Hyundai Rotem has entered the 30 trillion won range in its order backlog, driven by major projects in its defense and railway sectors. However, in the second quarter of 2026, revenue increased while operating profit declined, confirming that the scale of orders does not immediately translate into near-term profitability.

The Era of a 30 Trillion Won Order Backlog... But Profitability Is a Separate Matter Hyundai Rotem expanded its business foundation by securing large-scale contracts in the defense and railway sectors. According to a Chosun Biz report citing electronic disclosure data, the order backlog as of the end of the second quarter of 2026 stood at 30.4046 trillion won, the highest level in the company's history. However, a large order backlog does not mean that all volume is immediately reflected in revenue and profit. Quarterly performance can vary depending on the pace of contract execution, production progress rates, and product composition.

Q2 Revenue Increases, Operating Profit Decreases According to a report by Yonhap News Agency on July 24, citing a Hyundai Rotem disclosure, the company's consolidated revenue for the second quarter of 2026 reached 1.6061 trillion won, up 13.3% from the same period a year earlier. In contrast, operating profit fell 9.7% to 232.4 billion won, and net income declined 1.8% to 186.3 billion won. The second-quarter operating profit was 10.5% lower than the market consensus of 259.7 billion won compiled by Yonhap Infomax. In summary, while there was top-line growth, the results fell short of market expectations.

First Half Cumulative Figures Also Show "Rising Revenue, Stagnant Profits" According to reports citing electronic disclosure data, cumulative revenue for the first half of 2026 totaled 3.0635 trillion won, an 18.1% increase compared to the same period last year. Meanwhile, cumulative operating profit stood at 456.6 billion won, down 0.8%, showing a stagnation trend. On a quarterly basis, first-quarter 2026 revenue was 1.4575 trillion won with an operating profit of 224.2 billion won, resulting in an operating margin of approximately 15.4%. The simply calculated operating margin for the second quarter was around 14.5%, representing a slight decline in profitability.

Causes of Profitability Slowdown DS Investment Securities identified three factors behind the second-quarter profitability decline, according to Yonhap News:

• Changes in product mix due to an increase in domestic production volume, which has relatively lower profitability
• The concluding phase of the first execution contract for Polish K2 tanks
• Base effects from one-time gains in the same period last year

In other words, while production volume in defense and railways increased and drove revenue growth, the proportion of lower-margin volume and the high comparison base from the previous year constrained operating profit growth.

The Core of Order Backlog Expansion: Polish K2 Tanks The largest pillar of Hyundai Rotem's order backlog is the Polish K2 tank project. In August 2025, Hyundai Rotem signed a second execution contract worth approximately 8.98 trillion won with the Polish Armament Agency. According to the company's official announcement, the second contract includes not only the supply of completed tanks but also local production and maintenance cooperation for the Polish variant of the K2 tank. In April 2026, the company signed a local production and maintenance cooperation agreement with Bumar Labedy, a subsidiary of the Polish state-owned defense group PGZ, for the K2PL tank and armored recovery vehicle. This is a follow-up procedure to materialize the local production plan included in the second execution contract. However, the contract amount of approximately 9 trillion won will not be reflected as revenue in the short term. Since revenue is recognized over several years based on the tank production progress rate and delivery schedule, the order backlog and individual quarterly revenue should not be interpreted in the same way.

New Railway Business: Taiwan Taoyuan Brown Line According to the Korea Exchange listing disclosure system, Hyundai Rotem announced on July 28 that it had received notification of being selected as the contracting candidate for the E&M (electrical and mechanical) works—including power, signaling, and telecommunications—for the Taoyuan Brown Line in Taiwan. Hyundai Rotem participated as part of a consortium with Singapore's ST Engineering. The project value assigned to Hyundai Rotem was presented at approximately 358.5 billion won, combining the portions denominated in New Taiwan dollars and euros. However, this disclosure is a notification of selection as the contracting candidate, not the final contract execution. The actual contract amount and business conditions may change during the main contracting process.

Contract Stages Must Be Read Differently... "Not All Are Firm Orders" Hyundai Rotem's overseas order pipeline must be interpreted by differentiating between contract stages:

• Polish K2 tank second project: An execution contract has already been signed and is reflected in the order backlog and production plan.
• Taiwan Taoyuan Brown Line: Selected as the contracting candidate, but final contract procedures remain.
• Peru project: In December 2025, a framework agreement was signed for the supply of 54 K2 tanks and 141 K808 wheeled armored vehicles, but a separate execution contract is required for actual commencement.

Therefore, it is not appropriate to simply aggregate the Polish contract, the Taiwan preferred negotiation stage, and the Peru framework agreement as firm orders.

The Key Is Conversion Speed and Product Composition The key indicator for Hyundai Rotem's future performance is not the absolute size of its order backlog, but rather the speed at which it is converted into revenue and profit, along with the product composition. As the production progress rate for the second batch of Polish K2 tanks increases, revenue recognition in the defense sector is likely to expand. However, if the proportion of domestic mass production and maintenance volume grows simultaneously, the operating margin may fluctuate on a quarterly basis even as overall revenue increases. For the Taiwan railway project and the Peru defense project, changes in contract stages are also critical. Whether the selection as a contracting candidate or framework agreement leads to a final contract, and how the contract amount and delivery period are finalized, must be confirmed through Korea Exchange and electronic disclosures. While Hyundai Rotem has secured an order backlog exceeding 30 trillion won, its second-quarter 2026 results demonstrate that an increase in orders does not immediately guarantee an increase in profits. Going forward, the critical factor is not the expectation of additional orders, but how quickly and efficiently existing contracts are converted into revenue and operating profit.

[This article is for reference in making investment decisions and does not recommend the purchase or sale of any specific stock. The responsibility for stock investments lies with the investor. This article was written with AI assistance.]