Core ideas of this week
1. China’s national defense budget in 2022 was 145045 billion yuan, an increase of 7.1% year-on-year, and exceeded 7% for the first time since 2019. In 2022, the growth rate of national defense budget increased by 0.3pct year-on-year. The year-on-year growth rate of national defense expenditure in 2020 and 2021 was 6.56% and 6.8% respectively, a record low growth rate, mainly due to the impact of the epidemic. The growth rate of national defense budget has exceeded 7% for the first time since 2019, indicating that the national defense budget is returning to the rising cycle. At the same time, the military is in a critical period of large-scale assembly of new generation equipment, and the proportion of equipment procurement costs is expected to further increase. From 2010 to 2017, the proportion of equipment cost in China increased from 33.2% to 41.1%. The proportion of equipment cost is increasing day by day, and the training maintenance cost is expected to continue to increase. We believe that the sustained and stable increase in the national defense budget is in line with the growth of national defense demand. Looking ahead to the “14th five year plan”, we expect that the growth rate of national defense expenditure will continue to maintain a compound growth rate of about 7%. The upgrading of new generation equipment + comprehensively strengthened practical training will greatly increase the procurement and maintenance needs of weapons and equipment. It is expected that the growth rate of equipment cost during the 14th Five Year Plan period may be higher than the overall growth rate, reaching a compound growth rate of 10% – 15%.
2. The high cost performance of the sector is more prominent, which is expected to hit the bottom and rebound. It is suggested to strengthen the allocation. Since the beginning of 2022, the CSI military industry index has fallen by nearly 20%, the sector valuation has been fully digested, and the high cost performance has become more prominent. At present, the overall PE of the military industry sector is 56 times, at a historical low. From the core key companies we track, the current military sector pe38 Seven times. The average valuation levels of upstream, midstream and downstream in 22 years were 32.6, 32.6 and 48.8 times respectively, corresponding to peg levels of 0.77, 0.85 and 1.80 in 22 years. We believe that at present, the military industry sector is at the key node of the diffusion from local prosperity to overall prosperity, and the performance acceleration inflection point of middle and downstream companies is expected to come. At present, the valuation level of the sector is equivalent to the lowest valuation in 21 years and has higher investment cost performance. It is suggested to firmly increase the allocation proportion, and the sector is expected to regain its upward trend after the final shock bottoming stage.
3. In terms of investment strategy, we judge that the current military industry is spreading from local prosperity to overall prosperity. The “14th five year plan” is expected to experience two rounds of capacity expansion, and we are optimistic about the whole military industry chain in 2022. Upstream of industrial chain: focus on recommending leading companies in relevant subdivided fields that meet the three standards of “large industry space, excellent competition pattern and low localization rate”, mainly including key raw materials, core components and other fields. Middle reaches of the industrial chain: focus on recommending leading companies in relevant subdivided fields that meet the three standards of “high entry barriers, strong system capacity and wide business scope”, mainly including composite materials and products, power supply system and other fields. Downstream of the industrial chain: focus on recommending leading companies of complete machines and core subsystems that meet the three standards of “strong actual combat demand, many reserve models and mass production nodes”, mainly including fighter, helicopter, large aircraft, aeroengine, radar and other fields.
4. Key recommended combinations
Upstream: Weihai Guangwei Composites Co.Ltd(300699) , Zhuzhou Hongda Electronics Corp.Ltd(300726) , China Zhenhua (Group) Science & Technology Co.Ltd(000733) , Avic Jonhon Optronic Technology Co.Ltd(002179) , Beijing Yuanliu Hongyuan Electronic Technology Co.Ltd(603267) , Hubei Feilihua Quartz Glass Co.Ltd(300395) ; Midsmidsmidsmidsmidsmidsmidsmidsmidsmidsmids: following: Xiangtan Electric Manufacturing Co.Ltd(600416) \\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\;, Chengdu Ald Aviation Manufacturing Corporation(300696) , Jiangsu Toland Alloy Co.Ltd(300855) , Wuxi Paike New Materials Technology Co.Ltd(605123) , Beijing Relpow Technology Co.Ltd(300593) , Guizhou Aviation Technical Development Co.Ltd(688239) ; Downstream: Avic Shenyang Aircraft Company Limited(600760) , Aecc Aviation Power Co Ltd(600893) , Avicopter Plc(600038) , Avic Xi’An Aircraft Industry Group Company Ltd(000768) , Glarun Technology Co.Ltd(600562) .
