Introduction: March 2021, The 14th five year plan for the national economic and social development of the people’s Republic of China and the outline of long-term objectives for the year 2005 issued by China clearly pointed out that “We should strengthen the modernization of national defense and the army, achieve the unity of a rich country and a strong army, comprehensively strengthen military training and preparation, improve the strategic ability to defend national sovereignty, security and development interests, and ensure that the Centennial goal of building the army will be achieved by 2027.” In July 2021, at the general meeting to celebrate the 100th anniversary of the founding of the Communist Party of China, Xi Jinping General Secretary stressed that “taking history as a mirror and creating the future, we must accelerate the modernization of national defense and the army”. In November 2021, the communique of the Sixth Plenary Session of the 19th CPC Central Committee once again proposed “accelerating the modernization of national defense and the army”. The 14th Five Year Plan period will be an important window period for achieving the Centennial goal of building the army, and the industry boom is highly uncertain.
Reply: in the opening year of the 14th five year plan, the high-profile bearing of the military industry was fulfilled. Profit statement: Taking 78 stocks we selected as samples, in q1-q3 of 2021, the industry realized a revenue of 281.222 billion yuan, a year-on-year increase of + 17.73%, ranking 24th among the 28 industries of shenwanyi; The net profit attributable to the parent company was 24.105 billion yuan, with a year-on-year increase of + 50.31%, ranking 11th, and the performance growth rate was bright. In terms of profitability, in q1-q3 in 2021, the gross profit margin was 21.17%, a year-on-year increase of + 1.95pct, a new high in q1-q3 in recent five years; The net interest rate was 8.86%, with a year-on-year increase of + 2.05pct. The substantial increase in profitability was mainly due to the scale effect and the obvious effect of improving quality and efficiency. Balance sheet: from Q1 to Q3 in 2021, advances received + contract liabilities amounted to 172.766 billion yuan, a year-on-year increase of + 129.56%, which means that the number of orders increased. From Q1 to Q3 in 2021, the industry inventory was 218.031 billion yuan, a year-on-year increase of + 38.72%. It is expected that more revenue can be recognized in the future. Cash flow statement: from Q1 to Q3 in 2021, the net cash flow from industrial operating activities was -2.035 billion yuan, which was significantly improved compared with the same period last year, mainly due to the large advance payment received by aviation enterprises from downstream customers.
Looking forward to the future: superstructure + upward demand boom + good supply drive the industry fundamentals to continue to improve. 1) Superstructure: the national military construction goal of “achieving the Centennial goal of building the army in 2027, basically realizing the modernization of national defense and the army in 2035, and building the people’s army into a world-class army by 2050” provides policy support for the development of the industry; 2) Demand side: in the medium and short term, under the background of Comprehensively Strengthening military training and preparation, and driven by the phased goal of realizing the “Centennial goal for army building” by 2027, China’s weapons and equipment are expected to accelerate the large-scale production and upgrade iteration speed; In the long run, China’s national defense strength does not match its economic strength. Although its military expenditure shows an upward trend year by year, there is still a large gap compared with the world’s military powers, there is a large room for rise, high demand and high uncertainty; 3) Supply side: it is expected that 2022 will enter the accelerated release stage of production capacity, provide a strong guarantee for the increase of order delivery, highlight the scale effect, effectively reduce the marginal cost and help improve the efficiency of enterprises. In addition, 2022 is the last year of state-owned enterprise reform, accelerate the mixed reform process and help release the performance of enterprises.
Investment strategy: focus on high-profile sub industries, focusing on aviation, aerospace, new materials and information sectors. 1) Aviation: benefiting from the gap between the total amount and generations, the country is currently in a critical period of military aircraft upgrading, and the demand for new fighters has increased greatly. It is expected that advanced fighters will continue to be produced in large quantities in the next few years. It is suggested to pay attention to Aecc Aviation Power Co Ltd(600893) , Avic Heavy Machinery Co.Ltd(600765) , Avic Shenyang Aircraft Company Limited(600760) , Avic Xi’An Aircraft Industry Group Company Ltd(000768) , Avicopter Plc(600038) , Beijing Beimo High-Tech Frictional Material Co.Ltd(002985) , Avic Electromechanical Systems Co.Ltd(002013) ; 2) Aerospace: precision guided weapons benefit from incremental weapon platform mounting + new product replacement and upgrading + increased consumption of live ammunition drills + Chinese products are famous in the international market. It is suggested to pay attention to: Beijing Relpow Technology Co.Ltd(300593) , Chengdu M&S Electronics Technology Co.Ltd(688311) , Chengdu Tianjian Technology Co.Ltd(002977) ; 3) New materials: benefiting from the large-scale increase in the aerospace field and the increase in the proportion of carrier consumption, superimposed with military civilian integration and localization substitution factors, the new materials sector is expected to maintain a high outlook. It is recommended to pay attention to Western Superconducting Technologies Co.Ltd(688122) , Baoji Titanium Industry Co.Ltd(600456) , Fushun Special Steel Co.Ltd(600399) , Gaona Aero Material Co.Ltd(300034) , Jiangsu Toland Alloy Co.Ltd(300855) , Sinofibers Technology Co.Ltd(300777) , Weihai Guangwei Composites Co.Ltd(300699) , Avic Aviation High-Technology Co.Ltd(600862) ; 4) Informatization: benefiting from the deepening trend of military informatization and the large-scale growth in many downstream fields, with the acceleration of military modernization and the acceleration of superposition and localization substitution, the informatization sector is expected to usher in a period of rapid development. It is recommended to pay attention to Avic Jonhon Optronic Technology Co.Ltd(002179) , Changsha Jingjia Microelectronics Co.Ltd(300474) , Raytron Technology Co.Ltd(688002) , Unigroup Guoxin Microelectronics Co.Ltd(002049) , Guizhou Space Appliance Co.Ltd(002025) , China Zhenhua (Group) Science & Technology Co.Ltd(000733) , Beijing Yuanliu Hongyuan Electronic Technology Co.Ltd(603267) , Fujian Torch Electron Technology Co.Ltd(603678) , Zhuzhou Hongda Electronics Corp.Ltd(300726) ; 5) Reform of state-owned enterprises: for those benefiting from asset injection expectation / equity incentive expectation / equity incentive, it is recommended to pay attention to Avic Xi’An Aircraft Industry Group Company Ltd(000768) , Sun Create Electronics Co.Ltd(600990) ; According to the division of military industry group, focus on the listed companies of Aerospace Department, electrical technology department and weapon department.
Risk statement
The construction and delivery of weapons and equipment do not meet expectations; The implementation of the policy is less than expected; The progress of state-owned enterprise reform was less than expected.
