Event:
On March 5, according to the draft government budget report submitted by the Ministry of finance at the National People’s Congress, China’s defense expenditure budget in 2022 was 145045 billion yuan (about 229.5 billion US dollars in US dollars), a year-on-year increase of 7.1%, an increase of 0.3 percentage points from 6.8% in 2021.
Comments:
The military budget maintained steady and rapid growth, slightly exceeding expectations
China’s defense expenditure budget in 2022 continued to maintain rapid growth, and increased by 0.3 percentage points compared with 6.8% in 2021. The growth rate in 2019 was 6.6%, and the year-on-year growth rate in recent three years increased slightly. In recent years, the growth rate of China’s defense expenditure budget is higher than that of GDP in most years. We believe that China’s defense expenditure still has great room for growth and may be higher than GDP growth for a long time in the future.
The political environment outside China is complicated, and the big country game will last for a long time
During his tenure, former US President trump clearly positioned China as the primary competitor. After Biden took office, he still regarded China as the “most severe competitor” and continued to formulate policies and actions “to meet China’s challenges”. We believe that the game between major powers will continue in the future and tend to be diversified. Recently, the conflict between Russia and Ukraine has continued to escalate, and the situation is developing in the direction of complexity and uncertainty. Through the conflict between Russia and Ukraine, we have a better understanding of the importance of military struggle preparation. Military strength is an important guarantee for safeguarding China’s legitimate rights and interests. It is urgent to vigorously develop military modernization and information construction. In the future, China’s military equipment construction will continue to accelerate.
Global military spending is expanding, and Western countries continue to increase military spending
Since 2000, global military expenditure has expanded rapidly. Driven by the United States, the world’s major countries have followed the footsteps of the United States to increase military budgets, and the world has entered a new round of arms expansion cycle. In the context of the epidemic, the global military expenditure in 2020 reached US $1.981 trillion, continuing the growth trend, with a year-on-year increase of 2.6%.
The conflict between Russia and Ukraine is only a concentrated reflection of the deteriorating and complex international environment in Ukraine in the future. With the rising trend of “anti globalization”, the covid-19 pneumonia epidemic can not be effectively controlled globally, and the proliferation of national threats and security problems, the global defense policies of the United States and Europe will continue to be adjusted. The US defense budget in 2022 was US $753 billion, an increase of 1.7% over fiscal year 2021. Recently, Germany announced a substantial increase in defense spending, and the German defense force will receive 100 billion euros of special funds for national defense modernization. And from this year, Germany’s annual defense spending will exceed 2% of its GDP.
There is still a lot of room for growth in national defense expenditure, which still accounts for a large proportion of China’s growth
As the world’s second largest economy, China’s defense expenditure accounts for a low proportion of GDP. In 2021, China’s military expenditure accounted for only 1.18% of GDP, far lower than the world average (2.2% in 2019). In 2021, China’s GDP reached 70% of that of the United States, but its defense expenditure (US $193.3 billion) was only 26% of that of the United States, which was very mismatched with China’s economic strength. In terms of per capita, China’s per capita defense expenditure is lower than that of most major countries. In addition, China’s national defense expenditure has been relatively low in history, especially in equipment construction. At present, China’s national defense expenditure still lags far behind the security needs of safeguarding national sovereignty, security and development interests, fulfilling the international responsibilities and obligations of major countries, and its own construction and development. To sum up, China’s defense expenditure still has a lot of room for growth.
Real combat drills promote equipment development, and the proportion of equipment expenditure is expected to continue to increase
From the perspective of the internal structure of national defense expenditure, China’s national defense expenditure consists of three parts: equipment cost, training support cost and personnel living cost. The equipment cost is mainly used to increase the investment in the construction of weapons and equipment, eliminate and update some backward equipment, upgrade and transform some old equipment, and develop and purchase new weapons and equipment. According to the white paper on China’s national defense in the new era (hereinafter referred to as the “white paper”), the proportion of equipment expenditure in national defense expenditure increased from 33.2% in 2010 to 41.4% in 2017. The white paper emphasizes that the Chinese army should improve and optimize the system structure of weapons and equipment, comprehensively promote the development of weapons and equipment of all services and arms, coordinate the development of main combat equipment, information system and support equipment, strengthen the elimination of old equipment, and gradually form a weapons and equipment system with high-tech equipment as the backbone.
In 2021, the Central Military Commission issued the decision on building a new military training system, which pointed out that we should adhere to the focus on war preparation and practical training, and speed up the construction of a new military training system. Our army has comprehensively strengthened actual combat drills, further promoting the consumption of weapons and equipment and the need for upgrading. We believe that the growth rate of equipment expenditure will be significantly higher than the overall growth rate of national defense expenditure, and the proportion is estimated to further increase.
The investment value of the military industry is prominent and has entered the golden allocation period
China’s military expenditure has increased steadily and rapidly, the assembly of new equipment has accelerated, and the demand side of the industry is in the early stage of rapid growth; There are sufficient technical reserves in various fields, the industrial chain actively expands production, and the supply side will usher in an incremental period in the future. The supply and demand sides have jointly ensured the safety and certainty of the sector, and the long-term investment value is prominent.
With the continuous adjustment of the market since January, from the perspective of valuation, the price earnings ratio (TTM) of the military industry sector has reached 57, which is lower than the historical average 62 since 2010 and slightly higher than the low price earnings ratio (TTM) 54 in 2021. We believe that the current valuation of the sector is relatively low and has entered the gold allocation period.
We are optimistic about investment opportunities in aviation, aerospace, engines, new military materials, national defense informatization and other high boom tracks, and we suggest paying active attention to them.
(1) the air force has entered the 20th era, and the aviation industry chain has maintained a high boom. With the successive service of four generations of equipment such as j-20, yun-20 and zhi-20, the Chinese air force has officially entered the “20th era”. The mass production and delivery of “20 series” models will promote the prosperity of the aviation industry chain, so as to promote the continuous growth of the performance of relevant listed companies. Recommend Avic Xi’An Aircraft Industry Group Company Ltd(000768) , Avic Heavy Machinery Co.Ltd(600765) , etc.
(2) the demand for Aeroengines is large, and the research and development progress of new models is accelerated. The mass production of China’s new military aircraft has brought rapid growth in engine demand. At the same time, after years of accumulation, China’s aeroengine technology is currently in the stage of intensive research and development. It is expected that new engine models will be finalized and mass produced in the next five to ten years, bringing room for long-term and rapid development. It is suggested to pay attention to Aecc Aero-Engine Control Co.Ltd(000738) etc.
(3) during the large-scale period of flight weapon models, the demand for strategic reserves increased. During the 14th Five Year Plan period, the investment in the field of flight weapons has been greatly tilted. At present, the new models are in the iterative period. At present, the strategic situation is tense and the demand for strategic reserves has increased. The demand of the sector is expected to burst, and the performance of relevant listed companies can be expected. Hubei Feilihua Quartz Glass Co.Ltd(300395) , Beijing Yuanliu Hongyuan Electronic Technology Co.Ltd(603267) etc. are recommended.
(4) the mass production of new weapons and equipment is climbing, and we are optimistic about the subdivided industry leader of new military and civil dual-use materials. On the one hand, the increase of equipment demand leads to the direct increase of upstream material demand; On the other hand, the application of new materials in new equipment has been greatly improved compared with the previous ones (such as composite materials), resulting in a higher growth rate of the demand for new materials than the overall demand for equipment. In addition, the application of new military materials will expand to civil use and face a broader civil market in the long run. Attention: investment opportunities in carbon fiber composites, quartz fiber, superalloy, 3D printing and other fields, recommended Western Superconducting Technologies Co.Ltd(688122) , Baoji Titanium Industry Co.Ltd(600456) , Xi’An Bright Laser Technologies Co.Ltd(688333) , etc.
(5) China’s national defense informatization process has accelerated, and there is broad space for national defense autonomy and control. National defense informatization is the focus of our military modernization at this stage. After the military reform, the process of national defense informatization has accelerated. China is optimistic about the production and upgrading of satellite, integrated circuit and other new weapons and equipment of various arms. It is suggested to pay attention to: China Zhenhua (Group) Science & Technology Co.Ltd(000733) , Chengdu Spaceon Electronics Co.Ltd(002935) , Tianjin 712 Communication & Broadcasting Co.Ltd(603712) , etc.
Risk tip: the risk that the industry demand is less than expected.
