Top Picks: Hanwha Systems and Hanwha Aerospace
The author is an analyst of NH Investment & Securities. He can be reached at jaekwang.rhee@nhqv.com. -- Ed.
A surge in orders for Korean weapons systems, led by Poland in 2022, is not just a one-time event. Rather, we expect the Korean aerospace/defense industry, which has thus far relied on domestic demand, to take a leap forward thanks to export-oriented growth.
In addition, a rebound in air industry demand to a growth trajectory following Covid-19 should also help to boost profitability in Korea’s aerospace/defense industry, which supplies aircraft engine parts and structures. Finally, the capital and technology obtained from such developments should greatly assist in advancing AAM systems and satellite Internet, both of which are being touted as the next big thing.
We suggest Hanwha Systems and Hanwha Aerospace as our sector top picks, noting that: 1) Hanwha Systems is most actively investing in the AAM and satellite internet domains; and 2) Hanwha Aerospace is expected to enjoy robust earnings momentum going forward, backed by brisk exports of its K9 Thunder, K239 multi rocket launcher, and Redback infantry fighting vehicles.
I. Korean arms exports to expand further
Korea is the world’s eighth-largest weapons exporter with a market share of 2.8%, a figure which is anticipated to widen further going forward. Affected by a drastic change in national security perception following Russia’s invasion of Ukraine, defense spending is expected to keep increasing worldwide. But, the world’s second-largest arms exporter Russia’s market share (currently 18.6%) is likely to shrink, due to decreased confidence in the country’s weapons performance and economic sanctions on the country. In contrast, the exporting competitiveness of Korea’s weapons systems should improve on its recent securing of a sizable deal to export arms to Poland.
II. Commercial air transport to enter growth phase
Demand for civil aircraft, as well as military aircraft, is expected to expand. We note that having tumbled on the onset of the pandemic, air transportation demand is rebounding, and Boeing’s 737 MAX is soon to resume service in China. The commercial segment, which accounts for 43% of the domestic aerospace industry, is foreseen to grow in line with an uptick in global civil aircraft demand.
III. AAM and satellite internet to be next big things
The future innovations in the aerospace/military defense industry are forecast to be driven by Advanced Air Mobility (AAM) systems and satellite internet. AAM is going to be a game changer in the mobility arena, and satellite internet is expected to be an essential form of infrastructure for 6G networks.
IV. Top picks
Hanwha Systems is most actively investing in the AAM and satellite internet domains (W130bn in AAM and W450bn in satellite internet). The firm is also investing in companies with high growth potential, such as Overair, OneWeb, Hanwha Phasor, and Kymeta.
Hanwha Aerospace is expected to enjoy robust earnings momentum going forward, backed by brisk exports of its K9 Thunder, K239 multi rocket launcher, and Redback infantry fighting vehicle. With US$8bn worth exports already in pocket, the firm’s export competitiveness should continue to strengthen going forward.