Defense shares lose steam amid rising hopes for Russia-Ukraine truce, overvaluation fears

Key products of LIG Nex1 are displayed at a promotional booth at the Unmanned System World Congress 2025 held on July 9 at the Convention and Exhibition Center, southern Seoul (Yonhap)

Shares of South Korean arms makers dropped sharply Friday amid expectations that the upcoming US-Russia summit would include talks on a potential cease-fire in the Russia-Ukraine war. Concerns over valuation also contributed to the decline.

LIG Nex1, a domestic aerospace and defense firm, closed daytime trading at 513,000 won ($370) Friday, down 14.93 percent from the previous trading day. It marked the sharpest single-day decline for LIG Nex1 since a 12 percent plunge on June 24.

The shares inched down the day despite the company being added to the Morgan Stanley Capital International’s Korea Index — something that typically lifts share prices.

“The company is expected to achieve strong profit growth going forward. However, due to the recent sharp rise in the stock price, the short-term upside potential is limited,” analyst Jeong Dong-ho from Mirae Asset Securities said, following the brokerage firm’s decision to downgrade the investment rating to neutral.

Hanwha Systems, a major defense affiliate of Hanwha Group with a roughly 10 trillion won market capitalization, wrapped up trading at 52,800 won, down 6.88 percent from the previous trading day.

Though Hanwha Systems started trading at 55,500 won, it quickly shedded roughly 3,000 won and showed no recovery until the market closed. Friday’s close represents a nearly 20,000-won drop from its 52-week high of 70,200 won recorded on June 18.

Other defense stocks also traded lower, Hanwha Aerospace down 5.47 percent, Hyundai Rotem down 4.87 percent and Korea Aerospace Industries down 2.89 percent.

The shares dropped on expectations that US President Donald Trump and Russian President Vladimir Putin could hold a summit as early as next week and possibly discuss truce for the Russia-Ukraine war.

The plunge also comes amid concerns on overvaluation. Major defense stocks have surged between 70 percent and 300 percent since the beginning of this year.

While the projected price-to-earnings ratio for Lockheed Martin, a top US defense company, for this year stands at 19.6, major domestic defense stocks have been trade at significantly higher multiples, signaling a potential overvaluation.

Hanwha Systems posted a PE ratio of 61, LIG Nex1 44.1, Korea Aerospace Industries 37.1, Hanwha Aerospace 32.1, and Hyundai Rotem 23.5, according to the Korea Exchange Thursday. A high PE ratio suggests a potential overvaluation compared to industry peers.

After a strong buying spree earlier this year, foreign investors have shifted to a net selling stance on defense stocks this month.

Between Aug. 1-8, overseas investors offloaded 153 billion won worth of Hyundai Rotem shares, 71 billion won of Hanwha Aerospace, 66 billion won of Hanwha Systems, 50 billion won of LIG Nex1, and 3 billion won of Korea Aerospace Industries.