If you haven't heard yet about President Trump's plan to arm Taiwan, then, well, you probably don't live in China -- because China has been very vocal about this event. Calling America's plan to sell more than $1 billion worth of weapons to Taiwan a "wrong decision" that will "severely damage China's sovereignty and security interests"; the Chinese embassy to the U.S. said it was "outraged." And that's not all.
China went further, demanding last week that the U.S. "stop military contacts with Taiwan" -- and threatened "further action" if its demand is not met.
So what is it exactly about this deal that so upsets China, and why should investors pay attention? Here are the details.
Standard Missiles lead off Taiwan's Raytheon shopping list. Image source: Raytheon.
Taiwan's shopping list
The Trump Administration's sale of weapons to Taiwan is its first since the president took office -- and the biggest arms package for Taiwan since the Obama Administration's $1.7 billion deal, announced in 2015. It is described in a series of seven "notifications" made to Congress by the Defense Security Cooperation Agency, which is the Pentagon's department responsible for coordinating weapons sales to U.S. allies abroad. The weapons in question include:
- 16 Standard Missile-2 (SM-2) Block IIIA surface-to-air missiles, plus related equipment, valued at $125 million.
- 50 AGM-88B air-to-ground High-speed Anti-Radiation Missiles (HARMs) and 10 training rounds, valued at $147.5 million.
- 56 AGM-154C Joint Standoff Weapon (JSOW) Air-to-Ground Missiles valued at $185.5 million.
- Hardware and software needed to upgrade the AN/SLQ-32(V)3 Electronic Warfare Systems on Taiwan's four Keelung-class (former U.S. Kidd-class) guided missile destroyers, valued at $80 million.
- Conversion kits to upgrade 168 Taiwanese MK-46 Mod 5 Torpedoes into more advanced MK-54 Lightweight Torpedoes (LWTs), valued at $175 million.
- 46 new MK 48 Mod 6AT Heavyweight Torpedoes (HWT) valued at $250 million.
- And spare parts, engineering services, and contractor logistics support to maintain all of the above, valued at $400 million.
That's a heaping helping of weapons en route to Taiwan. But what does it mean for investors?
What it means for investors
In the case of six of these contracts, just one company -- Raytheon (RTN) -- is either the designated prime contractor on the sale, the weapon's manufacturer (and so likely to become the prime contractor), or both. This means that Raytheon is all but certain to reap at least $963 million from this arms deal -- and potentially all $1.363 billion covered by the seven contracts together.
It's unusual for such a varied set of weaponry in such a large arms deal with a single foreign ally to all be earmarked for fulfillment by just one single defense contractor -- but it is what it is. And what this is, judging from data provided by S&P Global Market Intelligence, is a very big deal for Raytheon, potentially accounting for more than 5% of the revenues that Raytheon ordinarily books in a year.
Of course, some may question whether the sale will even happen, given the strenuous objections from China -- but I think the sale will go through regardless. First, when China made similar objections to the Obama Administration's sale of an even larger pile of weapons two years ago, it failed to derail the sale. Second, while this new arms deal requires the approval of Congress to proceed, there has never been an instance of an arms deal officially notified by DSCA later being rejected by Congress. Ever.
So the upshot for investors is simple: This sale is going through. And Raytheon shareholders will benefit.
