In 2021, the military industry sector fluctuated upward, outperforming Shanghai and Shenzhen 300 as a whole. The Shenwan defense and military industry index rose by 8.6% (as of December 10, 2021), and the CSI 300 fell by 3.0% in the same period. It ranked 13th among the Shenwan level industries. After the accumulation of large gains in the military industry sector (increased by 49% in the second half of 2020 and 37% from May to August 2021). The market’s concern about the prosperity and valuation of the industry led to plate adjustment. With the data in the semi annual report and the third quarterly report, the market continued to confirm the prosperity, and the plate rose again.
The overall valuation is near the historical center, and the rising factors of military industry have changed to performance driven. At present, the overall valuation of military industry is about 70 times, near the historical valuation center. In the past, the rise and fall of the military industry sector was highly related to the change of valuation, and the rise of the military industry was mainly driven by valuation. At present, the Shenwan military industry index has returned to the level at the end of 2015, but the valuation is far lower than the level at the end of 2015, indicating that the rise of the military industry sector in the past year is mainly driven by performance. The rising factors of military industry are transforming into performance driven factors.
Timing: strong army, National Security + training and preparation for war. Investment in military industry conforms to the national strategy under the background of China US strategic competition. The remarkable feature of American strategic culture is threat oriented, active attack. After positioning China as a strategic competitor, it has actually implemented the strategy of “mixed war” against China. China has to comprehensively strengthen military training and war preparation and improve its strategic ability to defend national sovereignty, security and development interests. The construction of the PLA’s weapons and equipment system will reach a new level. The active fiscal policy under the goal of stabilizing the economy in 2022 will also ensure the growth rate of national defense expenditure. Military training and preparation, the Centennial goal of building the army and worry free national defense expenditure are the internal driving forces to ensure the growth of military demand.
Geographical advantage: prosperity improvement + hard core technology. The third quarterly report of 2021 further confirmed the prosperity of the military industry. Profit growth is faster than revenue growth, indicating that the profitability of the industry is improving. The substantial increase in contract liabilities indicates that the future boom may continue. In the context of China US decoupling of science and technology and emphasizing independent control and scientific and technological innovation, the development of military industry is an important starting point for improving China’s “hard science and technology”. “Specialized and new” military listed companies deserve attention.
Renhe: reform and efficiency + market recognition. The military industry sector grew with the reform of the national defense industry. The reform dividend superimposed on the improvement of the industry boom, and the listed military companies increased their equity incentive. The policy dividend of promoting the transformation of national defense scientific and technological achievements is also under discussion and formulation. The net asset scale of military theme funds and ETF funds hit a record high in 2021, and the number of new issues has warmed up significantly. The market’s recognition of the military industry sector has also reached an all-time high.
Sort out the investment logic of subdivision track. The PLA is loading third and fourth generation equipment in batches. We will reduce traditional ground operations and coastal defense equipment, and accelerate the development of aircraft carrier formation, amphibious formation and other high-sea defense equipment. We will continue to improve equipment systems for air control operations, electronic countermeasures, transportation and delivery, and enhance medium – and long-range precision strike capabilities. Aviation main engine, aviation engine, military electronics, marine main engine, new military materials and key parts all benefited.
Outlook: maintain the industry’s “stronger than the big market” rating. The prosperity of the national defense industry is carefree. A-share institutional investors pay more and more attention to military industry. The two investment directions of core main engine plants and key systems and parts have benefited from the leapfrog development of the PLA equipment system. The main engine factory involves: Avic Xi’An Aircraft Industry Group Company Ltd(000768) (000768), Aecc Aviation Power Co Ltd(600893) (600893), Avic Shenyang Aircraft Company Limited(600760) (600760), Avicopter Plc(600038) (60038), Jiangxi Hongdu Aviation Industry Co.Ltd(600316) (600316), China Cssc Holdings Limited(600150) (600150); the key parts involve: Avic Electromechanical Systems Co.Ltd(002013) (002013), Avic Aviation High-Technology Co.Ltd(600862) (600862), Guizhou Space Appliance Co.Ltd(002025) (002025), Chengdu Haoneng Technology Co.Ltd(603809) (603809), Chengdu Rml Technology Co.Ltd(301050) (301050).
Risk tips: 1. The development and delivery of new models are delayed; 2. The growth rate of orders is lower than expected; 3. The market liquidity impact caused by the US interest rate hike exceeded expectations.
