Korean arms maker’s 3,100% rally tests defence boom limits

Its parent Hanwha group, the country’s seventh-largest family-controlled conglomerate, is aiming to capitalise on the expected boom with a massive share sale for its weapons unit to finance large-scale investments and overseas deals.Now regulators, as well as some shareholders, are starting to ask whether it’s getting ahead of itself.

- HEEJIN KIM SANGMI CHA

Hanwha Aerospace shares have risen more than 3,100% in the past five years, making it the best performing defence stock on Bloomberg’s World Index. It and smaller rival Hyundai Rotem have been the top gainers in Asia’s stock market so far this year, more than doubling in value. Both are little known outside South Korea but play a key role in preparing the country’s troops for possible attacks by heavily militarised neighbour, North Korea.

Hanwha Aerospace last year won a deal to sell more K9 self-propelled howitzers to Poland, part of a weapons-supplying agreement between South Korea and its eastern European country. Expectations for overseas growth have helped the Hanwha group’s market capitalisation nearly double since the start of the year to around 7.3 trillion Korean won ($5.0 billion).

“We are witnessing signs of a new Cold War every country is seeking to strengthen its own security,” said Chai Ssangmuk, chief investment officer at Theil Asset Management with 3.8 trillion won in assets under management. “Demand for weapons is exploding now.”

Amid the enthusiasm, Hanwha last week unveiled plans for the aerospace business to raise 3.6 trillion won in what would be South Korea’s largest rights offering ever, according to data compiled by Bloomberg. The company said it will use the proceeds to invest in overseas plants and buy stakes in foreign partners. That triggered a selloff that sent its shares down as much as 16% on March 21. The announcement came on the heels of its purchase of a 9.9% stake in Australian shipbuilder Austal Ltd.

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