Korea Aerospace Industries, Ltd. (KRX:047810) grew revenue 41% in the June quarter, to ₩1,167.9bn. Operating profit fell 43%, to ₩48.4bn from ₩85.2bn a year earlier.
That combination is unusual enough to be the story on its own. Gross margin went from 18.7% to 10.7% in twelve months while the top line expanded by a third. Across the first half, revenue rose 48% and operating profit fell 12%.
Then there's the order book. KAI ended 2025 with a backlog of ₩27.34tn, up more than 10% on the year. It was ₩26.55tn at the end of March and ₩25.75tn at the end of June — down 3.0% in a quarter and 5.8% since December.
Backlog falling while revenue rises means one thing arithmetically: the company is consuming its order book faster than it is refilling it. Subtract the ₩1.59tn decline from ₩2.26tn of first-half revenue and new orders in the half come to roughly ₩0.67tn. Backlog figures move for currency and contract revisions too, so treat that as an approximation. But KAI's stated target for 2026 new orders is ₩10.44tn. Even generously, the first half delivered a small single-digit percentage of it.
Where did eight points of gross margin go?
The answer is mix, and it runs directly into how Korea prices defense work. KAI's profitable years were export years. The FA-50 campaigns across Southeast Asia, Europe and the Middle East are negotiated commercially, with the price set by what a foreign air force will pay against Western alternatives. Domestic work is not.
Korea prices its own defense procurement under a government cost-accounting standard administered by the Defense Acquisition Program Administration, with an allowed profit rate set administratively rather than negotiated. A US reader will recognize cost-plus contracting, but the Korean version is closer to a regulated utility's return: the contractor recovers audited cost plus a rate the government sets, and doing more of it raises revenue without raising the margin percentage at all. It is, deliberately, a system designed so the domestic industrial base makes a modest, predictable return.
That is why the KF-21 matters ambiguously for shareholders. Development completed in July 2026 and first deliveries to the Korean Air Force are being prepared. Ramping that production line is exactly what fills a Korean revenue target and exactly what dilutes a margin. The company has said profitability should improve in the second half as KF-21 output rises and FA-50 deliveries to Malaysia begin. The second of those is the one that carries margin.
The bull case for the stock is not the KF-21 as a domestic program. It's the KF-21 as an export product — Indonesia negotiations are live — and the FA-50 pipeline, which added 12 more aircraft from the Philippines. Those are the contracts priced in a market rather than by a formula.
The cash flow statement is the least discussed page of KAI's filings and the most informative.
Operating cash flow was negative ₩700.4bn in 2023, negative ₩728.2bn in 2024 and negative ₩903.3bn in 2025. The first half of 2026 added another negative ₩380.0bn. Four consecutive periods, cumulatively around ₩2.7tn out the door.
Where it went is visible on the balance sheet. Inventories were ₩1,593bn at the end of 2022 and ₩3,992.6bn in June — up two and a half times. That's aircraft in build, spares and long-lead components tied up against contracts that pay on delivery milestones.
What paid for it: the cash pile, then borrowing. Cash and equivalents were ₩2,023.7bn at the end of 2022, ₩658.1bn a year later, ₩114.7bn at the end of 2024 and ₩60.9bn at the end of 2025. It's ₩163.6bn now, rebuilt with debt — financing brought in ₩1,029.9bn during 2025 and ₩878.5bn in the first half.
Equity is ₩1,982.7bn against total liabilities of ₩9,600.0bn. That's 4.8 times, on a business whose working capital swing in a single quarter can exceed a third of its equity.
None of this is a distress signal. Aerospace primes carry heavy working capital and KAI has a state-owned largest shareholder in Korea Development Bank, which is not nothing when a Korean industrial needs funding. But it does mean that four years of "record orders" headlines have coincided with four years of the balance sheet getting worse, and an investor should know which of those two facts the share price is following.
The shares closed at ₩122,600 on September 2, down 3.6% on the day, in a 52-week range of ₩94,400 to ₩202,000. Market capitalization is ₩11.95tn — roughly $8.7bn at about 1,370 won to the dollar, an approximate rate. The stock is 39% below its high.
Trailing four-quarter net income is ₩179.4bn, so about 67 times earnings. Trailing revenue of ₩4,429bn puts it near 2.7 times sales. Book value of ₩1,982.7bn puts it at 6.0 times.
Six times book for a manufacturer earning single-digit operating margins under a regulated domestic pricing formula is a price paid entirely for the export option. That's a coherent thing to pay for — global trainer and light-combat demand is real, and KAI is one of very few credible suppliers outside the US and Europe. It just leaves nothing for disappointment.
Against the company's own 2026 revenue target of ₩5.73tn, the first half delivered ₩2.26tn. The second half needs ₩3.47tn, or 54% more than the first. KAI does back-load: the December 2025 quarter alone did ₩1,466.7bn. It is still a demanding number.
Export campaigns are lumpy in a way that makes any single year's order target close to meaningless, and 2026's ₩10.44tn depends on deals that either sign or don't. Korean defense reporting in August already described backlogs across the sector's big four shrinking as the export wave slowed. That's an industry condition, not a KAI-specific failure, which is worse — it means the problem isn't one lost campaign.
The margin compression may not be temporary. If the next three years are dominated by domestic KF-21 production, the blended margin stays near where it is regardless of how much revenue grows.
Working capital is the near-term one. Another year like the last three, funded by borrowing against ₩1.98tn of equity, starts to constrain what the company can bid for.
And there's an odd feature of KAI's income statement worth flagging: finance income and finance costs are both large and roughly offsetting — ₩119.5bn against ₩177.4bn in 2025 — so pretax income sits well below operating income, and small moves in either line change reported earnings noticeably. The 67 times multiple sits on a number that is more volatile than the operating business underneath it.
The third-quarter backlog. If it stops at ₩25.75tn or turns up, the first half was timing. A third consecutive quarterly decline says the export cycle that built this valuation has turned, and no amount of KF-21 domestic volume compensates for that.
The Indonesia KF-21 negotiation, because it is the first real test of whether the aircraft is an export product or a national program. A signed export contract for the KF-21 would revalue the whole backlog, since it would mean the most expensive thing KAI ever built has a market price rather than an administered one.
And the cash flow statement. Positive operating cash flow in any quarter of 2026 would be the first in four years, and would say the inventory build has stopped converting into more inventory and started converting into deliveries.
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