South Korean defense stocks have caught the wave of global rearmament in the past two years.

Russia's invasion of Ukraine has accelerated military spending across Europe. Korean companies are attracting buyers with competitively priced and relatively fast-delivered weapons, including tanks, artillery, and missile systems.

However, this round of gains has turned into a massive sell-off, with the stock prices of several major South Korean defense companies plummeting significantly this year.

According to data cited by South Korean broadcasting company SBS, as of the end of October, the combined market value of South Korea's four major defense companies – Hanwha Aerospace, LIG D &A, Hyundai Rotem, and Korea Aerospace Industries – had plummeted from a 52-week high of 170 trillion Korean won to approximately 62 trillion Korean won (46.18 billion US dollars).

A South Korean company known for exporting tanks and artillery systems, is it suitable for a modern battlefield where drones and anti-drone systems have seen rapid proliferation on both the Ukrainian and Iranian battlefields?

The Ukraine war has shown how relatively inexpensive drones can pose a threat to expensive military equipment; meanwhile, Iranian drone attacks have also depleted the stock of expensive anti-aircraft missiles held by the United States and its Gulf allies.

KB Securities Senior Managing Director Peter Kim stated: "Modern warfare is increasingly relying on fewer traditional weapons such as tanks, cannons, and armored vehicles, and Korean companies are precisely experts in these areas. Even in this front, sectors like drones are dominated by China, squeezing out potential competitors from Europe, the United States, and other parts of Asia."

Bank of America's Korea auto and industrial analyst KJ Hwang also agrees that the focus of procurement is shifting, with more emphasis on drones, anti-drone systems, and air defense.

Short-term downward trend?

The reversal of the Defense Division's situation is not entirely due to new combat platforms.

As stock prices fall, investors are weighing a range of concerns: disappointing profits, a strengthening Korean won, and delays in export orders.

The Kim of KB Securities indicates that the capital flowing into the semiconductor sector, as well as the high valuations formed based on strong profit growth expectations, have also dragged down South Korean defense stocks. He added that the government's pace of converting defense spending commitments into approved budgets and orders has been slower than expected.

Financial results have further amplified these concerns. Hanwha Aerospace's operating profit in the third quarter decreased by more than 46% year-on-year, and the company attributed this to adjustments to the delivery schedule and one-time costs. The company's stock price has fallen by more than 28% so far this year.

Modern Rotem announced a decline in operating profit of over 11.1%, and its stock price has fallen by nearly 60%.

Korean Air's aerospace industry saw sales and operating profits increase by approximately 52% and 32% in the third quarter, respectively, which narrowed the company's stock price decline this year to just over 8%.

However, experts still hold a positive view of the industry, especially regarding its long-term prospects.

Hwang indicates that 'South Korean defense companies continue to expand their cooperation with partners in Western Europe and the Middle East, including in air defense systems; moreover, new orders for K9 howitzers show that supply constraints and the importance of deterrence still exist, continuing to support the demand for traditional platforms.'

Some of the transactions concluded this year include Hanwha Aerospace selling a K9 order to Spain, worth approximately 546 million euros, as well as selling a K239 rocket system to Norway, for an order worth 922 million US dollars.

LIG D has reached a deal worth $94 million with Malaysia, which involves its K-SAAM naval shipborne air defense missile system. This is also the first export transaction for this system.

Countries are still heavily reliant on traditional weapons to enhance their defense capabilities. According to Kim, the Korean defense sector "remains attractive because its long-term growth prospects are still in the double digits."

Strategists Quantum Strategy and David Roche indicated to CNBC that as major powers learn from the lessons of the Ukraine war, there is a 'greater' emphasis on artificial intelligence and drone technology in military procurement orders; however, 'drones are unable to seize and hold territory... therefore, in any mobile combat scenario, infantry, tanks, armored vehicles, etc., are still essential.'

South Korean defense companies are also actively investing in drones and unmanned systems. Kim It is expected that while meaningful exports will still take some time, as overseas buyers require verified combat records, more concrete results may emerge in the near future.