South Korea’s Hanwha Aerospace Co. has emerged because the world’s best-performing protection inventory as buyers wager the upending of safety alliances by U.S. President Donald Trump will spur a shopping for spree for weapons, notably within the inexpensive typical arms the corporate’s been making for many years.
Its guardian Hanwha group, the nation’s seventh-largest family-controlled conglomerate, is hoping to capitalize on the anticipated growth with an enormous share sale for its weapons unit to finance large-scale investments and abroad offers. Now regulators, in addition to some buyers, are beginning to ask whether or not it’s getting forward of itself.
Hanwha Aerospace shares have risen greater than 3,100% within the final 5 years, making it one of the best performing protection inventory on Bloomberg’s WORLD index. It and smaller rival Hyundai Rotem have been the highest two gainers in Asia’s inventory market up to now this yr, greater than doubling in worth. Each are little identified outdoors South Korea however play a key function in making ready the nation’s troops for attainable battle with its closely militarized neighbor, North Korea.
Hanwha Aerospace final yr received a deal to promote extra K9 self-propelled howitzers to Poland, a part of a weapons-supplying settlement between South Korea and the japanese European nation. Expectations for abroad development have helped the Hanwha group’s market capitalization almost double because the begin of the yr to round 73 trillion Korean received ($50 billion).
“We’re witnessing indicators of a brand new Chilly Struggle as each nation is looking for to strengthen its personal safety,” mentioned Choi Kwangwook, chief funding officer at TheJ Asset Administration with 3.8 trillion received in belongings underneath administration. “Demand for weapons is exploding now.”
Amid the keenness, Hanwha final week unveiled plans for the aerospace enterprise to lift 3.6 trillion received in what can be South Korea’s largest rights providing ever, in line with knowledge compiled by Bloomberg. The corporate mentioned it’s going to use the proceeds to spend money on abroad crops and purchase stakes in international companions. That triggered a selloff that despatched its shares down as a lot as 16% final Friday. The announcement got here on the heels of its buy of a 9.9% stake in Australian shipbuilder Austal Ltd.
Late on Thursday, Korea’s Monetary Supervisory Service mentioned that the corporate’s submitting on the share sale was “inadequate” for buyers. That echoed considerations by some shareholders who had been looking for greater returns and questioning the corporate’s governance. The announcement got here after Hanwha Aerospace’s board accepted the use its money move to accumulate a stake value 1.3 trillion received within the group’s transport unit Hanwha Ocean Co. from associates together with Hanwha Power, which is wholly owned by the Hanwha chairman’s three sons.
The shares fell greater than 4% by Friday afternoon. Nomura Securities Co. analyst Eon Hwang, nevertheless, mentioned he was sustaining his “purchase” suggestion on the shares.
“Regardless of the considerations concerning governance, we count on near-term catalysts to drive its share worth restoration,” he mentioned. “We advocate Hanwha on the again of its robust earnings development, abroad new orders and enticing valuation in comparison with friends.”
Hanwha shares are buying and selling at simply 19 occasions anticipated earnings, a lot decrease than European friends — round 41 occasions for Rheinmetall AG or 25 occasions for Leonardo SpA. The corporate goals to generate 70 trillion received income by 2035, with 10 trillion received annual revenue, when it completes constructing manufacturing services in Europe, Center East, Australia and the U.S.
Traders mentioned Hanwha’s benefit was its expertise of manufacturing comparatively inexpensive weapons designed to defeat Soviet-era methods, together with these deployed by Russia towards Ukraine. Hanwha by no means stopped producing typical weapons and armored autos, even amid expectations that warfare was shifting to drones and AI.
“There are only a few international locations on this planet that produce these sorts of old school weapons and nobody anticipated up to now we’d badly want them once more for a warfare with land-based troops,” mentioned Lee Chaiwon, chairman of Life Asset Administration, a long-term fund working 1.6 trillion received in belongings. “South Korea positively has an edge in manufacturing of those out of date weapons.”
Although South Korea doesn’t promote weapons to international locations at warfare and denies it’s supplying arms to Ukraine, it does promote to the U.S. and European governments seeking to enhance their stockpiles. South Korea is ranked because the world’s tenth largest weapons exporter, in line with a report from the Stockholm Worldwide Peace Analysis Institute, and is aiming to develop into quantity 4 by 2027.
Whereas a lot smaller than trade leaders like Lockheed Martin or BAE Programs, the Korean producers even have a repute for delivering such weapons extra shortly than rivals, some extent famous by Polish President Andrzej Duda.
“Why did we purchase South Korean weapons? The reason being easy,” the president mentioned throughout his go to to NATO earlier this month. “We predict South Korean companions would have the ability to provide high-quality weapons inside just a few months.”
Some analysts noticed extra room for good points if Hanwha succeeds in tapping into U.S. efforts to revive its shipbuilding trade. Trump in November informed South Korea’s President Yoon Suk Yeol that he needed shut cooperation with South Korea within the sector. Final yr, Hanwha Ocean purchased the Philly Shipyard in Philadelphia in a deal valued at $100 million. Bloomberg Intelligence analyst Eric Zhu mentioned Hanwha might be able to faucet into U.S. Navy applications which are projected to price $1.06 trillion in shipbuilding over the subsequent thirty years.
Herald van der Linde, head of fairness technique at HSBC, mentioned the shift in international protection spending ought to deliver substantial advantages over the subsequent a number of years however warned of extreme optimism.
“Korea has publicity to shipbuilding and others. It may possibly achieve market share as a result of usually the Individuals or the Chinese language usually are not going to purchase from one another,” he mentioned. “However it’s the identical as with different types of hype, like AI. In some unspecified time in the future in time you’re gonna say everyone loves AI and if everyone loves it, it’s a must to watch out.”
This story was initially featured on Fortune.com
