We now believe KAI is highly likely to win the bid for both of the major projects set to determine its growth potential, i.e., the aircraft maintenance, repair, and overhaul (MRO) service project in Korea and the US Air Force‘s T-X project. 

We also expect marked HoH improvement in its new order intake in 2H16, given: 1) the scheduled receipts of new orders by both the defense and aircraft parts divisions; and 2) likely additional exports of finished aircraft. With KAI forecast to report relatively strong earnings for 2Q16, we expect the shares to stage a turnaround in 2H16, after having remained weak in 1H16 due to overhang issues and the lack of growth momentum. 

We maintain our BUY rating and target price of KRW106,000 for KAI.




Key takeaways from 22 June Analyst Day event KAI, on 22 June, held an Analyst Day event, providing presentations about progress on its major ongoing projects. Key takeaways from the event are as follows:

1) [MRO] We now see an even greater possibility of the KAI consortium being selected for the MRO project, final selection for which is slated for completion in 2H16, as KAI is also highly likely to secure key engine MRO technology related to its KF-X project;

2) [T-X project] Regarding the T-X project, we believe that the Lock-heed Martin-KAI consortium has gained the upper hand over rival consortiums (e.g. Boeing-Saab, Northrop Grumman-BAE), which had shifted their stance to the development of new aircraft for the project, given: 1) the tight schedule of the project (actual test flight results need to be submitted by end-March 2017; and 2) the sizable risks and costs which accompany development of new aircraft;



3) [New order intake] We expect HoH improvement in KAI’s new order receipts in 2H16, given: 1) third-round orders for Korean utility helicopters (KUH) by the Republic of Korea Army (ROKA); 2) orders for Surionamphibious task helicopters; 3) Boeing’s orders for B777x parts; and 4) additional exports of finished aircraft. KAI’s 2016 full-year new order target is KRW6.5tn.

2Q16 preview: Sales to come in at KRW806bn with operating margin of 11.2%

For 2Q16, we expect KAI to report sales of KRW806bn (+19% YoY, +13% QoQ), operating profit of KRW90.4bn (+17% YoY, +11% QoQ, operating margin 11.2%), and net profit of controlling interests of KRW64.3bn (+13% YoY), in line with market consensus. We attribute a likely QoQ growth in sales to: 1) an increase in operating days; 2) a rise in sales contribution from the KF-X project; and 3) the receipt of follow-up orders for the T-50 series. Despite the rise in the company’s capacity utilization rate, we expect a slight QoQ drop in operating margin to 11.2% from 11.4%, given: 1) the slide in the average US dollar-won rate; and 2) a likely QoQ decline in the portion of high-margin aircraft-parts sales. Nevertheless, we think the earnings prospect for the company should continue to improve going forward.

BUY and target price of KRW106,000 maintained

We think overhang issues that have continued to weigh on shares of KAI in 1H16 have mostly dissipated, given: 1) the decrease in the remaining overhang from 25% to 11% (KAI stakes held by Hanwha Techwin and Hyundai Motor are currently at 6% and 5%, respectively); and 2) overhang concerns are already priced-in. We recommend accumulating shares of KAI at its current price levels, in light of: 1) a likely upturn in its new order intake in 2H16; and 2) increasing earnings visibility of its major projects.

We maintain our BUY rating and target price of KRW106,000 (37x P/E to 2016E EPS) for KAI.

Source: Mirae Asset Securities http://www.miraeasset.co.kr/index.do