Hyundai Rotem's Defense Solutions Division Leads to Record Earnings

Hyundai Rotem's second-quarter earnings for 2024 have surged, largely driven by increased exports of K2 tanks to Poland. The company is expected to maintain this growth trajectory, with several significant contracts on the horizon, including a second K2 tank export contract with Poland, a fourth domestic mass production contract, and a first-time contract with Romania.

Raising Target Price on Strong Q2 Performance

We are maintaining our Buy rating and raising our target price for Hyundai Rotem by 22% to W60,000, reflecting our increased operating profit (OP) projections due to robust defense solutions sales. In 2022, the company secured a $3.4 billion order for 180 K2 tanks from Poland. After delivering 10 tanks in 2022 and 18 tanks in 2023, Hyundai Rotem plans to deliver 56 tanks in 2024 and 96 tanks in 2025.

Second Contract with Poland Expected Soon

The second contract with Poland, valued at approximately W7 trillion for 180 K2 tanks, is expected to be signed no later than this year, with the earliest possible date being September. Additionally, Hyundai Rotem is set to sign a fourth domestic mass production contract (W2 trillion) in October. According to the Defense Acquisition Program Administration (DAPA), Hyundai Rotem will mass-produce around 150 K2 tanks by 2029.

Q2 Review: Strong Earnings Driven by K2 Tank Exports

Hyundai Rotem reported operating profit (OP) of W113 billion for Q2 2024, significantly exceeding both our estimate and consensus. The robust earnings growth, both year-over-year and quarter-over-quarter, was primarily supported by increased K2 tank exports to Poland. In Q2 2024, defense solutions exports totaled W374 billion, accounting for about 66% of the division's sales.