New Business Additions on Track
The author is an analyst of NH Investment & Securities. He can be reached at jinmyung.choi@nhqv.com. -- Ed.
As Hanwha Systems’ addition of new businesses becomes more centered on acquiring stakes in venture companies than on direct development, the scale of costs incurred should decline. The firm has secured large-scale M-SAM export orders from the UAE, and is likely to acquire contracts to mass-produce new weapons (eg, L-SAM) at the end of the year.
Continued progress at defense division: M-SAM exports to UAE, L-SAM mass production to begin
At end-2021, order backlog at Hanwha Systems’ defense division was confirmed at W5.5tn, an increase of 37.5% y-y. We expect W1.3tn in exports of the M-SAM mid/high altitude air defense system to the UAE to drive sales growth and profitability improvement moving ahead.
Additional large-scale orders are expected at end-2022. In particular, as the development of the L-SAM high altitude air defense system is nearing its final stage, the winning of mass production orders is anticipated in the near future. High-tech weapons system development projects such as the low-orbit SAR reconnaissance satellite should also result in new orders at end-2022.
Actively securing new businesses: More than W600bn to be invested this year
While new businesses have yet to begin generating sales, Hanwha Systems continues to invest actively. The purchase of a stake in OneWeb (US$300mn) will be completed by 1Q22. Moreover, investment in OverAir’s Series B (estimated at over W100bn) and additional investment in digital platform and blockchain technology (estimated at W180bn) should be completed this year.
4Q21 review: Improved valuation of venture subsidiaries
Hanwha Systems posted 4Q21 sales of W679.5bn (+3% y-y) and OP of W7.3bn (-61% y-y; OPM of 1.1%), slightly exceeding our estimate. We attribute the favorable results to the addition of new businesses via investment in overseas venture companies rather than via direct investment necessitating capex and R&D. We also note that some of these venture companies have attracted Series B investment, resulting in unexpected non-operating profit.