Hyundai Rotem bets big on acquiring Hyundai WIA's defense business, seeks turnaround by bringing K2 main gun production in-house

[Financial News] Hyundai Rotem Company will spend 358.4 billion won to take direct responsibility for producing the main gun, a key armament of the K2 tank. The acquisition of Hyundai WIA's defense business will consolidate Hyundai Motor Group's defense production system, previously divided between “Hyundai Rotem for tanks and Hyundai WIA for main guns.” The strategy is to leverage an order backlog nearing 30 trillion won as of the end of the third quarter and cash in the 1.8-trillion-won range to improve cost competitiveness, expand into artillery and unmanned weapons systems, and secure new growth drivers.■ Acquisition of Hyundai WIA's defense business ... Consolidating Hyundai Motor Group's defense capabilitiesHyundai Rotem Company disclosed that its board of directors met on the 19th and decided to acquire Hyundai WIA's Special Business Division for 358.386 billion won. The acquisition will be conducted as a business transfer, encompassing the transfer of assets and liabilities, personnel, intellectual property rights, and other items.
Hyundai WIA's Special Business Division is the only manufacturer in South Korea specializing in large-caliber artillery, producing the 120-mm main gun for the K2 tank and 155-mm gun barrels for the K9 self-propelled howitzer, among other products. With this acquisition, Hyundai Rotem Company will be able to handle everything from designing and manufacturing the K2 tank to producing its key armament within a single company. At the Hyundai Motor Group level, consolidating defense capabilities under Hyundai Rotem Company is also expected to improve cost competitiveness and supply chain stability. Previously, Hyundai Rotem Company manufactured the tanks while Hyundai WIA supplied the main guns; after the business integration, the companies will be able to coordinate component procurement and production schedules more closely. The integration is also considered significant because it will enable the company to develop unified production and localization strategies for tanks and key armaments as exports to countries such as Poland expand and demand for local production grows.
The acquisition is also expected to help diversify the business. Hyundai WIA has developed remote-controlled weapon stations (RCWS) and counter-drone defense systems, in addition to K9 gun barrels and naval guns. Combining these weapons technologies with the “HR-Sherpa” multipurpose unmanned vehicle platform, which Hyundai Rotem Company is developing as a future growth driver, is expected to strengthen its capabilities in developing unmanned weapons systems.
Hyundai Rotem Company plans to retain all employees of Hyundai WIA's Special Business Division and initially lease and operate its existing production facilities before establishing a separate production process. The business transfer is expected to be completed by the end of March next year.■ Order backlog nearing 30 trillion won ... Expansion of defense businessThe acquisition is seen as a move to strengthen the competitiveness of the defense business and build a foundation for medium- to long-term growth amid a recent slowdown in profitability. Hyundai Rotem Company announced that it recorded consolidated revenue of 1.6207 trillion won and operating profit of 247.1 billion won in the third quarter of this year. Revenue rose 0.1% from the same period a year earlier, while operating profit fell 11.1%. The operating margin was 15.2%, down 2.0 percentage points. For the first three quarters of this year, revenue rose 11.2% year over year to 4.6842 trillion won, while operating profit fell 4.7% to 703.7 billion won, adding to concerns about profitability.
By business segment, the AD&RH division, which handles defense, robotics and hydrogen, recorded revenue of 841.2 billion won and operating profit of 236 billion won, down 10.1% and 10.5%, respectively, from a year earlier. The Rail (RS) division posted revenue of 656.1 billion won, up 21.4%, but operating profit fell 16.9% to just 5.9 billion won. The Eco-friendly Plant (EP) division recorded revenue of 123.4 billion won and operating profit of 5.2 billion won, down 13.6% and 24.6%, respectively.
The order backlog stood at 29.142 trillion won at the end of the third quarter, down 2.1% from a year earlier but still close to 30 trillion won. The AD&RH division accounted for 9.5228 trillion won, while the rail division accounted for 19.031 trillion won. In September, the rail division secured contracts including a 344.5 billion won deal to supply and maintain electric multiple units for Taiwan's Taoyuan Brown Line and a 310.3 billion won contract for electric train maintenance in Singapore. Cash and cash equivalents totaled 1.8787 trillion won over the same period. The acquisition price for Hyundai WIA's Special Business Division amounts to about 19% of the company's cash holdings, and the company is considered to have ample financial capacity. Its debt ratio also fell to 148% from 206% at the end of last year. The company is now pursuing new growth drivers on the back of its improved financial position.
A Hyundai Rotem Company official said, “We have continued to achieve solid revenue growth as production of defense export orders has continued,” adding, “We plan to pursue export diversification and sustain growth over the medium to long term.”
[email protected] Jeong Won-il Reporter