K2 Tanks to Gain Traction in Overseas Markets
The authors are analysts of Shinhan Investment Corp. They can be reached at idh@shinhan.com and jiunmyoung@shinhan.com, respectively. -- Ed.
Initiate coverage with BUY for a target price of KRW40,000
We initiate coverage of Hyundai Rotem with BUY for a target price of KRW40,000. Our target price is based on the 2023F BPS of KRW14,500 and a target PBR of 2.7x, reflecting: 1) the expansion of focus from domestic sales to exports for the defense solutions business; and 2) the value of stabilizing rail solutions and eco-plant businesses.
The target PBR applied to valuations is based on LIG Nex1's average PBR from 2015-2019. Similar to LIG Nex1 during that period, Hyundai Rotem is generating growth momentum from exports to overseas defense markets, starting with Poland.
From trains to tanks
In 1999, during the Korean financial crisis, the rolling stock divisions of Hyundai Precision & Industries, Daewoo Heavy Industries, and Hanjin Heavy Industries were merged into a single company to create Hyundai Rotem. The company is now a subsidiary of Hyundai Motor.
The company has three divisions: rail solutions, defense solutions, and eco-plants. Hyundai Rotem is competing with a few rivals in the domestic market for subway trains, but is in fact the country's exclusive supplier of high-speed trains such as KTX, SRT, and GTX. The defense solutions division produces K2 tanks, wheeled armored vehicles, and wearable robots. The eco-plant business contributes to the production facility capex projects of the group’s steel and automaker affiliates.
K2 tanks to gain traction in overseas markets
Hyundai Rotem announced on August 29 that it signed the first phase of the executive contract worth KRW4.5tr with Poland to build 180 K2 tanks by 2027 (actual shipments likely to be completed by 2025). The deal is part of an initial agreement signed with Poland for the supply of 1,000 K2 tanks in total, and the company expects to seal the second phase of the contract in the near term.
The arms deal with Poland is forecast to drive immediate earnings growth from 2023. Hyundai Rotem was chosen for its fast delivery times, backed by sufficient production capacity built up to meet domestic demand. Moreover, the company is expected to generate large margins from the deal and secure additional orders from other countries going forward.
Meanwhile, the company's shares have remained stagnant, weighed down by the limited growth of the rail solutions business. Going forward, we expect growth in exports of defense solutions to provide stability to the company's overall business portfolio.