A New Space Era Is Coming
The author is an analyst of NH Investment & Securities. He can be reached at jinmyung.choi@nhqv.com. -- Ed.
We maintain a Positive rating on the defense/space development sector. Earnings at domestic defense/space-related companies should expand rapidly going forward, spurred by: 1) expansion of national defense budget; 2) rising civil aviation-related demand; and 3) growth of the global space industry. We estimate that Korea’s budget for domestic weapons development and purchase will rise by 9% y-y in 2022. And, recovering air passenger traffic in line with the re-opening of the economy is to translate into higher demand for civil aircraft parts.
The global space industry is growing rapidly, driven by aggressive investment by US-based space ventures such as Space-X and OneWeb. Aware of the potential of satellite business, existing telecom plays are considering entry into the market. In Korea, the government is spearheading investment in low-earth orbit (LEO) satellites, aiming to induce Korean private companies’ entry into the global market by 2030.
We offer KAI and LIG Nex1 as our sector top picks. KAI is to benefit from recovering civil aircraft parts orders and mass production of a light-armed helicopter (LAH). The firm also stands at the center of the government project to develop Korean rocket technologies. Meanwhile, LIG Nex1 is to receive mass production orders for a long range/high altitude missile defense system (L-SAM) in 2022, and should emerge as a core developer of long-distance missile systems and Korean GPS.
I. Domestic defense industry spending to expand
In Korea, expansion of the national defense budget is supporting the growth of the defense industry. The government’s defense budget is to rise only 2.0% y-y to W17.3tn in 2022, but despite such marginal y-y growth, we estimate that spending on domestic weapons development and purchase will climb 9.0% y-y next year. In addition, in light of the government’s strong commitment to development in-house missile systems, nuclear submarines, and other projects, the domestic defense market looks promising.
II. Growth drivers: New weapons development; rising demand from civil aviation industry
Development of new weapons system and rising demand from civil aviation industry should support rapid earnings growth at the domestic defense industry. The Korean government is expected to issue mass production orders for LAH and L-SAM in 2H22. Such orders should carry trickle-down effects for suppliers of parts, including radar and aviation electronics systems for L-SAM and LAH. Meanwhile, with the global air passenger traffic recovering to 45% of the pre-Covid-19 level, civil aircraft parts demand looks primed to improve going forward.
III. Crucial to screen for gems
A new space era is coming. The number of satellites orbiting in space over recent five years has surged from 4,524 units to 8,018 units. More than 25% of these satellites are owned by private companies such as Space-X and OneWeb. The LEO satellite market is estimated to expand at a CAGR of 70% going forward, and a number of domestic companies are preparing to enter the market. Under the circumstances, it is crucial to screen for gems as share price performance is to differ significantly by company. For instance, while Space-X’s market cap surged 178% over two years, Virgin Galactic’s market cap rose only by 27%.
IV. Top pick
We present KAI and LIG Nex1 as our top picks for the sector. KAI is predicted to display earnings improvement in line with a recovery in demand for civil aircraft parts. It is also expected to launch LAH small-sized light armed helicopter and undertake Nuri technology transfer. LIG Nex1 is forecast to win L-SAM orders, and develop long-range guided missiles. The two companies’ new product launches should lead to higher demand for related aviation electronics equipment and aircraft engines, and benefit other defense companies as well.