1. Market review this week
This week, the Shenwan national defense industry index fell by 2.35%, the Shanghai Composite Index fell by 0.11%, the gem index fell by 3.75%, the Shanghai and Shenzhen 300 index fell by 1.68%, and the national defense industry sector ranked 26th among the 31 Shenwan level industries. The largest increase was 1.66% on Tuesday (March 1), and the largest decrease was 2.14% on Thursday (March 3). As of Friday’s closing, the PE (TTM) of Shenwan national defense and military industry sector was 60.51 times, the aviation equipment in each sub sector was 63.62 times, the aerospace equipment was 62.11 times, the ground military equipment was 55.22 times, the military electronics was 48.30 times and the navigation equipment was 133.07 times. At present, the PE (TTM) quantile of Shenwan national defense military industry index in the past ten years is 31.25%, and the PE (TTM) quantiles of aviation equipment, aerospace equipment, ground military equipment, military electronics and navigation equipment are 23.44%, 25.78%, 29.30%, 20.70% and 73.83% respectively.
2. In 2022, the growth rate of China’s national defense budget was 7.1%, and there is still much room for improvement in the long term
According to the draft government budget report submitted by the Ministry of finance at the National People’s Congress, China’s national defense budget in 2022 was 1.45 trillion yuan, a year-on-year increase of 7.1%, an increase of 0.3pct over last year, and the GDP growth target for the same period was 5.5%. In recent years, China has continued to increase its military spending. The growth rate of the national defense budget from 2018 to 2021 was 8.1%, 7.5%, 6.6% and 6.8% respectively. The growth rate of the national defense budget returned to more than 7% in 2022. Internationally, changes in the past century and the epidemic situation in the 21st century are intertwined and superimposed, world turbulence and changes continue to intensify, the conflict between Russia and Ukraine promotes the escalation of geopolitical tensions, and military deterrence, friction and conflict among major powers are becoming more and more normalized. According to the national defense budget of fiscal year 2022, the United States, Russia, Japan, India and other countries have increased military spending, and the military game among major countries is becoming increasingly fierce. For China, at present, China’s national defense strength does not match its economic strength and scientific and technological strength, and does not meet the needs of its international status and security strategy. In order to ensure the realization of the Centennial goal of building the army, it is necessary to make full use of the high-quality resources of the whole society and accelerate the modernization of national defense and the army. At present, the scale of China’s military expenditure is only about 1 / 4 of that of the United States, and the proportion of China’s national defense budget in GDP is low. In 2020, China’s national defense budget accounted for only 1.2% of GDP, while that of the United States, Russia, Britain and India were 3.7%, 4.3%, 2.2% and 2.9% respectively in the same period. China’s military expenditure has great room for long-term improvement and is expected to continue to grow steadily in the future.
3. The industry’s attention is expected to increase during the two sessions
The strength of advanced equipment is an important decisive factor in Modern War: internationally, the United States has made great efforts to maintain the advantage of “generation difference” in equipment technology in recent years. In its defense budget in fiscal year 2022, the budget of “research, development, test and evaluation” project reached 112 billion US dollars, a year-on-year increase of 5.1%, a record high; For China, during the 14th Five Year Plan period, domestic equipment will move from the stage of “research and small batch production” to the stage of “large-scale construction”. China’s military expenditure is expected to further tilt towards equipment expenditure, and the industry demand is expected to continue to be large-scale. According to the 2021 performance forecast or performance express, the upstream and some midstream manufacturing continued to grow rapidly, and the performance of some links continued to exceed expectations. To some extent, it once again verified that the fundamentals of the military industry continued to improve. In 2022, the growth rate of national defense budget continues to increase, the growth rate of “breaking 7” exceeds market expectations, and the attention of the sector is expected to increase.
4. Key recommendations this week
1) focus on recommending military electronic components with sustained and high performance: China Zhenhua (Group) Science & Technology Co.Ltd(000733) , Zhuzhou Hongda Electronics Corp.Ltd(300726) , Beijing Yuanliu Hongyuan Electronic Technology Co.Ltd(603267) , Unigroup Guoxin Microelectronics Co.Ltd(002049) .
2) recommend midstream aviation manufacturing targets with scale effect gradually emerging and comprehensive supporting capacity expected to be greatly improved: Avic Heavy Machinery Co.Ltd(600765) , Chengdu Ald Aviation Manufacturing Corporation(300696) , Chengdu Haoneng Technology Co.Ltd(603809) , Anhui Yingliu Electromechanical Co.Ltd(603308) .
3) focus on recommending the overall and key systems of weapons and equipment with monopoly and scarcity and huge long-term growth space: Avic Shenyang Aircraft Company Limited(600760) , Aecc Aviation Power Co Ltd(600893) , Avicopter Plc(600038) , Aecc Aero-Engine Control Co.Ltd(000738) , Wuhan Guide Infrared Co.Ltd(002414) and Aerospace Ch Uav Co.Ltd(002389) .
4) it is suggested to pay attention to the beneficiary objects of the mixed reform of state-owned enterprises: Chengdu Spaceon Electronics Co.Ltd(002935) , Avic Xi’An Aircraft Industry Group Company Ltd(000768) , Avicopter Plc(600038) , Guizhou Space Appliance Co.Ltd(002025) and Sun Create Electronics Co.Ltd(600990) .
Risk warning: the release and delivery of military orders are not as expected; Performance growth is less than expected; The reform of state-owned enterprises did not advance as expected.
