Hanwha Aerospace
The author is an analyst of Shinhan Securities. He can be reached atldh@sinhan.com -- Ed.
1Q23 preview: Exports of K9 howitzers, merger of Hanwha Munitions
We now expect Hanwha Aerospace to post sales of KRW1.76tr (+28% YoY), operating profit of KRW108.5bn (+63% YoY), and operating margin of 6.2% (+1.4%p YoY) for 1Q23. Our revised figures exceed consensus estimates by 12% for sales and 37% for operating profit, but partial reflection or absence of earnings from Hanwha Corp's spun-off defense unit (named Hanwha Munitions) complicates direct comparison with market consensus or previous year results. In 1Q23, we believe exports of K9 self-propelled howitzers to Poland continued to drive sales as in 4Q22. Hanwha Aerospace has yet to disclose quarterly earnings details following the merger with Hanwha Munitions, but we expect to see top-line growth from the baseline of KRW1.4tr in 2021 given the increase in order backlog of the integrated defense business. Operating margins from K9 exports to Poland were likely similar to 4Q22 levels. We expect Hanwha Munitions to report basic-level operating margins from domestic operations, and believe domestic military earnings at the parent were hit by seasonal weakness in 1Q23. We also expect to see reports of sluggish recovery in margins at the aircraft engine division, strong US earnings at Hanwha Techwin, and increased investment at Hanwha Systems.
Weapons demand remains intact
At the start of the year, defense stocks were weighed down by uncertainties in exports with the Russia-Ukraine war seen to have passed a peak. However, we believe weapons buildup will continue even after the war ends. According to media reports, the Romanian government is seeking parliamentary approval for the purchase of K9 howitzers. Securing the order from Romania would add another growth engine for Hanwha Aerospace in addition to the exports to Poland. With the defense order backlog reaching up to KRW20tr (KRW13tr in exports, KRW5tr in 4Q21), expectations are also high for improvement in cash flows from advance payments.
Target price raised to KRW138,000; Next up DSME
We retain BUY on Hanwha Aerospace and raise our target price by 15% from KRW120,000 to KRW138,000, with the BPS base changed from 2023 to the 2024-2025 average in order to reflect long-term growth potential. The company unveiled a new vision for its integrated defense operations at a recent town hall event, targeting annual sales of KRW40tr and operating profit of KRW5tr by 2023. Focus will be placed on offering total defense solutions, expanding the aerospace business and entering into the urban air mobility (UAM) market, pointing toward additional business expansion and large-scale investment going forward. Next up on the company's agenda is the acquisition of Daewoo Shipbuilding & Marine Engineering (DSME). All overseas regulatory hurdles have been cleared with final approval from the EU, and we believe it is a matter of time before the deal gets the nod from the Fair Trade Commission. Further revisions to the company's grand vision is expected upon completion of the acquisition of DSME.