S. Korean Defense Stocks Plunge Despite Export Momentum

Hanwha Aerospace's K9MH wheeled self-propelled howitzer. South Korean defense stocks, which had been leading the domestic market, have fallen sharply in October, significantly weakening investor sentiment. The selloff reflects mounting concerns over deteriorating export profitability due to a stronger won, compounded by delays in revenue recognition for major export shipments. According to the Korea Exchange on Oct. 21, Hanwha Aerospace, a leading defense stock, closed down 11.71% at 799,000 won, or approximately $603, the previous day, bringing its decline since the beginning of the month to 20.66%. Other major defense stocks have suffered similar losses. Over the same period, Hyundai Rotem fell 22.13%, while LIG Defense & Aerospace, Korea Aerospace Industries and Hanwha Systems declined 19.65%, 13.39% and 5.87%, respectively. The sharp declines have also left retail investors facing mounting unrealized losses. According to data from Naver Pay's "My Assets" service, 16,108 investors in Hanwha Aerospace recorded an average loss of 22.92%. Investors in Hyundai Rotem and LIG D&A have also struggled, posting average returns of -49.32% and -22.97%, respectively. Online stock discussion forums have been filled with complaints from investors frustrated that share prices have returned to levels last seen a year and a half ago despite positive export news. Securities analysts point to concerns over weak third-quarter earnings as a primary driver of the selloff. The won has appreciated sharply against the U.S. dollar in the second half of the year, putting pressure on export profitability. The won-dollar exchange rate, which stood at around 1,550 won per dollar in early July, has since fallen to the 1,320-won range. Analysts also believe that development expenditures concentrated in the second half of the year, together with delays in recognizing revenue from export shipments, have weighed on earnings. Hyundai Rotem's third-quarter results fell short of market expectations. Revenue edged up just 0.1% year on year to 1.6207 trillion won, while operating profit declined 11.1% to 247.1 billion won, more than 10% below the consensus estimate. Yang Seung-yoon, an analyst at Eugene Investment & Securities, said the recent decline in defense stocks reflects investors pricing in concerns over third-quarter earnings ahead of time. External uncertainties have also contributed to the correction. Although escalating tensions in the Middle East have raised expectations for new orders, delays between anticipated deals and actual contract signings have weakened share price momentum. The future direction of defense stocks will largely depend on whether new orders materialize. A series of potential major contracts is expected from the end of this year through next year, including deals in the United Arab Emirates (UAE), Saudi Arabia and Iraq, a third K2 tank contract with Poland, and projects in Peru. In particular, a significant recovery in share prices could follow if orders for air defense systems accelerate after inventories were heavily depleted by conflicts this year. Lee Seo-yeon, an analyst at Sangsangin Investment & Securities, expects a sustained recovery to gain momentum once major Middle Eastern orders become more visible, particularly as valuation pressures have eased. Other key indicators to watch include Korea Aerospace Industries' potential first export of the KF-21 fighter jet and whether Hyundai Rotem resumes its sales activities in Romania and Iraq. 비지니스코리아 businesskorea (Businesskorea)