China’s military budget increased by 7.1% year-on-year, significantly exceeding market expectations under the slowdown of GDP
According to the report of Lianhe Zaobao, China’s military budget in 2022 reached 145045 billion yuan, a year-on-year increase of 7.1%, an increase of 0.3pct compared with 2021, the first time since 2019 that the growth rate of military expenditure exceeded 7%, and the growth rate of military expenditure affected by the epidemic in the previous two years was less than 7%. From the perspective of the proportion of military expenditure in GDP, China’s military expenditure in GDP has continued to decline in recent years, only 1.19% in 2021, down 0.06pct from 2020.
Earlier, Germany announced that it 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 previous requirement of NATO for the proportion of 2% of military expenditure of Member States. Compared with international powers, China’s military expenditure accounts for a low proportion of GDP. Under the current international situation, we believe that the proportion of military expenditure may show an upward trend in the future.
The conflict has inspired the importance of modern equipment and information command and control system, and the core equipment has entered the rapid loading period
Germany pointed out in the previously announced 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, and the subsequent medium-term orders may exceed expectations.
Investment suggestion: we believe that the military industry sector may continue to be the preferred sector of institutional allocation under the background of high-profile bearing (the preference of over allocation represents positive). Although the performance of a few listed companies of central enterprises is lower than expected due to the impact of “steady growth” recently, it may play the role of the mainstay of central enterprises under the demand of “steady growth” in 2022, Expected repair and reconstruction occurred. 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 be strengthened, and the progress of new models exceeds expectations. It is recommended to continue to focus on the current high cost performance stage of valuation – the field in which the growth rate of new models / new processes / new flow business exceeds expectations from 2022 to 2025, 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) , Wuxi Paike New Materials Technology Co.Ltd(605123) , Jiangsu Toland Alloy Co.Ltd(300855) , Fushun Special Steel Co.Ltd(600399) , 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.
