Why Hanwha Aerospace's historic share sale has investors up in arms

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Why Hanwha Aerospace's historic share sale has investors up in arms

Published: 30 Mar. 2025, 19:17

SHIN HA-NEE
[email protected]

Audio report: written by reporters, read by AI

The declining share prices of Hanwha Aerospace and Hanwha Corporation are shown on an electronic screen at the Yonhap Infomax office in Jongno District, central Seoul, on March 21, a day after Hanwha Aerospace announced its rights offering. [YONHAP]

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Hanwha Aerospace’s multibillion-dollar rights offering has sparked controversy as critics argue that the massive cash boost would come at the expense of minority shareholders.

Some speculate that the move aims to bolster the succession plan of the founding family of Korea’s seventh-largest conglomerate — a claim that Hanwha denies. Regardless, the latest development evokes a recurring pattern in Korea’s chaebol-dominated corporate landscape that is often cited as one of the key factors behind the country’s low corporate valuations, or the so-called Korea discount.

Regulator hits brake

On March 20, Hanwha Aerospace caught the market by surprise with its plan to raise 3.6 trillion won ($2.45 billion) in what would be Korea's largest share sale to date.

Hanwha Aerospace Executive Vice President Han Sang-yun characterized the share sale as inevitable during a conference call on March 20.

“Although there are ways to pursue gradual growth while maintaining financial stability, the current industry environment is not favorable enough for that,” said Han. “We request our shareholders' understanding, as the decision was necessary in order to advance.”

But the market reacted immediately, with Hanwha Aerospace’s share price plunging 4.5 percent on the day of the announcement and sliding 13 percent further the next day. Though Hanwha‘s top executives including Hanwha Group Vice Chairman and third-generation heir Kim Dong-kwan promised to buy 4.8 billion won of its stock, and parent company Hanwha Corporation vowed to purchase 1.6 million of the newly issued shares for a total of 980 billion won, the manufacturer's price still stood at 629,000 won on Friday, down 16.8 percent from its closing price on March 19.

The ambitious proposal hit another snag when the Financial Supervisory Service (FSS) demanded that the arms supplier revise its securities filling on Friday.

The regulator cited a lack of crucial information regarding matters such as the company's justification for the rights offering, communication process with shareholders and intended use for raised capital.

Hanwha Aerospace has already outlined its plan for the cash: It said on March 20 that it would allocate 1.6 trillion won to overseas defense businesses, 900 billion won to domestic defense operations, 800 billion won to overseas shipbuilding and 300 billion won to unmanned aircraft engine development.

The FSS said that plan was insufficient, but did not specify further details of its request, in a statement released on Friday.

Investors are now questioning whether a rights offering — and the consequent dilution of existing shareholders — was really Hanwha Aerospace's best option.

Hanwha Aerospace argues that the capital increase is necessary to expand investments and capitalize rising opportunities as nations across the world, especially the eurozone, begin to ramp up their defense spending. While the rationale appears solid, some experts believe Hanwha Aerospace could have opted for other options given its strong fundamentals and profit generation capacity.

“While investments are necessary, it is very regretful that Hanwha Aerospace decided to fund them through a rights offering instead of using its internal cash flow, liquidation of its assets or debt financing,” said LS Securities analyst Choi Jeong-hwan.

“It appears that Hanwha Aerospace could not create enough cash flow to match the fast-changing defense industry environment since the company’s acquisition of Hanwha Ocean and Dyna-Mac.”

Shareholders attend Hanwha Aerospace's annual general meeting in Seongnam, Gyeonggi, on March 25. [NEWS1]

Succession in picture?

And then there's the additional 7.3 percent of Hanwha Ocean that Hanwha Aerospace acquired, from Hanwha Energy and Hanwha Impact, for 1.3 trillion won on March 13, bringing its stake in the shipbuilding subsidiary to 30.44 percent.

Which raises another hot-button question: Why is Hanwha Aerospace securing additional shares of Hanwha Ocean now?

Hanwha Energy is wholly owned by Hanwha Group Chairman Kim Seung-youn's three sons — Dong-kwan, Dong-won and Dong-sun — and Hanwha Impact is 52 percent owned by Hanwha Energy.

One could interpret the move as a streamlining of Hanwha Aerospace’s business operations with a focus on defense, given that Hanwha Energy and Hanwha Impact are energy companies. But many have speculated that it could be a stepping stone to secure funding for the three heirs' eventual ascent — in other words, that Hanwha Aerospace funneled money to the founding family, via Hanwha Energy, and opted for a rights offering that would dilute current shareholders soon after.

“It is hard for regular shareholders to accept Hanwha Aersopace extending its hand to shareholders only a week after paying 1.3 trillion won in buying Hanwha Ocean shares from an unlisted, family-controlled subsidiary,” the Korea Corporate Governance Forum said in a statement on March 25.

“When a company pursues a rights offering, it is obligated to provide sufficient explanation to its shareholders,” said Hwang Yong-sik, a business professor at Sejong University.

“The backlash would've been significantly milder if the company had offered a detailed explanation of its plan and rationale, especially considering that Hanwha Aerospace needs to make large investments, but shareholders obviously won’t be able to accept it if there are doubts over the rights offering’s intention.”

Similar strategies, which appear to benefit major shareholders or owner families at the expense of minority shareholders, have been cited as among the factors eroding the Korean stock market’s integrity, leading to the Korea discount.

Doosan Group, for example, announced a major governance shake-up plan last year. The group’s initial plan was to delist industry-leading construction player Doosan Bobcat and incorporate it as a subsidiary of the much newer Doosan Robotics, following a rally in AI-linked shares that had blown up Robotics' market value despite the fact that the firm had never turned a profit. Investors and regulators alike protested that the deal, and particularly its swap ratio, would disproportionately benefit Doosan Corporation's owning family while severely diluting Bobcat's shareholders.

The FSS demanded that Doosan revise the merger and outline its justification from shareholders' perspective seven times before finally granting approval in November. However, Doosan ultimately scrapped the deal in December following a steep fall in its stock prices.

The recent controversy highlights the ongoing debate regarding a contentious revision of the Commercial Act designed to bolster shareholder protection, the National Assembly passed on March 13. The acting president can veto the bill by April 5. If approved, the bill will take effect a year later.

“Companies might speed up their [fund-raising] plans to avoid legal complexities” before the potential law takes effect, Hwang suggested.

BY SHIN HA-NEE [[email protected]]