Research Report

Company Analysis

Hanwha Systems (272210 KS/Buy)Share of defense exports on the rise

Share of defense exports on the rise



3Q24 review: OP beats consensus by 15.6%

For 3Q24, Hanwha Systems reported revenue of W639.2bn (+3.0% YoY; 9.2% below consensus), operating profit of W57bn (+44% YoY; 16% above consensus), and OP margin of 8.9%. Operating profit beat the consensus yet again, driven by continued growth in defense exports and cost-cutting efforts. On the other hand, pretax profit and net profit came in at only W14.5bn (-72% YoY) and W8.1bn (-80% YoY), respectively, primarily due to equity-method losses of W17.4bn (W12.6bn from Hanwha Ocean and W4.8bn from Hanwha Phasor) and FX-related losses of W25.4bn.

The defense unit posted revenue of W467.8bn (+1.8% YoY) and operating profit of W46.3bn (+37% YoY; OP margin of 9.9%), driven by the fourth round of Tactical Information Communication Network (TICN) mass production, increased K2GF deliveries to Poland, and continued revenue recognition for M-SAM multi-function radar exports (UAE/Saudi Arabia). The ICT unit reported revenue of W169.6bn (+5.1% YoY) and operating profit of W14.7bn (+21% YoY; OP margin of 8.7%). While earnings declined QoQ on the completion of a next-generation IT system project for Shinhan EZ General Insurance, OP margin remained firm thanks to higher captive volume.

Defense exports¡¯ share of revenue reaches 20%, fueling profit growth

Excluding one-off items (+W2.5bn from cost reimbursement and -W14bn from R&D costs), 3Q24 operating profit was decent at W68.5bn (OP margin of 10.7%), with a growing defense export mix continuing to boost profitability. Revenue recognition for key exports, including components for K2GF tanks (Poland) and multi-function radars for KM-SAM II systems (UAE/Saudi Arabia), should gain further steam in 2025. With domestic projects (e.g., fourth round of TICN mass production) making a reduced contribution, defense exports¡¯ share of revenue expanded to 20% in 3Q24 (from 18% in 2Q24); we see the share of defense exports growing further to 21-24% in 2025-26.

Maintain Buy and TP of W26,000

We maintain our Buy rating and target price of W26,000 on Hanwha Systems. For 2024, management is guiding over 10% revenue growth and a high-single-digit OP margin. While it has guided full-year orders at W4tr, order intake through end-3Q24 reached W1.6tr (W1.4tr for defense and W130bn for ICT), leaving around W2.4tr to be secured in 4Q24. Anticipated orders for the defense unit include systems/components for the fourth round of K2 mass production, the third round of K-SAM Pegasus performance-based logistics, KDX combat system upgrades, and K21 upgrades and mass production. For ICT, we anticipate a next-generation system for Mirae Asset Life Insurance. We expect 4Q24 earnings to be solid (in line with 3Q24 levels).





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