Core view:
The defense budget grew by 7.1%, in line with expectations. According to the government budget report, the national defense budget in 2022 is about 1.45 trillion yuan, with a year-on-year increase of 7.1%, and the proportion of GDP is about 1.27%, which is in line with the expectation of 6% – 8%, and also in line with the national conditions and international situation after the epidemic. However, compared with military powers such as the United States and Russia, the GDP proportion index of military expenditure still has great room for improvement. Vertically, the growth rate of China’s military budget is nominal. Since 2016, the proportion of GDP has shown a downward trend; Horizontally, the US defense budget in 2022 exceeded US $750 billion, accounting for 3.3% of GDP. In the same period, China’s military spending was only about US $230 billion, which is far from the absolute amount and proportion. With the rise and fall of great powers, China has ushered in a “century of great changes”. Accelerating the upgrading of equipment, strengthening the training of armament warfare and improving the strategic deterrence have become the inevitable choice in the new era. In addition, the Centennial goal of building the army is close at hand, the proportion of GDP of military expenditure may rise slowly, and the steady growth of military expenditure can be expected.
The direction of the government work report is clear and the wording has been eased. For the first time, the report clearly mentioned accelerating the construction of modern military logistics system and building a modern management system of weapons and equipment. The emphasis on “comprehensively deepening military training and preparing for war, firmly and flexibly carrying out military struggle” and the addition of “implementing the party’s overall strategy for solving the Taiwan issue in the new era” and “resolutely opposing the interference of external forces” indicate that China has an overall strategy for solving the Taiwan related issue and is currently implementing it step by step. In addition, the words “be highly vigilant and resolutely curb Taiwan independence separatist activities” were changed to “resolutely oppose Taiwan independence separatist acts”, and the tone was eased, or the current cross-strait tension was deliberately reduced.
From a global perspective, the situation in Russia and Ukraine may affect the construction of China’s national defense industry from four aspects: 1) the issue of Russia and Ukraine once again proves the importance of strong national defense forces to national security. China’s national defense strength should match its economic strength, and China’s military spending growth is expected to maintain a growth rate of 6% – 8% in the future; 2) The conflict between Russia and Ukraine reiterated that precision guided weapons have become the “standard configuration” of modern war, which has important enlightenment for the development of China’s weapons and equipment; 3) The geopolitical pattern has changed dramatically, and the military trade may meet a breakthrough; 4) Equipment autonomy is imminent, and the localization rate will be further improved.
Investment advice: fundamentals are king, pay attention to the first quarter market. In the context of the conflict between Russia and Ukraine, the market risk appetite has fallen sharply, and the risky assets have retreated sharply. The military industry sector is no exception. The previous high has fallen by nearly 20% so far, and the valuation risk has been further released. At present, the PE (TTM) of military industry sector is about 54x, which is lower than the central level of 57x. We believe that the annual report and the first quarterly report window are approaching. As the market sentiment gradually stabilizes, it is recommended to pay attention to individual stocks whose performance growth is expected to exceed expectations. “Four dimension” configuration is recommended at the current time point: 1) oversold rebound targets, including Avicopter Plc(600038) ( Avicopter Plc(600038) . SH), Fujian Torch Electron Technology Co.Ltd(603678) ( Fujian Torch Electron Technology Co.Ltd(603678) . SH), Nanjing Quanxin Cable Technology Co.Ltd(300447) ( Nanjing Quanxin Cable Technology Co.Ltd(300447) . SZ) and Guangdong Shenglu Telecommunication Tech.Co.Ltd(002446) ( Guangdong Shenglu Telecommunication Tech.Co.Ltd(002446) . SZ); 2) Targets with both performance growth and valuation, including Nancal Technology Co.Ltd(603859) ( Nancal Technology Co.Ltd(603859) . SH), Baoji Titanium Industry Co.Ltd(600456) ( Baoji Titanium Industry Co.Ltd(600456) . SH), Beijing Relpow Technology Co.Ltd(300593) ( Beijing Relpow Technology Co.Ltd(300593) . SZ); 3) Performance exceeding expectations and high growth targets with certainty, including China Zhenhua (Group) Science & Technology Co.Ltd(000733) ( China Zhenhua (Group) Science & Technology Co.Ltd(000733) . SZ), Unigroup Guoxin Microelectronics Co.Ltd(002049) ( Unigroup Guoxin Microelectronics Co.Ltd(002049) . SZ); 4) The targets of performance growth improvement by SOE reform include Avic Xi’An Aircraft Industry Group Company Ltd(000768) ( Avic Xi’An Aircraft Industry Group Company Ltd(000768) . SZ), Addsino Co.Ltd(000547) ( Addsino Co.Ltd(000547) . SZ), China Marine Information Electronics Company Limited(600764) ( China Marine Information Electronics Company Limited(600764) . SH), etc.
Risk warning: the risk that the 14th five year plan and military industry reform are not as expected.
