Geopolitical Easing May Be the Turning Point for South Korean Defense Stocks; Order Recovery Expectations Boost Share Prices

Overview

This research report focuses on the South Korean aerospace and defense sector, pointing out that recent weak stock performance stems from stalled order discussions due to Middle East geopolitical tensions. The report argues that progress in a US-Iran peace agreement will be a key catalyst, driving the realization of potential orders and thereby boosting the share prices of Hanwha Aerospace and Hyundai Rotem. The firm reiterates Buy ratings for both companies and provides clear target prices.

Core views

The core view of the report revolves around expectations for order recovery driven by easing geopolitical tensions. Shares of Hanwha Aerospace and Hyundai Rotem have continued to decline since their April highs, primarily because Middle East tensions shelved potential order discussions. The surge in share prices on Friday was driven by reports of a US-Iran peace agreement; the firm believes such developments will prompt the market to reprice the order pipeline. In terms of order potential, assuming a 100% win rate, potential orders for Hanwha Aerospace and Hyundai Rotem would reach KRW 95.5 trillion and KRW 89.5 trillion, respectively. Under a probability-weighted model, the expected EPS CAGRs for 2025-2028 are 32% and 48%, respectively. From a valuation perspective, Hanwha Aerospace's target price corresponds to a 28x P/E for 2027, while Hyundai Rotem's corresponds to a 20.8x P/E.

Analysis framework

Goldman Sachs employs an analytical framework combining event catalysts with a probability-weighted model. It first identifies geopolitical events (such as a US-Iran agreement) as key catalysts for advancing orders, and then quantifies the contribution to EPS growth by estimating potential order sizes and win probabilities. The valuation method uses the P/E multiple approach, deriving target prices based on expected 2027 EPS to reflect medium-to-long-term growth expectations.

Methodology notes

• Valuation MethodPE/PEG valuation

  Calculate target price based on target P/E multiple and expected EPS

  The report assigns 28.0x and 20.8x expected 2027 P/E multiples to Hanwha Aerospace and Hyundai Rotem, respectively. This method determines reasonable stock price levels based on industry comparable valuations and growth expectations.

• Event Gaming & Behavioral FinanceExpectation Gap/Expectation Management

  Geopolitical events change market expectations for order realization

  The report emphasizes that events such as a US-Iran peace agreement will reverse pessimistic market expectations regarding stalled orders, driving stock price repricing and reflecting the impact of event-driven factors on valuation.

• Industry/Sector Analysis FrameworkSupply and Demand Framework

  Defense orders are influenced by supply and demand changes driven by geopolitics

  Restocking demand for air defense systems in the Middle East and the easing of geopolitical tensions jointly affect the pace of orders; the report analyzes the likelihood of order recovery through supply and demand dynamics.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hanwha Aerospace (012450.KS)

  Benefits from restocking demand for Middle East air defense systems and geopolitical easing catalyzing order realization

  Strengths

  Large potential order size, high EPS growth expectations

  Weaknesses

  Overseas production operating margins may be lower than expected

  Risks

  Order acquisition falling short of expectations, KRW appreciation

• Hyundai Rotem (064350.KS)

  Benefits from recovery in tank and armored vehicle export orders, with geopolitical easing advancing negotiations

  Strengths

  Potential orders exceed overseas revenue expectations for 2026-2030

  Weaknesses

  Demand from NATO's eastern flank and the Middle East may weaken

  Risks

  Order acquisition falling short of expectations, exchange rate fluctuations

Key data

• Hanwha Aerospace Potential OrdersKRW 95.5 trillionUnder 100% win rate scenario
• Hyundai Rotem Potential OrdersKRW 89.5 trillionUnder 100% win rate scenario
• Hanwha Aerospace EPS CAGR32%Probability-weighted expectation for 2025-2028
• Hyundai Rotem EPS CAGR48%Probability-weighted expectation for 2025-2028
• Hanwha Aerospace Target P/E28.0xApplied to 2027 expected EPS
• Hyundai Rotem Target P/E20.8xApplied to 2027 expected EPS

Impact & implications

The report believes that easing geopolitical tensions will directly advance order negotiations for both companies, thereby improving earnings expectations. If a peace agreement is reached, the market will gradually incorporate the value of the order pipeline, boosting share prices. For the industry, South Korean defense companies are highly dependent on exports, and the recovery of demand from the Middle East and NATO's eastern flank countries is a key growth driver.

Risks

• Order acquisition below expectations
• Overseas production operating margins below expectations
• Weak demand from NATO's eastern flank and Middle Eastern countries
• Geopolitical changes leading to a shift towards local procurement
• KRW appreciation against the USD

What to watch

• Progress in US-Iran peace agreement
• Status of potential order negotiation finalization
• Changes in defense budgets of Middle Eastern and NATO eastern flank countries