In January 2022, the trend of the military industry sector resumed: there was a major adjustment in the industry, and some high-quality stocks were killed by mistake. From January 4 to January 28, 2022, the CITIC index of national defense and military industry fell by 18.35%, and many representative stocks in the sector made major adjustments. During this period, the market of the sector experienced adjustment (expected impact of procurement with tax) - stabilization (components and parts enterprises took the lead in stabilizing) - decline (the performance of 2021, a representative target of the military aircraft industry chain, was lower than expected) - Secondary stabilization (the aviation sector was relatively resistant to decline). We believe that in the process of rapid adjustment of the industry, some high-quality stocks were killed by mistake.
The current valuation level of the sector has fallen back to the bottom area since May 2020, with a large margin of safety and absolute income space: observed by the national defense and military industry CITIC index, since the launch of the military industry market in July 2020, the overall dynamic valuation of the sector is about 60 times as low as may 2020, nearly 100 times as high as January 2021, and about 65 times at present, It has fallen back to the bottom area since May 2020 (see Figure 3 below). From the dynamic valuation of the representative targets of the sector, the dynamic valuation of many targets fell back to the bottom area since May 2020 (see attached Fig. 4-fig. 11 below). We believe that the current valuation level has a large margin of safety and absolute income space.
Can the sector rebound? We believe that the answer is yes.
1) it is expected to usher in the time point of rebound: on the one hand, during the Spring Festival, the peripheral market is relatively warm; At the beginning of the lunar new year, the market style is expected to switch from avoiding holiday risks to the midline layout. The sharp decline in sentiment in the early stage of the military industry sector will bring good opportunities for the left layout. Considering that the current valuation of the military industry sector is at the bottom since May 2020, the market's willingness to trade time for space is expected to increase. On the other hand, the target performance of the military aircraft industry chain has become the main repressive factor of the current sector market. Before the Spring Festival, some enterprises released performance forecasts / express reports, which relatively fully released the risks in advance. The 2021 annual report will be disclosed from March 16 to 31, and the first quarterly report of 2022 will be disclosed before the end of April. Bad news is expected to become the deadline catalyst for the rebound and repair of the industry.
2) possible magnitude of rebound: Based on the above analysis of the valuation level of the industry and the valuation level of key individual stocks, there is a large upward space for both. We believe that the rebound space of the industry index is expected to reach 30-50%, the rebound space of representative individual stocks is expected to reach more than 50%, and the repair is expected to be completed in stages in the second and third quarters of 2022.
3) segmentation direction that may rebound first: in addition to the oversold rebound of the wrongly killed stocks, we believe that other more sustainable layout directions include: upstream private enterprises with performance in line with or exceeding expectations, central enterprises and state-owned enterprises that have implemented equity incentive, and other central enterprises and state-owned enterprises that maintain good communication with the market.
The short-term fluctuation does not change the medium and long-term growth of the military industry: on the one hand, the military industry has just entered the primary stage of the large-scale cycle, and from the perspective of the law of industrial development, new models will still appear in the future. The large-scale superposition of new models, the upgrading of original models, and the increase of equipment scale will bring the demand of the market, It is expected to support the military industry to maintain a high growth rate in the dimension of at least 5-10 years. On the other hand, the military industry has always been one of the key areas of reform. With the continuous promotion of the reform of state-owned enterprises, reform measures such as equity incentive and high-quality asset securitization are expected to continue to deepen and accelerate the growth of the industry.
2022 layout of military industry sector: we suggest paying more attention to the market pattern, business quality and medium and long-term growth space of military industry, focusing on five investment directions. 1) Military aircraft: air control is very important in modern war. Many models enter the batch production period, focusing on Avic Shenyang Aircraft Company Limited(600760) , Avic Xi'An Aircraft Industry Group Company Ltd(000768) , Jiangxi Hongdu Aviation Industry Co.Ltd(600316) , Avicopter Plc(600038) , etc; 2) Aeroengine: Changpo thick snow high-quality track, pay attention to Aecc Aviation Power Co Ltd(600893) , Aecc Aero-Engine Control Co.Ltd(000738) and so on; 3) Materials and forging and casting: a generation of materials and equipment. Forging and casting is the key link of equipment production. Pay attention to Western Superconducting Technologies Co.Ltd(688122) , Baoji Titanium Industry Co.Ltd(600456) , Weihai Guangwei Composites Co.Ltd(300699) , Sinofibers Technology Co.Ltd(300777) , Western Metal Materials Co.Ltd(002149) , Fushun Special Steel Co.Ltd(600399) , Gaona Aero Material Co.Ltd(300034) , Xi'An Triangle Defense Co.Ltd(300775) , Guizhou Aviation Technical Development Co.Ltd(688239) , Wuxi Paike New Materials Technology Co.Ltd(605123) , Wuxi Hyatech Co.Ltd(688510) , Avic Heavy Machinery Co.Ltd(600765) , Chengdu Ald Aviation Manufacturing Corporation(300696) , Anhui Shenjian New Materials Co.Ltd(002361) etc; 4) Missiles: with the continuous improvement of combat readiness and the increase of war training consumption and replenishment demand, we pay attention to Jiangxi Hongdu Aviation Industry Co.Ltd(600316) , Chengdu M&S Electronics Technology Co.Ltd(688311) , North Navigation Control Technology Co.Ltd(600435) , Chengdu Rml Technology Co.Ltd(301050) , Wuhan Guide Infrared Co.Ltd(002414) , Zhejiang Dali Technology Co.Ltd(002214) , Hubei Feilihua Quartz Glass Co.Ltd(300395) ; 5) Informatization: informatization is a multiplier of combat power. All countries have invested heavily in Avic Jonhon Optronic Technology Co.Ltd(002179) , Guizhou Space Appliance Co.Ltd(002025) , China Zhenhua (Group) Science & Technology Co.Ltd(000733) , Unigroup Guoxin Microelectronics Co.Ltd(002049) , Zhuzhou Hongda Electronics Corp.Ltd(300726) , Beijing Yuanliu Hongyuan Electronic Technology Co.Ltd(603267) , Fujian Torch Electron Technology Co.Ltd(603678) , Wuhan Guide Infrared Co.Ltd(002414) , Zhejiang Dali Technology Co.Ltd(002214) , Raytron Technology Co.Ltd(688002) , Chengdu M&S Electronics Technology Co.Ltd(688311) , Beijing Starneto Technology Co.Ltd(002829) , Tianjin 712 Communication & Broadcasting Co.Ltd(603712) and so on.
Risk tips: market fluctuation risk, risk of industry orders falling short of expectations, risk of company performance falling short of expectations, risk of state-owned enterprise reform progress falling short of expectations.
