South Korean defense stocks fell in unison by around 10% in intraday trading on the 20th. The selloff came as brokerages, with the third-quarter earnings season under way, cut earnings forecasts and target prices one after another, compounded by weakening expectations for higher U.S. defense spending ahead of next month’s midterm elections.
On the Korea Exchange’s main board that day, sector bellwether Hanwha Aerospace fell as much as 12.60% from the previous session to 791,000 won (approximately $600). After sliding to around 810,000 won on the 15th, the stock had rebounded more than 10% over the two sessions of the 16th and 19th to recover the 900,000-won level, but gave back most of those gains in a single day. Hanwha Systems, the second-largest defense stock by market capitalization, tumbled as much as 14.27% to 70,300 won (approximately $53), while Hyundai Rotem widened its loss to 14.10%. LIG Defense & Aerospace fell by around 9% and Korea Aerospace Industries by around 6%. The TIGER K-Defense & Space exchange-traded fund (ETF), which holds these stocks, also dropped more than 10%.
StockIntraday DeclineHanwha Systems-14.27%Hyundai Rotem-14.10%Hanwha Aerospace-12.60%LIG Defense & Aerospace~-9%Korea Aerospace Industries~-6%
Note: Intraday on the Korea Exchange main board on the 20th, versus the previous session
The immediate trigger for the plunge was a wave of brokerage reports lowering earnings expectations. Hyundai Rotem’s third-quarter operating profit, announced the previous day, came in at 247.1 billion won (approximately $186.0 million), down 11.0% from a year earlier and roughly 10% below the market consensus. In response, Kiwoom Securities cut its target price to 195,000 won (approximately $150) from 240,000 won (approximately $180), Samsung Securities to 156,000 won (approximately $120) from 250,000 won (approximately $190), and Shinhan Securities to 150,000 won (approximately $110) from 230,000 won (approximately $170). Samsung Securities’ cut was close to 40%. The brokerages cited delays in export orders and currency fluctuations as the reasons for the adjustments.
Target-price cuts for Hanwha Aerospace also continued. In a report that day, DS Investment & Securities estimated that Hanwha Aerospace’s third-quarter revenue and operating profit would fall short of market expectations and lowered its target price to 1.65 million won (approximately $1,200) from 1.83 million won (approximately $1,400). It projected third-quarter operating profit at 980.5 billion won (approximately $738.1 million), about 17% below the market estimate. DS Investment & Securities analyst Kang Tae-ho explained that revenue recognition was delayed for seven K9 self-propelled howitzers bound for Romania and two K10 and K12 ammunition resupply vehicles, and that the won-dollar exchange rate had also declined. He added, however, that the shortfall was “a temporary earnings setback stemming from a gap between the timing of exports and the timing of revenue recognition, not a production disruption,” and said the revenue would be reflected in the fourth quarter.
Concerns about an order gap were also raised for Hyundai Rotem. Baek Joo-ho, an analyst at Hyundai Motor Securities, said “worries about a defense export gap and declining profitability from delayed new orders next year will weigh on the stock,” and noted that operating profit could shrink next year even if revenue holds at this year’s level.
Overseas factors added further downward pressure. In overnight New York trading, the S&P 500 rose 0.41% as semiconductor stocks rebounded, while defense shares lagged. On the 19th (local time), Northrop Grumman closed down 1.77% at $510.65 (~680,000 won), while Lockheed Martin and RTX fell 0.70% and 0.93%, respectively. The declines were attributed to expectations that a Democratic takeover of Congress in next month’s midterm elections could put the brakes on defense budget increases by the Trump administration.
On the same day, with the Kospi down more than 4% amid simultaneous declines in Samsung Electronics and SK Hynix, defense stocks failed to rebound even amid rumors of Kim Jong-un’s death that spread on social media, and they had not recovered their losses by the afternoon—a development that is heightening investor concerns. That is because it runs counter to the usual pattern in which buying flows into defense stocks when geopolitical tensions rise.
Still, some analysts say there is room for a rebound given that the weak earnings have already been largely priced in. Kang, the analyst who cut his target price, said in the previous day’s report that “as the war drags on, with Russia and Ukraine resuming mutual air strikes, the need to increase defense spending is growing within Europe,” and predicted that South Korean defense companies’ export discussions with Europe would accelerate. He named Hanwha Aerospace and LIG Defense & Aerospace as his top picks in the sector and Hanwha Systems as his second pick.