Germany plans to set up funds with a quota of two years' military expenditure to support equipment upgrading, and the proportion of military expenditure in GDP will rise to more than 2% in the future
On February 27, German time, according to Deutsche Welle, the German Chancellor announced that he plans to set up a fund with a total amount of 100 billion euros in 2022 to improve the level of weapons and equipment and modernization. In the future, the annual military expenditure will account for more than 2% of GDP, meeting the requirement of 2% of the military expenditure of member countries before NATO.
We believe that the situation in Russia and Ukraine may promote NATO countries to accelerate the completion of the requirement of 2% military expenditure as a proportion of GDP proposed by NATO in 2018. At present, only 10 of the 29 NATO member states have met the requirement of 2% military expenditure (compiled and reported on the website of British three services Radio and television forces on February 24, 2022). Germany is the first NATO country to take the initiative to increase the proportion of military spending standards under the influence of the situation between Russia and Ukraine (1.53% before the increase). We expect more NATO countries to increase military spending.
The conflict has revealed the importance of modern equipment and information command and control system, and NATO's military expenditure has increased or accelerated its deployment of advanced equipment
Germany pointed out in the establishment of the 100 billion euro fund that the purpose of the fund is mainly to purchase weapons and equipment, improve the modernization of weapons and equipment, support new military projects, etc. geopolitical factors may affect the region to enter the stage of equipment upgrading. We believe that the R & D and production of China's modern equipment will be accelerated in line with the international situation.
Investment suggestion: we believe that the military industry sector may continue to be the preferred sector of institutional allocation under the background of high vision (the preference of over allocation representatives is positive), although the performance of a few central enterprises is lower than expected due to the impact of "stable growth" and "equity incentive" in the near future, The sector may have completed the digestion of the impact through adjustment (for example, Avic Electromechanical Systems Co.Ltd(002013) , Avicopter Plc(600038) etc. return to the bottom area of the 5-year historical valuation 10% quantile value), and the sector enters the stage of stabilizing and undervaluing the value (the quantile of the historical valuation of the sector is about 20%).
At present, there is no negative situation in the medium and long-term fundamentals of the industry, the logic of weapons and equipment volume continues to strengthen, and the progress of new models exceeds expectations. It is suggested to continue to focus on the current high cost performance stage of valuation - the new model / new process business will promote the growth rate to exceed expectations in 20222024, and the target with strong valuation advantages after the valuation switch in 2023:
It is recommended to pay attention to the following related stock targets:
1. The aero-engine industry chain with high sustainability and high prospect and new models exceeding expectations: Avic Heavy Machinery Co.Ltd(600765) , Western Superconducting Technologies Co.Ltd(688122) , Guizhou Aviation Technical Development Co.Ltd(688239) , Aecc Aviation Power Co Ltd(600893) , Fushun Special Steel Co.Ltd(600399) , Wuxi Paike New Materials Technology Co.Ltd(605123) , Jiangsu Toland Alloy Co.Ltd(300855) , etc;
2. New military products market stocks appearing in the second growth curve: Chengdu Ald Aviation Manufacturing Corporation(300696) , Sinofibers Technology Co.Ltd(300777) , Guoguang Electric Co.Ltd.Chengdu(688776) , Xi'An Triangle Defense Co.Ltd(300775) , etc;
3. Steady growth military electronics and missile information enterprises with strong valuation advantages: Unigroup Guoxin Microelectronics Co.Ltd(002049) , capacitors, Chengdu Zhimingda Electronics Co.Ltd(688636) , China Zhenhua (Group) Science & Technology Co.Ltd(000733) , Jiayuan technology, etc;
4. Core barriers / state-owned enterprise reform main engine factory enterprises: Avic Shenyang Aircraft Company Limited(600760) , Avic Xi'An Aircraft Industry Group Company Ltd(000768) , Avicopter Plc(600038) , Avic Electromechanical Systems Co.Ltd(002013) , etc
Industry logic focuses on the four highlights of military 2022
(1) the growth rate in 2022 has strong comparative advantages;
As 2022 is the first year of release of the overall new capacity of the industry, the growth rate of the revenue side will accelerate, so the second-order derivative is positive, and some sectors can have a longer growth expansion period, which has the strategic comparative advantage of the industry.
(2) new models are intensively entering the pre production stage of batch production, and enterprises in all links of the industrial chain have the possibility of performance exceeding expectations and the extension of the duration of medium and high-speed growth;
(3) the military industry is a kind of crossing varieties in the economic cycle, which has the advantage of fundamental anti risk;
(4) China's state-owned assets reform or entering the deep-water area is expected to carry out market-oriented mechanism reform in fields other than the general assembly of non strategic weapons (excluding state-owned enterprises of strategic resources).
(5) medium term renewal of mature models and UAV (expected establishment of a longer growth period).
Risk tip: the delivery of military products slowed down in the first half of the year, the pricing progress of new products was slow, and the impact of macro liquidity.
