weaker-than-expected second-quarter earnings forecasts for major companies including Hanwha Aerospace and Korea Aerospace Industries.
What is the outlook for Korean defense stocks in the second half?
Analysts project recovery potential starting in the second half based on confirmed factors. Hanwha Aerospace is expected to see expanded domestic mass production and overseas export volumes including Poland. Korea Aerospace Industries is anticipated to gain new order momentum centered on the KF-21 program. LIG Nex1 has potential pipelines for Malaysia's Haeseong and Indonesia's Cheongung-2 that could materialize within three months, according to Daol Investment & Securities researcher Choi Gwang-sik.
