Hanwha Aerospace (012450.KS) has sharply raised its chances of entering the U.S. defense market after being selected as the sole prototype developer for the U.S. Army's next self-propelled howitzer program, according to a brokerage analysis. DAOL Investment & Securities lifted its target price for Hanwha Aerospace to 2.46 million won from 2.14 million won, citing a much higher likelihood of winning the U.S. contract.
In a report released on the 20th, DAOL said Hanwha Defense USA, Hanwha Aerospace's American unit, was chosen as the sole prototype maker for the Army's Mobile Tactical Cannon (MTC) program. The MTC program is meant to replace the existing M777 155mm towed howitzer, and Hanwha proposed the K9MH, a wheeled self-propelled howitzer developed from its K9.
The contract initially covers six prototypes and is worth $100.3 million. Including options, it could expand to as many as 18 units and $262.9 million. If the guns pass performance validation through prototype production, testing and field operational trials, the deal could lead to a mass-production program of 498 units worth about 10 trillion won, DAOL estimates.
DAOL rated the selection highly as a step into the U.S. market for Korea's defense industry. It said the K9, which has established a strong position in the global tracked self-propelled howitzer market, could now expand into the wheeled segment. In meeting the U.S. military's demanding required operational capability (ROC), the vehicle's marketability improves in areas such as speed and automation, while gaining the credibility of a howitzer actually operated by U.S. forces. The brokerage also said K9 variants could be well positioned in future programs to replace the aging M109 Paladin self-propelled howitzer.
DAOL also raised its target price to reflect the U.S. market entry. The brokerage lifted the probability of winning the MTC mass-production order to 90% from 10% and raised Hanwha Aerospace's expected order profit to 11.4 trillion won from 5 trillion won. As a result, it raised the target price to 2.46 million won from 2.14 million won. Compared with the 1.177 million won close on the 19th, that implies upside of 109%.
"This program carries great significance as the first large-scale entry of a Korean defense weapons system into the United States," said Choi Kwang-sik, an analyst at DAOL Investment & Securities. "Beyond the 10 trillion won in mass production, the scale of the business could grow further through ammunition and maintenance, repair and overhaul (MRO)."
