South Korean defense stocks surge on prospects for post-Iran-war sales boosts

POCHEON, SOUTH KOREA - MAY 25: South Korea's K-2 battle tanks fire live rounds during the live fire drill at Seungjin fire training center on May 25, 2023 in Pocheon, South Korea. South Korea and the United States are holding combined live-fire exercises on the occasion of the 70th anniversary of alliance. Last week North Korea condemned South Korea and the United States’ combined live-fire drills, describing the drills as a “war exercise” against the nation. (Photo by Chung Sung-Jun/Getty Images)

Chung Sung-jun | Getty Images News | Getty Images

South Korean defense stocks climbed sharply on Tuesday as the end of the Iran war appeared to be in sight, because the companies may benefit from sales to the Middle East afterward.

Hanwha Aerospace, Seoul's largest defense stock, was up as much as 11.8%. Hyundai Rotem, maker of the K2 Black Panther main battle tank, gained as much as 12.67%, and LIG Defense & Aerospace spiked to nearly the 30% limit gain on the Kospi index. Firstec, which makes components for ground combat vehicles, also almost hit the 30% upward limit.

Investors increasingly expect defense export pipelines will soon resume and that orders from the region will pick up, Mirae Asset Securities wrote in a note June 16.

Kang Tae Ho, an analyst at South Korean brokerage DS Investment and Securities, also said the end of the Iran war would serve as a "positive catalyst" for the Korean defense industry.

LIG manufactures the Cheongung air defense system, also known as the M-SAM, which saw its combat debut in the United Arab Emirates during the Iran war.

Analysts have said that the Cheongung intercept missile, offers similar performance to the U.S. made PAC-3 interceptor used in the Patriot air defense system — and costs a third of the PAC-3's reported $4 million price tag.

Kang pointed to Hanwha Aerospace's negotiations with Saudi Arabia, which had been suspended due to the war, as an example of reasons to be optimistic about the sector, along with Hyundai Rotem's talks for the export of 250 K2 main battle tanks to Iraq. "Securing orders will become a reality once negotiations resume following the end of the war," he said.

"Considering that the development of the Middle East-specific derivative model, the 'K2ME,' has already been completed, we believe there is a high probability that a contract will be signed in the second half of this year or the first half of 2027," he added.

Hyundai Rotem had reportedly announced the K2ME in March, signaling that it would target the Gulf market for armored vehicles.

Investors may be focusing on the sector's longer-term demand drivers, according to Vikas Pershad, portfolio manager for Asian equities at M&G Investments, told CNBC.

"Defense spending is increasingly being driven by longer-term strategic considerations rather than any single geopolitical event, and those trends remain intact," he said.

— CNBC's Lisa Kim contributed to this report.