Hyundai Rotem's Defense Expansion Overshadowed by Earnings Miss, Sending Shares Down 10%

Hyundai Rotem's headquarters in Uiwang, Gyeonggi Province. Hyundai Motor Group is moving to consolidate its defense capabilities to strengthen its global competitiveness. Hyundai Rotem announced on Oct. 19 that its board of directors had approved the acquisition of Hyundai Wia's Special Business Division for 358.39 billion won, or approximately $269.93 million. The move will allow Hyundai Rotem to establish a vertically integrated production system extending beyond the K2 tank's hull to its main gun. The acquisition covers Hyundai Wia's entire defense business, including its personnel, intellectual property rights and liabilities. The transaction is expected to be completed by March 2027, subject to approval at a Hyundai Wia shareholders' meeting. The Special Business Division, whose roots date back to the company's establishment in 1976, produces the 120 mm main gun for the K2 tank and the 155 mm gun barrel for the K9 self-propelled howitzer. Hyundai Rotem expects the acquisition to improve cost competitiveness while strengthening its negotiating position in overseas markets. The move also lays the groundwork for securing future battlefield technologies. Hyundai Rotem plans to integrate the artificial intelligence (AI)-based remote firing system and counter-drone system developed by Hyundai Wia into platforms such as its HR-Sherpa multipurpose unmanned ground vehicle. The company aims to enhance its technological capabilities in unmanned weapons systems. For Hyundai Wia, the divestiture will accelerate its restructuring around new businesses, including electric vehicle thermal management systems and robotics. Following the sale of its machine tool business last year, the company is now exiting the defense sector as well, marking a full-scale shift away from its internal combustion engine-focused operations toward future mobility. Investors initially welcomed the restructuring, with Hyundai Rotem and Hyundai Wia shares closing up 3.92% and 7.09%, respectively, on the day of the announcement. Despite the positive development from the business integration, Hyundai Rotem's shares reversed course sharply the following day. As of 9:09 a.m. on Oct. 20, the stock was trading at 90,600 won, down 10.03% from the previous session. The decline followed the company's third-quarter earnings announcement the previous day, which showed operating profit falling 11% year over year to 247 billion won, missing market expectations by 10.5%. Brokerages moved quickly to lower their target prices following the earnings release. Of the 14 securities firms that issued research reports, 10 cut their price targets, with Shinhan Securities making a particularly sharp reduction from 230,000 won to 150,000 won. Revenue stood at 1.621 trillion won, roughly unchanged from a year earlier, but analysts cited a stronger Korean won and slowing export growth as key factors weighing on earnings. Market concerns are focused on the company's heavy reliance on a single export market and delays in securing follow-on orders. Hyundai Rotem's high profitability currently depends heavily on exports to Poland, while additional contracts outside the Polish market have been slow to materialize. Negotiations over local production remain unresolved for Poland's third contract, while projects in Peru and Iraq have also faced delays due to local political conditions and budget constraints. Analysts have warned that profitability could deteriorate next year. If export volumes decline while lower-margin domestic mass-production contracts account for a larger share of revenue, Hyundai Rotem could face pressure on its operating profit margin. Han Young-soo, an analyst at Samsung Securities, said the company needs to reduce its excessive dependence on specific products and markets to restore confidence in its long-term growth prospects. Hyundai Rotem is looking to potential approval by Peru's Congress in early 2027 and an anticipated acceleration in orders following the formation of Romania's new government as possible catalysts for future growth.