South Korea's Hanwha Aerospace announces $2.5 billion share sale to expand overseas

Hanwha Aerospace, South Korea's largest defence group, saw its shares plummet by 13% on March 21 after announcing a 3.6 trillion won ($2.5 billion) share offering to fund its overseas expansion.

The company had previously enjoyed a significant rise in its stock price, with shares more than doubling this year due to expectations of strong orders from European countries, especially following former US President Donald Trump's questioning of NATO commitments, Caliber.Az reports, citing foreign media.

Despite its recent surge in stock value, Hanwha Aerospace experienced its biggest drop since last August after revealing plans to issue nearly 6 million shares at 605,000 won each — 16% lower than March 20's closing price. This share sale, which is the largest in South Korea in over three years, comes amid a boom in Asian defence stocks driven by Europe's increased military spending and rearmament efforts.

Hanwha, known for its artillery manufacturing, is seizing on the rise of defence stocks in Asia, which have reached record highs as European nations ramp up defence spending. The company has become one of the top 10 global defence exporters, fueled by strong demand, particularly from Eastern Europe, in the wake of Russia's invasion of Ukraine in 2022.

South Korea’s defence industry has been growing rapidly, as it produces a wide range of armaments at competitive prices due to its ongoing security challenges with nuclear-armed North Korea. Hanwha intends to use the proceeds from the share sale to secure overseas production facilities in Europe, the Middle East, Australia, and the US to meet the rising demand for defence products. Hanwha has earmarked 1.6 trillion won for the construction of overseas factories focused on ground defence arms and acquiring stakes in foreign partners.

The company’s order backlog has surged more than 60% over the past two years, now totalling 32.4 trillion won. Hanwha, the leading exporter of self-propelled howitzers, aims to increase its sales to 70 trillion won and its operating profit to 10 trillion won by 2035, largely through international expansion. Recently, Hanwha acquired a 9.9% stake in Australian shipbuilder Austal, after a failed $1 billion takeover bid, and is increasing cooperation with the US Navy, having secured two naval maintenance contracts last year.

However, the planned share sale has sparked concerns among investors, who worry about the potential dilution of stock value. The Financial Supervisory Service (FSS) is reviewing the offering following complaints from investors, although FSS governor Lee Bok-hyun has expressed a positive view of the sale.

Analysts have pointed out that Hanwha could have financed its expansion through its strong cash flow, citing its impressive earnings growth. In 2023, Hanwha’s operating profit nearly tripled to 1.7 trillion won, while revenues rose by over 40% to 11.2 trillion won.

Analyst Choi Gwang-shik of Daol Investment & Securities estimated that Hanwha’s operating profit for this year could reach 3.5 trillion won. While Choi acknowledged the need for production localization in Europe, the Middle East, and the US fighter jet market, he questioned the need for external funding, suggesting Hanwha could cover its capital spending needs from its projected earnings.

By Tamilla Hasanova