Defense Market Expanding
The author is an analyst of NH Investment & Securities. He can be reached at jinmyung.choi@nhqv.com. -- Ed.
In line with the ongoing expansion of the defense budget, the defense industry should achieve 10%-or-higher domestic market growth. Also boding well are both the recent start of a recovery in the commercial aircraft market and anticipated further space development market expansion. We present KAI and LIG Nex1 as our sector top picks.
Defense market is expanding
In Korea, expansion of the national defense budget is supporting the growth of the defense industry. We estimate that spending on domestic weapons development and purchase will climb 10.0% y-y next year, with R&D focusing upon telecommunications/reconnaissance and next-generation weapons systems.
Development of new weapons systems is to support rapid earnings growth in the domestic defense industry. The Korean government is expected to issue mass production orders for the LAH, a light armed helicopter, and the L-SAM, a surface-to-air missile system.
Economic reopening: Aviation industry turnaround imminent
In line with an easing in the Covid-19 crisis, air passenger traffic has started to recover. Global passenger traffic has already risen to 45% of the pre-pandemic level. And, the industry’s aircraft/engine parts-related sales have recovered to 70% of the 2018~2019 average.
Space industry investment appears well on track. Space Internet competition has intensified, centering on US ventures such as Space-X and OneWeb, and there is anticipation that telecommunications companies will enter the market. Domestic players are aiming to enter the space development market by 2030 via both technology transfers from the government and investment in overseas ventures.
Crucial to screen for gems
The space exploration industry carries high business uncertainties. Accordingly, we believe that it is necessary to invest in firms that are strongly committed to generating tangible results and making investment in development. In particular, companies that can generate clear short-term results are advantageous for investors in terms of risk.
We present KAI and LIG Nex1 as our top picks for the sector. We anticipate that earnings growth momentum will be visible for both, noting that the launches of major products such as LAH and L-SAM are imminent. The steady development of space development projects offers further investment appeal.