Korea Aerospace Industries (047810), or KAI, reported second-quarter earnings that fell far short of market expectations. While new orders centered on the KF-21 fighter jet are seen as the company's biggest momentum, the lack of concrete progress has raised calls for securing growth drivers through measures such as privatization.
KAI said on the 29th that its preliminary second-quarter operating profit was 48.4 billion won, down 43.1% from a year earlier. This marked an earnings miss, falling 45.6% below the market estimate of 88.9 billion won. Revenue rose 41.0% to 1.1679 trillion won but fell short of the market forecast of 1.2028 trillion won. Hyundai Rotem (064350) recently reported operating profit below market expectations, but its year-on-year decline was limited to 9.7%. In particular, Hanwha Aerospace (012450) and LIG Nex1 D&A are expected to post improved second-quarter earnings compared with the same period last year.
Analysts cited the delayed delivery of the Light Armed Helicopter (LAH) and the growing cost burden on the FA-50 export business amid a continued weakening of the won as reasons for KAI's poor earnings this quarter.
The market expects earnings to improve once domestic deliveries of the KF-21 begin in earnest in the second half. However, negotiations with Indonesia over the export of the initial batch of 16 KF-21 jets—the biggest variable—remain at the level of projections, with key terms such as exact quantity, price, and delivery schedule still undetermined. Speculation about KF-21 purchases has also emerged in the Philippines, Malaysia, and the Middle East, but these have failed to translate into concrete contracts, drawing criticism that the limitations of a state-owned enterprise are being exposed on the global stage.
Concerns about long-term growth drivers are also significant. On the same day, KAI held a "Ceremony Marking the Completion of KF-21/IF-X System Development" at its headquarters in Sacheon, South Gyeongsang Province. It signified that the supersonic fighter development project had been completed after 10 years and shifted to a mass-production system, but it also meant that the work of the roughly 1,000 research and development personnel involved had effectively ended.
"Follow-on projects such as satellites and unmanned aircraft are being mentioned, but there will hardly be any new project capable of absorbing large-scale personnel," an industry official said. Unless KAI quickly secures a major project to succeed the KF-21, around 1,000 researchers will have no suitable work to do.
This is why concerns are emerging that KAI could fall entirely behind the trend, even as K-defense continues to enjoy a boom with its technological capabilities and price competitiveness recognized in the global market. "The need to seriously consider privatization has grown in order to boost KAI's performance and competitiveness," a defense industry official said.
