South Korean defense sector benefits from global supply-demand mismatch in air defense and ground defense equipment
AI summary card
South Korean defense sector benefits from global supply-demand mismatch in air defense and ground defense equipment
Goldman Sachs believes recent conflicts, Patriot delivery delays, European security concerns, and expectations for an Iraq order are jointly reinforcing order opportunities for Korean defense companies, and it maintains Buy ratings on Hanwha Aerospace and Hyundai Rotem.
- Over the past week, South Korean defense stocks outperformed the Kospi, with Hanwha Aerospace up 9% and Hyundai Rotem up 14%, while the Kospi fell 1%.
- Signs of tight global supply and demand for air defense systems have become more evident, including Switzerland considering canceling a U.S. Patriot purchase due to delivery delays and Poland refusing to transfer Patriot systems to the Middle East.
- Hanwha Aerospace may benefit from new orders for M-SAM II and L-SAM I, and could expand its overseas military products footprint by bidding for Poongsan's ammunition business.
- Hyundai Rotem's recent outperformance is seen as notable; the report continues to highlight the catalyst link between expectations for an Iraq order and visibility on the prime minister appointment.
Report interpretation
Overview
This report focuses on South Korea's aerospace and defense industry. Goldman Sachs believes that recent global conflicts and bottlenecks in air-defense system deliveries indicate a severe supply-demand mismatch in defense equipment, and order opportunities for Korean defense companies in Europe, the NATO Eastern Flank, MENA, and Iraq may continue to increase.
Core views
The core view is that the Korean defense sector will remain in investors' focus. Hanwha Aerospace is expected to benefit from demand for air defense systems such as M-SAM II and L-SAM I, and may strengthen its ground defense synergy through ammunition business expansion; Hyundai Rotem should benefit from improving expectations for an Iraq order and valuation/performance recovery after recent underperformance versus peers.
Analysis framework
The report assesses investment opportunities in Korean defense companies by using recent market performance, delivery cases for global air defense equipment, geopolitical events, potential M&A and order catalysts, and a target P/E valuation approach.
Methodology notes
Apply target P/E to 2027E EPS to derive the 12-month target price.
Hanwha Aerospace's 12-month target price of W1,830,000 is based on a 28.0x target P/E; Hyundai Rotem's 12-month target price of W280,000 is based on a 20.8x target P/E.
Compare stock characteristics across growth, financial returns, valuation multiples, and composite score dimensions.
This framework uses Goldman Sachs analyst estimates and normalized percentile ranks to compare stocks with the market and industry peers.
Assess the likelihood of a company becoming an acquisition target on a scale of 1 to 3.
Rank 1 indicates a high probability of acquisition, Rank 2 a moderate probability, and Rank 3 a low probability; Rank 1 or 2 may be considered in target price assumptions.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Hanwha AerospaceA core beneficiary of the South Korean defense industry; Buy rating maintained.
- Strengths
- May benefit from new M-SAM II and L-SAM I orders; has a ground defense revenue base; seeks to expand overseas ammunition business; may have operational synergies with Poongsan's defense business.
- Weaknesses
- Overseas production margins, order capture, and FX movements remain uncertain.
- Comparison
- Up 9% over the past week, outperforming the Kospi but lagging Hyundai Rotem's 14% gain over the same period.
- Risks
- Orders below expectations, overseas production OPM below expectations, lower-than-expected demand from the NATO Eastern Flank and MENA, geopolitical shifts causing procurement to favor domestic suppliers, and a stronger KRW versus USD.
- Hyundai RotemA beneficiary in the South Korean defense industry; Buy rating maintained.
- Strengths
- Recent share price performance has recovered; expectations for an Iraq order may strengthen as visibility on the prime minister appointment improves.
- Weaknesses
- The stock had significantly underperformed defense peers over the past month, and order realization still depends on political and procurement progress.
- Comparison
- Up 14% over the past week, which the report views partly as normalization after prior underperformance.
- Risks
- Orders below expectations, overseas production OPM below expectations, lower-than-expected demand from the NATO Eastern Flank and MENA, regional geopolitical changes, and a stronger KRW versus USD.
- Poongsan defense divisionA potential M&A or business synergy candidate for Hanwha Aerospace.
- Strengths
- Has ammunition-related businesses such as 155mm shell casings, with 2025 defense division revenue of W1.2tn.
- Weaknesses
- The report provides no independent rating or target price.
- Comparison
- Complementary to Hanwha Aerospace's existing 155mm modular charge systems and ground defense business.
- Risks
- Uncertainty remains around whether a deal can be completed, integration synergies, and the effectiveness of overseas expansion.
Key data
- Report date2026-04-04The report was published at 3:07 PM KST on 4 April 2026.
- Recent stock performanceHanwha Aerospace +9%; Hyundai Rotem +14%; Kospi -1%The report says South Korean defense stocks significantly outperformed the Kospi over the past week.
- Hanwha Aerospace target priceW1,830,000Based on 2027E EPS and a 28.0x target P/E.
- Hyundai Rotem target priceW280,000Based on 2027E EPS and a 20.8x target P/E.
- Potential Poongsan ammunition business transactionAbout $1.1bnMedia reports say Hanwha Aerospace is a bidder for Poongsan's ammunition division.
- Poongsan defense division revenueW1.2tn in 2025The division produces products such as 155mm shell casings.
- Hanwha Aerospace parent-company revenueAbove W4tnMainly from the ground defense business.
Impact & implications
If global air defense and ground defense equipment supplies remain tight, Korean defense companies may receive more overseas orders and attract greater investor attention. European countries increasing reliance on Korean equipment due to uncertainty over U.S. commitments to NATO could also become a medium-term demand catalyst.
Risks
- Orders for Korean defense companies may come in below expectations.
- Overseas production operating margins may fall short of expectations.
- Demand from the NATO Eastern Flank and MENA countries may be weaker than expected.
- Regional geopolitical changes could shift procurement priorities toward domestic suppliers.
- A stronger KRW versus USD could hurt earnings or competitiveness.
- If expectations for an Iraq order are delayed by political developments, Hyundai Rotem's catalyst could weaken.
What to watch
- Whether delays in global air defense system deliveries such as Patriot continue to widen.
- Whether European countries increase reliance on Korean equipment due to uncertainty over the U.S. stance on NATO.
- Whether Hanwha Aerospace advances a Poongsan ammunition business transaction and expands overseas military products.
- Progress on new orders related to M-SAM II and L-SAM I.
- Progress on the appointment of an Iraqi prime minister and visibility on Hyundai Rotem's potential order.
- Changes in KRW/USD and the overseas production OPM trend.