Korea Aerospace Industries - Fighter Jets, Helicopters, & Commercial Planes (Part 1)

This report is Part 1 of an in-depth report on Korea Aerospace Industries (047810 KS) ("KAI"). While the stock is down nearly 45% from its highs in 3Q15, KAI is a key beneficiary of some of the best long-term, positive fundamentals driving the military and commercial aircraft sectors in Korea. The following seven factors will be the major drivers of KAI's strong sales and earnings growth in the next several years.

• Resolute push by the South Korean government to advance in Aerospace
• Huge domestic moat
• Protection against North Korea's nuclear threat
• Technology
• Demographics
• Growth of low-cost airlines in Asia
• South Korea is less hindered with geopolitical issues compared to China, Russia, US, and Israel

Despite the positive long-term drivers for the company, the following main factors contributed to stock underperforming the market in the past one and half years:

• New orders and earnings in 2016 falling short of guidance
• Valuations
• Poor test results of Surion helicopters by US Defense testing center
• Crash of T-50 fighter trainer jet
• Concerns about block sales of KAI by major shareholders

Overall, we believe that the long-term positives are starting to outweigh the near-term concerns on Korea Aerospace Industries.