Shares of South Korea’s only military aircraft maker Korea Aerospace Industries (KAI) tanked after the county’s prosecutors last week launched a probe into KAI for alleged corruptions related to defense procurements. Defense stocks are expected to remain weak until uncertainties over KAI’s alleged corruptions are eased, according to market analysts.

On Monday, KAI stocks ended at a new 52-week low of 51,000 won ($45.31) after plunging 11.46 percent from the previous session. This was also the lowest since March 20, 2015. KAI stocks ended Tuesday at 47,950 won, down 5.98 percent or 3,050 won from Monday.

Earlier, state auditors found KAI gained illicit profits by inflating costs for the Surion utility helicopter project, triggering the prosecutors’ raids on KAI late last week. On Monday, President Moon Jae-in strongly criticized shady deals in the defense industry, likening military procurement-related corruption to an enemy-benefiting activity that threatens national security. The government is reviving a once-defunct anti-corruption inter-agency consultation body in order to come up with measures to root out corruption in the sector.

Investors are now raising questions on the sustainability of KAI’s 1.55 trillion won project to produce a third batch of Surion helicopters. They are also keenly focused on the government’s future decision regarding the company’s project to provide advanced trainer jets to the U.S.

KAI has been pushing for a 17 trillion won project in partnership with U.S.-based Lockheed Martin to replace aging trainer jets at the U.S. Air Force. A successful bidder is due to be selected in December. But because a corruption issue is one of major factors that affect the U.S. government’s decision in choosing a supplier of defense imports, the outlook deems gloomy.

“These are factors that are directly associated with KAI’s earnings. Uncertainty is very likely to continue and there would be no immediate recovery in its stock price for the time being,” said Lee Jae-won, an analyst at Yuanta Securities.

To make matters worse, KAI’s second-quarter results are estimated to have underperformed prior expectations by a wide margin. According to analysts polled by FnGuide, the company’s second-quarter operating profit is estimated to have fallen by 16.2 percent on-year to 80.3 billion won over sales of 766.3 billion won, down 4.7 percent.

KAI’s aircraft exports came below expectations in the second quarter, and the weaker-than-expected sales of aircrafts that contribute highly to its profitability would further weigh on its profit, said Yoon Kwan-chul, an analyst at BNK Securities Co.

Stocks of other major defense companies that supply components to KAI were also hit hard by the ongoing investigation. Hanwha Techwin and LIG Nex1 dropped more than 2 percent each on Monday from the previous session, while Huneed Technologies plunged 5.19 percent.

“Hanwha Techwin supplies engines to KAI and LIG NEx1 electric components,” said Choi Jin-myung, an analyst at Cape Investment & Securities. “More investigations (on possible corruption cases in other defense companies) could follow after KAI.”

On Tuesday, Hanwha Techwin shares finished down 1.53 percent, or 600 won, at 38,700 won. LIG Nex1 ended at 67,200 won, up 0.15 percent and Huneed rose 0.5 percent to close at 10,100 won.

By Yoon Jin-ho

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