Korea's top 4 defense firms set for record quarterly profit, major contracts expected in H2

South Korea's four major defense companies are expected to post a combined operating profit of 1.5 trillion won ($1.01 billion) in the second quarter of this year, a record for any single quarter. The result would mark five consecutive quarters in which the group's combined operating profit has exceeded 1 trillion won. A string of major contract wins is also anticipated in the second half.

According to financial data provider FnGuide, the consensus operating profit forecast for Hanwha Aerospace, Hyundai Rotem, Korea Aerospace Industries (KAI) and LIG Defence & Aerospace (LIG D&A) for the second quarter stands at 1.47 trillion won — up roughly 9 percent from the same period last year. The four companies' combined second-quarter sales consensus also exceeds 11.56 trillion won, well above the 10 trillion won mark.

Breaking down the figures by company, Hanwha Aerospace's second-quarter operating profit consensus stands at 996.2 billion won, up more than 15 percent year on year, with analysts watching closely to see whether quarterly operating profit reaches the 1 trillion won threshold. Hyundai Rotem is forecast to post operating profit of 270.6 billion won, about 5 percent higher than a year earlier. LIG D&A is projected at 108.5 billion won and KAI at 93.1 billion won.

The defense industry has undergone a dramatic transformation since the Russia-Ukraine war, shifting from a domestically focused sector to an export-driven one and posting rapid growth. Second-quarter earnings are expected to be underpinned by previously secured European contracts, including exports of K9 self-propelled howitzers and K2 tanks to Poland.

Attention is now turning to whether a series of large contract wins will materialize in the second half. In a recent report, DS Investment & Securities said multiple export pipelines would come fully online from the second half onward, dispelling concerns about the contract drought that persisted in the first half. The brokerage also said South Korean ground-combat systems are increasingly positioned to meet NATO's requirements for joint procurement and in-region European production, and that their market share is set to expand further.

The report said that as Russia's security threat to Poland persists and the Russia-Ukraine war intensifies, ground systems such as the K9 self-propelled howitzer and Chunmoo multiple rocket launcher are urgently needed within NATO, meaning cooperative arrangements including joint development are likely to be strengthened rather than weakened. It added that once the Middle East situation stabilizes, large contract negotiations for the region — including the Saudi MNG project and K2 tank exports to Iraq — are expected to accelerate again, and that uncertainty surrounding the large contracts the market has been waiting for will be resolved again in the second half.

Hanwha Aerospace is awaiting results this month of a selection process for companies to enter the prototype competition for the US Army's self-propelled howitzer modernization program, estimated at around 10 trillion won. The July announcement covers only the prototype competition entry stage; a final contractor will be selected around the fourth quarter of next year following performance evaluations.

The Spain K9 self-propelled howitzer project is also understood to be nearing the end of a legal dispute between local companies, with a main contract for joint development with Spanish defense firm Indra expected to be signed between July and August. Negotiations on a third local-production contract for K9 howitzers in Poland are also said to be ongoing. Hanwha Investment & Securities said of Hanwha Aerospace that "strong export references and an aggressive localization strategy are raising the likelihood of contract wins," forecasting that export contracts will grow, including the Spain howitzer deal and discussions on a third K9 contract in Poland.

Hyundai Rotem is also continuing negotiations to export K2 tanks and K808 wheeled armored vehicles to Peru. Iraq, meanwhile, is planning to replace its aging tank fleet, and a K2 tank export contract worth around 9 trillion won is seen as a possibility — though analysts note that progress in those negotiations will require the Middle East situation to stabilize first. For KAI, attention centers on whether it can secure an Indonesia KF-21-related contract expected in the fourth quarter, as well as FA-50 light combat aircraft exports to countries including Peru and Egypt. LIG D&A is being watched to see whether it can close deals in the second half to export its medium-range surface-to-air Cheongung-II missile system to Qatar and Kuwait.