Shares of South Korean defense contractors fell sharply across the board, with Hyundai Rotem hitting a 52-week low. Brokerages are cutting their price targets one after another as concerns about the won's strength eroding exporters' profitability combine with weak earnings and the prospect of delayed orders at major defense companies.
Hyundai Rotem (064350.KS) closed the previous session at 86,900 won, down 13.7% from the prior trading day, according to the Korea Exchange on the 21st. The stock fell as low as 86,300 won during the session, setting a new 52-week low. Hanwha Aerospace (012450.KS) also plunged 11.7% to close at 799,000 won. The stock, which had traded above 1 million won as recently as the 6th of this month, dropped into the 700,000-won range in nine trading sessions, surrendering its status as an "emperor stock." Other defense names also weakened, including Hanwha Systems (272210.KS), down 13.9%, LIG Defense & Aerospace (079550.KS), down 8.21%, and Poongsan, down 5.10%.
Defense stocks posted far steeper declines on the day than large-cap chipmakers. Samsung Electronics (005930.KS) closed at 211,500 won, down 2.98%, while SK hynix (000660.KS) ended at 1.223 million won, down 4.23%. Both had fallen as much as 4.24% and 7.36% during the session before recovering part of their losses. Samsung Electronics was the most heavily bought stock by foreign investors, while SK hynix was the most heavily sold.
Behind the sharp deterioration in sentiment toward defense stocks are lowered expectations for earnings and new orders. With the won recently strengthening past 1,330 won against the dollar, analysts say concerns have grown about won-denominated revenue and profitability at defense companies that rely heavily on exports. Expectations that geopolitical uncertainty in the Middle East could delay some overseas order schedules are adding to the pressure.
Hyundai Rotem's third-quarter operating profit came in at 247.1 billion won, down 11% from a year earlier and about 9.7% below the market consensus of 273.7 billion won. The company also faces the possibility of delays in orders for overseas projects it is pursuing in Iraq and elsewhere. Hanwha Aerospace's third-quarter operating profit is likewise expected to fall short of market estimates.
Brokerages are revising their earnings forecasts for defense companies and cutting price targets. Kiwoom Securities (039490.KS) lowered its target for Hyundai Rotem to 195,000 won from 240,000 won, while iM Securities cut its target to 190,000 won from 280,000 won, Samsung Securities (016360.KS) to 156,000 won from 250,000 won and Shinhan Securities (008670.KS) to 150,000 won from 230,000 won. For Hanwha Aerospace, DS Investment & Securities cut its target to 1.65 million won from 1.83 million won, Korea Investment & Securities to 1.65 million won from 2 million won and Hyundai Motor Securities (001500.KS) to 1.32 million won from 1.39 million won.
Han Seung-han, an analyst at SK Securities (001510.KS), said the revision reflects "the price correction in K-defense stocks, growing uncertainty in the company's order pipeline, and downward revisions to profit estimates and multiple adjustments stemming from a worsening mix next year." Lee Han-kyul, an analyst at Kiwoom Securities, said of Hyundai Rotem that "there is a strong possibility that a significant portion of the order pipeline expected within this year will be pushed back to next year," adding that "in the case of Iraq, negotiations are somewhat stalled as the war in the Middle East drags on."
