Mirae Asset Securities logo

OP margin on defense exports hits 37.4% despite slow season

1Q25 review: OP beats consensus by 11.7%

For 1Q25, Hanwha Aerospace reported revenue of W5.34tr (+268.4% YoY; 11.2% above the consensus), operating profit of W560.8bn (+3,060.4% YoY; 11.7% above the consensus), and an OP margin of 10.5%. The consensus beat was driven by: 1) increased deliveries of K9 and Chunmoo systems to Poland; 2) favorable FX and operating leverage effects; and 3) strong earnings from subsidiaries. That said, the company booked W300bn in non-operating losses (mainly due to interest expenses and FX losses on derivatives), weighing on net profit attributable to owners of the parent (W86.6bn).

The land systems (defense) division led overall earnings, with revenue of W1.2tr (+76.3% YoY) and estimated operating profit of W301.9bn (turning to black; estimated OP margin of 26.1%). Domestically, production of wheeled anti-aircraft guns and 120mm self-propelled mortars drove solid results, with revenue of W405bn (+15% YoY) and estimated operating profit of W20.3bn (+91.7% YoY; estimated OP margin of 5%). As for exports, the company delivered 20 K9 and 24 Chunmoo units to Poland and also recognized development revenue from the K9 project in Egypt, resulting in revenue of W752.5bn (+147.2% YoY) and estimated operating profit of W289.8bn (+7,650.4% YoY; estimated OP margin of 37.4%).

Operating leverage lifts land systems export margin to 37.4%

Despite the first quarter being a slow season for the defense industry, we estimate the land systems export OP margin held steady QoQ at 37.4% (vs. 37.2% in 4Q24), driven by continued operating leverage effects from repeat production. Given this positive trend, we view the 1Q25 margin as the floor for this year and forecast it to exceed 40% in 4Q25. Meanwhile, 1Q25 land systems export revenue was somewhat low relative to the number of K9 and Chunmoo systems delivered to Poland, as optional add-ons (e.g., shells and support services) were not included. From 2H25, however, we expect ASP to normalize to our estimated levels (W13.7bn for K9 and W23.2bn for Chunmoo). For the full year, we expect the company to deliver 72 K9 units and 72 Chunmoo units (vs. previous estimates of 72 and 54 units, respectively).

Maintain Buy and raise TP by 27.7% to W1,200,000

We maintain our Buy rating on Hanwha Aerospace and lift our target price to W1,200,000 (from W940,000), as we raised our 2025 and 2026 operating profit estimates by 7.4% and 12.9%, respectively. Our target price revision also reflects a 6.7% increase in the average P/E of global defense peers (to 27.2x) and a 16.4% increase in the value of non-operating assets. The stock is currently trading at 18.2x based on 2025F land systems NOPLAT, a 33% discount to global peers; given its superior fundamentals, we believe the stock is undervalued.