New Businesses Set to Take off
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 KRW21,000
We initiate our coverage on Hanwha Systems with BUY for a target price of KRW21,000. Our target price is based on 2023F BPS of KRW11,684 and a target PBR of 1.79x, reflecting expectations for business expansion into urban air mobility (UAM), low-earth orbit satellite, and satellite antenna on the back of solid defense and ICT businesses.
The target PBR is the average of 2019-2021 during which the company was listed on the KOSPI and raised funds by way of rights issue to make investments in new businesses. Hanwha Systems went public in 2019 after merging with the ICT unit of Hanwha Group, and since then has invested in a wide range of new businesses, especially UAM systems, with the raised funds.
Massive growth potential to be unleashed
Founded as Samsung Aerospace in 1977, the company’s defense division has built a strong track record in a number of areas including radar, communication system, and combat system. After merging with the ICT unit in 2019, the company has offered various IT services for finance, manufacturing, construction, and service sectors in the ICT business, as well as expanding its foothold in C4I, air defense, command, control and communication system, and comprehensive logistics support in the defense business.
To expand its business areas, Hanwha Systems raised KRW1.2tr through a rights offering in June 2021. It has made investments in a slew of companies, such as the US UAM company Overair, the British satellite service provider OneWeb, the US satellite antenna company Kymeta, the UK-based Hanwha Phasor, and some blockchain businesses. From satellites and antennas to UAM systems, we see massive growth potential hidden in the company’s new businesses.
Focus on future earnings with new businesses set to take off
Hanwha Systems secured a KRW1.3tr order for its multi-function radars as part of the MSAM-II export deal with the UAE on January 17. The company also supplies fire control systems and various components for K9 self-propelled howitzers. It has successfully completed domestic production of active electronically scanned array (AESA) radars, and signed a memorandum of understanding with the Italian defense company Leonardo and Poland-based WB Group in May and June, respectively.
The valuation upgrade following the rights issue in 2021 is mainly focused on new businesses rather than the existing ones. As growth stocks tend to do poorly during the interest hike cycle, the company’s earnings have turned stagnant like its US peers, Joby Aviation and Archer Aviation. Despite the current weak performance, we find Hanwha Systems attractive given its leading position in the domestic UAM market with new businesses set to take off in earnest going forward.