South Korean Defense Stocks Soar as Tensions Rise on the Korean Peninsula
South Korean defense stocks have experienced significant gains in the past year, with one stock surging over 60% due to escalating tensions in the region. Demand for arms, driven in part by Russia’s invasion of Ukraine, has also contributed to increased military spending globally. As of 2021, global military spending has reached $2.1 trillion, according to the SIPRI Arms Transfer Database.
Hanhwa Aerospace, a subsidiary of South Korean conglomerate Hanhwa Group, has seen a remarkable 66% rise in its shares since the beginning of the year and a nearly 90% surge in the last 12 months. The company manufactures air defense systems, armored fighting vehicles, and artillery systems.
South Korea has become one of the top 10 defense export countries worldwide, benefiting from the rise in global military expenditure. The country has also seen interest in its weapon platforms remain high due to the ongoing tensions on the Korean Peninsula. Some of these systems have found their way into markets such as the Middle East and Europe, particularly as a result of the Ukraine war.
Increasing Demand for South Korean Weapons
Morgan Stanley reports that South Korea has become a major exporter of military and defense equipment, with exports reaching 22.9 trillion South Korean won ($17.9 billion) in 2022, more than double the figure in 2021. Rising demand from Europe and Asia for Korean manufacturers to provide military/defense equipment, including tanks, artillery, and airplanes, has driven up export volumes.
Notable weapons systems from South Korea’s defense industry include the K9 Thunder self-propelled howitzer from Hanhwa, the K2 main battle tank from Hyundai Rotem, and the FA-50 light attack aircraft manufactured by Korea Aerospace Industries. Poland, in an effort to replace arms donated to Ukraine during the Russia-Ukraine war, placed an order for 672 K9 units for $2.4 billion and 1,000 K2 main battle tanks for $3.34 billion. Malaysia also ordered 18 FA-50s for $920 million.
The procurement of K2 tanks by Poland is surprising as it marks a new entrant into the European arms market. NATO forces typically use the German Leopard 2 tank for interoperability. The K2 tanks are manufactured by South Korean company Hyundai Rotem. The FA-50 aircraft are manufactured by Korea Aerospace Industries.
Growth Potential in South Korean Defense Industry
Despite a year-to-date loss of about 4%, shares of Korea Aerospace Industries have experienced a 17% increase compared to the start of the year. The company’s first-quarter results were disappointing due to delays in domestic aircraft shipments related to exports to Poland and its Iraqi reconstruction project. However, analysts expect these sales to be recognized in the second half of the year, driving most of KAI’s 2023 earnings.
Morgan Stanley and other experts remain optimistic about the outlook for the South Korean defense industry. The country’s strong industrial and tech base positions it well for growth opportunities in areas such as chip-making, electric vehicle value chains, defense, and energy. South Korea aims to become a major arms exporter globally, focusing not only on conventional military equipment but also on expanding into areas like drones, unmanned aerial vehicles, and undersea vehicles.
