The Ministry of national defense has indicated that “the construction of our military’s weapons and equipment has reached another big level” and the development of military industry is in the ascendant. The Ministry of national defense recently said that “the whole army will thoroughly implement the important instructions and decisions of Xi Jinping , grasp the historical orientation of weapons and equipment construction in the new era, accelerate the construction of a new development pattern of weapons and equipment construction, spare no effort to accelerate the modernization of weapons and equipment, and promote the construction of weapons and equipment of our army to a new level from a new starting point.” We believe that this speech once again sets the tone for China’s military industry development in the 14th five year plan. The “weapon modernization” points out the scientific and technological attributes of weapons, the “accelerating construction” emphasizes the urgency, and the “big step” indicates a double leap in equipment performance and quantity.
The Beijing stock exchange was inaugurated, and military specialized and new small and medium-sized enterprises released their vitality. On November 15, the unveiling and opening ceremony of Beijing stock exchange was grandly held in Beijing. On the first day of opening, 81 of the first batch of listed companies collectively appeared, including a number of military listed companies, such as Guandian defense, Tongyi aerospace, etc. Small and medium-sized military enterprises have made important contributions to China’s military construction. The establishment of the Beijing stock exchange is expected to support the growth of a large number of small and medium-sized military enterprises, stimulate innovation potential and inject strong momentum into the high-quality development of the army.
Q3 has good business performance and prominent scale effect. In the first three quarters of 2021, the military industry sector achieved an overall operating revenue of 372.6 billion (YoY + 28.9%) and a net profit attributable to the parent company of 31.91 billion (YoY + 55.9%). In Q3, the growth rate of the revenue side decreased (YoY + 21.2%), but the profit side showed a good growth performance, and the growth rate of net profit attributable to the parent company reached 42.9%. In addition to the rapid growth of revenue caused by strong demand, the high growth of sector performance also benefited from the increase of gross profit margin and the decline of period expense rate caused by scale effect. Looking forward to the whole year, due to the high base effect of 2020q4, the year-on-year growth of 2021q4 industry may slow down, but with some The release of link capacity superimposes strong demand for military products, and the high outlook of the industry is expected to continue. We expect that the growth rates of revenue and net profit attributable to parent company in 2021 will be about 25.0% and 48.2% respectively, and that in 2022 will be 20.0% and 38.0% respectively.
The proportion of fund positions has increased significantly, and the boom has driven the allocation higher. 2021q3 fund’s military positions accounted for 4.02%, a significant increase of 1.2pct year-on-year and 0.93pct month on month. The military position concentration of 2021q3 fund was 64.5%, up 3.95pct month on month. At present, the allocation proportion of the military industry sector remains in the over allocation state (the over allocation proportion is 0.99%), reflecting the return of market investment enthusiasm.
Investment suggestion: it is not suitable to catch up in the short term, but can be firmly held in the medium and long term. In the short term, first of all, the current round of military industry index has increased by 21.5% since mid October. Some growth stocks have increased significantly, and the demand for valuation risk release has increased. However, the prosperity of the military industry sector is high, and the callback space of the military industry sector may be limited. Moreover, the current valuation quantile of the military industry sector is about 68%, and the limit of valuation improvement is far from coming; In the medium term, the removal of capacity bottlenecks will help the industry continue to improve its prosperity, and the rapid growth 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” accelerates the development of the industry, which is expected to welcome the golden age. We suggest that we should not chase higher in the short term and can firmly hold it in the medium and long term. We recommend Aecc Aviation Power Co Ltd(600893) (600893. SH), Nanjing Quanxin Cable Technology Co.Ltd(300447) (300447. SZ), Tianjin 712 Communication & Broadcasting Co.Ltd(603712) (603712. SH), China Marine Information Electronics Company Limited(600764) (600764. SH)
Risk tip: the “14th five year plan” and military industrial reform are less than expected.
