As Korean defense companies suffered a string of losses in global order competitions and their share prices lagged, a brokerage report has emerged recommending an increased weighting in the defense sector. With warfare methods recently changing due to drones and other factors, global demand for air defense missiles is rising, creating the potential for related Korean companies to win more orders. However, the strengthening of "security barriers" in Europe and the North Atlantic Treaty Organization (NATO) poses a burden.
In a report on the 24th, Korea Investment & Securities maintained an "overweight" investment opinion on the defense sector, diagnosing that the global shortage of air defense missile supply is deepening. The report said, "Amid rising global demand for air defense missiles, Lockheed Martin has formalized a plan to develop the new PAC-3 ACE interceptor," adding, "Actual mass production is expected after 2029, making it difficult to resolve the air defense missile supply shortage in the short term." It further analyzed, "Building local production and supply chains in Europe will also only serve as a short-term measure that partially eases supply disruptions, and is insufficient to resolve the structural supply-demand imbalance."
Korean defense companies have recently struggled in major weapons system order competitions in North America and Europe. Hanwha Ocean recently lost out in Canada's 60 trillion won next-generation submarine acquisition project. Despite pan-governmental support to win the large-scale project, Canada selected Germany's Thyssenkrupp Marine Systems (TKMS) as its contracting partner. Hanwha Aerospace was beaten by Germany's Rheinmetall in June in the order competition for Romania's next-generation infantry fighting vehicle project. Despite offering a localization rate of up to 80%, experts cited the security barriers of European nations seeking to rely on companies within the region as the reason it failed to win the order.
The Korea Investment & Securities report views that defense companies could see growing earnings in air defense missiles and the related value chain. It presented LIG Defense & Aerospace as its top pick within the sector. The report said, "Global demand for air defense missiles and the related value chain will continue for the coming years," and forecast, "Overseas order expansion is expected for Korean defense companies that have secured export references in the Middle East."
