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Korea Aerospace shares plunge amid government raid

Military aircraft manufacturer suspected of manipulating R&D costs

SEOUL -- Korea Aerospace Industries shares dropped sharply on Friday following news that government prosecutors had raided the state-owned military company on suspicion it manipulated development costs on helicopters and military aircraft.

KAI stocks dropped 5.6% to 57,600 won, erasing all of the 4.6% gains posted over the previous three trading sessions. The benchmark Kospi edged up 0.21% to 2,414.63, hitting a fresh record high.

The Seoul Central Prosecutors' Office raided the company's headquarters in Sacheon, South Gyeongsang Province, and its Seoul offices, seizing financial documents, digital files and officials' handsets. Prosecutors suspect KAI made tens of millions of dollars by inflating expenses in the development of its Surion utility helicopter and T-50 fighter trainer aircraft.

The Justice Ministry also placed a travel ban on Chief Executive Ha Sung-yong whose car was raided by the prosecution. Ha has led the company for four years since May 2013.

The investigation comes amid a crackdown by the Moon Jae-in government on corruption in military deals. The liberal president, who took power two months ago, pledged to clean up dirty dealings between high-ranking defense ministry officers and military companies during his campaign.

The raid is a big blow to KAI, which has focused on increasing exports of military aircraft. Earlier this month, the company completed delivery of 12 FA-50PH fighter jets to the Philippines. The deal generated $420 million in revenue. The company is also finalizing a $258 million deal to sell eight T-50 trainer jets to Thailand.

KAI is also hoping to win orders from the U.S., which plans to buy trainer jets worth $17 billion later this year. The South Korean company is expected to compete with U.S. producer Boeing and Swedish company Saab for the contract.

State-run Export-Import Bank of Korea is now the largest shareholder in KAI, after taking over a 18.7% stake from fellow state-owned lender Korean Development Bank last month, taking its total ownership up to 26.4%. KDB handed over its stake to Eximbank as part of the South Korean regulator's plan to strengthen that institution's financial soundness.

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