The military industry sector made a sharp correction in the early stage and did not change the industry’s high boom expectations. In January, the military industry sector fell sharply by 18.2%, and the scissors difference between performance and valuation converged rapidly. The valuation of the sector fell to 53.4x, which was lower than 57x of the valuation center. We believe that there are three main reasons for the current round of correction of the military industry sector: 1) the overall valuation correction of the growth track; 2) The performance of some military central enterprises is lower than expected, and the funds may deliberately avoid the performance disclosure window; 3) The cancellation of the military value-added tax reduction policy has increased the uncertainty of the performance of the sector. We believe that the high outlook of the military industry sector still exists, and the adjustment driven by short-term negative factors will not change the medium and long-term good expectations of the sector.
The performance of the military industry sector has been disclosed one after another, and the prosperity of the industry has been continuously confirmed. As of January 28, 2022, 56 listed companies in the military industry sector have disclosed their performance express or forecast for the past 21 years. Excluding 13 companies whose performance is greatly affected by the civil products business or with large impairment provision, 37 of the remaining 43 listed companies have recorded positive performance growth, accounting for about 86%, the average of the median growth rate of net profit is about 54.0%, and the median is 62.4%, It basically confirms the high outlook of the military industry, but it is mixed with expectations. Among them, most of the performance of upstream component manufacturers meet or exceed market expectations, while the performance of midstream and downstream manufacturers is slightly inconsistent. As most main engine plants and middle and downstream enterprises need to disclose their business data in April, the prosperity of the industry still needs to be observed. We expect the growth rate of revenue and net profit attributable to the parent company of the military industry sector to be about 25.0% and 48.2% respectively in 2021, 20.0% and 40.0% respectively in 2022, and the compound growth rate of the performance of the military industry sector is expected to reach 32% during the 14th five year plan period.
Investment suggestion: the military industry sector is expected to stabilize gradually, and it is suggested to actively layout on bargain hunting. In the short term, after a sharp correction in the early stage, the risk of performance falling short of expectations has been fully released. At present, the valuation of the military industry sector has dropped to 53.4x, with a high margin of safety, which is expected to stabilize gradually in the later stage; In the medium term, as the second year of the 14th five year plan for equipment procurement, 2022 is expected to intensively implement bidding, eliminate the superimposed capacity bottleneck, and help the prosperity of the industry continue to improve. The rapid growth of the industry in the next three years is still expected; In the long run, the “Centennial goal of building the army” is nearly late, and the “Centennial change” is bound to promote the rapid development of the industry.
We are optimistic about the medium and long-term performance of the military industry sector and suggest the “four dimensions” configuration: 1) the targets of oversold rebound include Fujian Torch Electron Technology Co.Ltd(603678) (603678. SH), Nanjing Quanxin Cable Technology Co.Ltd(300447) (300447. SZ) and Guangdong Shenglu Telecommunication Tech.Co.Ltd(002446) (002446. SZ); 2) The subjects with sufficient adjustment but both performance growth and valuation include Beijing Beimo High-Tech Frictional Material Co.Ltd(002985) (002985. SZ), Tianjin 712 Communication & Broadcasting Co.Ltd(603712) (603712. SH), Avic Electromechanical Systems Co.Ltd(002013) (002013. SZ); 3) Targets with higher than expected performance and high certainty growth include China Zhenhua (Group) Science & Technology Co.Ltd(000733) (000733. SZ), Unigroup Guoxin Microelectronics Co.Ltd(002049) (002049. SZ); 4) The expected targets of state-owned enterprise reform include Addsino Co.Ltd(000547) (000547. SZ), China Marine Information Electronics Company Limited(600764) (600764. SH), etc.
