As Iran Conflict Weighs on Markets, the Korean Defense Sector Is Thriving

Stocks to Play in a Stringent Iran Sanctions Scenario

Asian stocks have been hit hard by the threat of energy disruption. But one sector has been thriving: South Korea’s defense sector.

Prior to the U.S. attacks on Iran, Korean defense contractors were already supplying missile systems to the Middle East. Demand for their munitions has only escalated after the onset of war and Iran’s retaliatory strikes on U.S. bases and allies in the region.

UAE First Export Customer

The United Arab Emirates have deployed the Cheongung-II missile defense system, with the system successfully intercepting 96% or 29 out of 30 missile targets, according to Korean lawmaker Yu Yong-weon, who sits on the parliamentary National Defense Committee.

The conflict in Iran has added impetus to the Middle Eastern order flow for Korean missile systems, which was already growing after the Russian invasion of Ukraine in 2022.

North and South Korea are still technically at war. So there is consistent domestic demand for Korean-made weapons even at the best of times in terms of conflict elsewhere in the world.

These are not those times. Orders for Korean-made missiles escalated after the Russian invasion of Ukraine in February 2022, and the order book has grown given that U.S. missile manufacturers such as Lockheed Martin (LMT) and Raytheon parent RTX (RTX) are already at capacity, with a significant order backlog.

Heaven’s Bow at Work

The Cheongung-II — which roughly translates as “Heaven’s Bow” — is a mid-range surface-to-air battery with four launchers mounted on a truck, with up to eight missiles per launcher. It’s modeled on the Patriot PAC-3 defense system, at a fraction of the cost. It can intercept both missiles and planes.

Where the first Cheongung system could intercept only cruise missiles, the second iteration can also intercept ballistic missiles. A third model is under development and should enter production around 2030.

South Korea deploys both the Cheongung and Patriot systems. The Cheongung-II system targets lower-altitude threats than the Patriot system and the Terminal High Altitude Area Defense or THAAD system, also developed by Lockheed Martin. The UAE has all three in use.

South Korea’s stock market has suffered since the onset of the Iran conflict, with the benchmark Kospi plunging 19.2% in the first days of the war. Investors have sold down risk in the world’s top-performing major market, which remains up 27.5% year to date, but Korean stocks have recovered only 7.9% from their March 4 low, moving sharply lower again on March 31 to retest those levels.

LIG Defense Shares Up 88.4%

LIG Defense & Aerospace (KR:079550), the principal manufacturer of the Cheongung-II, has moved in exactly the opposite direction. It was up only slightly for the year until the Iran war began on February 28. It immediately shot up 63.9%, and remains up 88.4% so far in 2026.

The UAE became the first country to order the Cheongung-II system in January 2022, with a purchase of 4 trillion won (then equivalent to $3.5 billion). Saudi Arabia followed suit in November 2023 with a 4.25 trillion won order ($3.2 billion at the time), and then Iraq signed a 3.7 trillion won (then $2.8 billion) order in September 2024.

It is a dramatic success story for LIG Defense, the main surviving business of LIG (or the Leading Innovation Group), which began life as an insurer but was forced to recast itself after an over-expansion into the construction sector. The company separated from the LG Group in 1999 and bought the defense division of LG Innotek in 2004.

Troubled Past

The group was forced to sell its insurance business to compensate victims after LIG Construction issued what was subsequently ruled to be fraudulent commercial paper it had no way to repay. Chairman Koo Ja-won and his sons, Koo Bong-sang and Koo Bon-yeop, were convicted in 2014 of issuing fraudulent bonds, knowing the construction business was about to fail.

The defense business saved the troubled group. LIG has expanded into 5G communications with the 2020 purchase of telecom-network equipment maker InnoWireless and by buying 60% of U.S. robot maker Ghost Robotics in July 2024.

The acquisitions should help LIG expand from guided weapons into broader unmanned defense systems and into battlefield (and oil field) robots.

Hanwha Aerospace Stock Up 62.5%

Hanwha Aerospace (KR:012450), which makes parts for the Cheongung-II system, has been another major beneficiary of stepped-up demand in defense capabilities, with its shares up 62.5% in 2026.

Hanwha Aerospace began life as Samsung Precision Industry, making missile-propulsion systems. Hanwha, South Korea’s seventh-largest corporate group, bought the unit from Samsung, the largest chaebol or Korean conglomerate, in 2014.

The aerospace unit in 2022 absorbed all of Hanwha’s defense businesses, and spun out its civilian businesses to other Hanwha subsidiaries. Hanwha Aerospace now makes not only air-defense systems but also aircraft-engine parts, armored vehicles, missiles, ammunition and artillery systems.

Hanwha makes the Cheongeom or “Heavenly Sword” helicopter-mounted anti-tank missile system, for the South Korean military. It is also known as the TAipers or “Tank Snipers” system when made for export. The company also last year unveiled the High-Performance Multiple Rocket Launcher (HPMRL) as a prototype mobile launcher for the Korean marines. The vehicle-mounted system can be fired from ships or landing craft and is small enough to be transported by helicopter.

Hanwha struck a $5.3 billion deal on March 24 with the Spanish weapons company Indra Sistemas (ISMAY) to make 280 tracked artillery vehicles for the Spanish military, based on Hanwha’s K9 self-propelled howitzer. That adds Spain to a list of NATO customers for Hanwha’s K9 artillery gun that already includes Turkey, Norway, Poland, Finland, Romania and Estonia.

Hanwha in February broke ground on its first production site in Europe, in Romania, to support those efforts. Besides South Korea, the list of the “K9 user club” also includes Australia, India, Egypt and Vietnam.

Korea Discount Causes Seoul Valuations to Lag 30%

South Korea’s chaebol worked hand-in-hand with the military-led dictatorships that governed South Korea after the end of the Korean war in 1953, until the late 1980s. That brought the country off its knees and contributed to the “Miracle on the Han River” economic recovery. But it also led to corporate-governance and insider-dealing scandals. Seoul stocks have subsequently traded at the “Korea discount” with a price-earnings ratio that is roughly 30% below international peers.

But just like their Japanese counterparts, Korean companies have since overcome prejudice against their goods. Korean carmakers such as Hyundai Motor (HYMTF) (KR:005380) and affiliate Kia (KIMTF) (KR:000270) have shed an initially shaky reputation on quality to join Toyota Motor (TM) (T:7203) and Honda Motor (HMC) (T:7267) as some of the world’s top exporters and most-familiar brands.

Unlike U.S. weapons manufacturers, Korean companies are proving willing to manufacture weapons in other countries, and to share their technology with other militaries. U.S. companies are known for their secrecy and protectionist attitude over their intellectual property.

Lower Cost on Korean Systems

The popularity of the systems from LIG and Hanwha also stems from their lower cost. A Cheongung-II interceptor costs roughly $1 million as compared with the $4 million cost of a Patriot PAC-3 system.

Shares in Lockheed Martin, which developed the Patriot PAC-3 system, initially rose when the United States attacked Iran, but the shares are down 6.5% since that initial spike on March 2.

Raytheon parent RTX has seen its shares sink 7.1% since March 2, giving back all of their initial 8.3% jump. Raytheon makes the radar and control systems and incorporates Lockheed’s PAC-3 missiles into the overall Patriot system.

South Korean President Lee Jae-myung said at the Seoul International Aerospace & Defense Exhibition last October that the nation will devote a “larger-than-expected” budget to defense and aerospace research through 2030, aiming to build its defense industry into the world’s fourth-largest. It ranked 10^th globally in 2023, according to the Stockholm International Peace Research Institute.