Market in recent week
Defense industry (Shenwan) index (- 5.22%), industry (Shenwan) ranking (23 / 31); Shanghai Composite Index (- 4.00%), Shenzhen Component Index (- 4.40%) and gem index (- 3.03%);
Top five increases: Shanghai Fudan Microelectronics Group Co.Ltd(688385) (+ 8.07%), Anhui Wantong Technology Co.Ltd(002331) (+ 5.81%), Jiangsu Shentong Valve Co.Ltd(002438) (+ 4.57%), Suzhou Sushi Testing Group Co.Ltd(300416) (+ 4.26%), Sinofibers Technology Co.Ltd(300777) (+ 3.64%);
Top five declines: Zhejiang Rifa Precision Machinery Co.Ltd(002520) (- 19.90%), Kede Numerical Control Co.Ltd(688305) (- 17.24%), Yunnan Xiyi Industrial Co.Ltd(002265) (- 15.99%), Wuhan Guide Infrared Co.Ltd(002414) (- 15.75%) and Fujitec (- 14.73%).
Important events and announcements
On March 6, the four-day Saudi world defense exhibition opened in the capital Riyadh. China’s State Administration of Defense Science, technology and industry organized 8 companies to make a wonderful appearance with the “China military industry” exhibition group. There are many kinds of high-end equipment on display, such as Yilong 2, rainbow 5, wj-700 and other UAVs, y9e transport aircraft, ly-80 air defense system, 155mm self-propelled gun, SR5 multi barrel rocket system, jy-27a air defense radar, electronic warfare defense system, multi-purpose unmanned boat, anti UAV system and so on.
On March 8, Tianjin Jieqiang Power Equipment Co.Ltd(300875) announced that recently, the company received the letter of acceptance of the project, which promoted the company’s subsequent market share. The successful project is expected to have a positive impact on the company’s future business performance and market development after the formal contract is signed and successfully implemented.
On March 9, Avic Xi’An Aircraft Industry Group Company Ltd(000768) announced that in the resolution of the 20th meeting of the 8th board of directors of the company, in order to meet the capital needs of the company’s operation and development, the company was approved to apply for the use of a comprehensive bank credit line of 24 billion yuan, including a loan line of 20 billion yuan, a bank acceptance bill line of 2.8 billion yuan, a commercial acceptance bill discount line of 300 million yuan The L / C amount is 360 million yuan, the letter of guarantee amount is 40 million yuan, and the supply chain financing amount is 500 million yuan.
On March 9, Beijing Relpow Technology Co.Ltd(300593) announced that it had recently signed a strategic cooperation framework agreement with the Changping District government to reach a cooperation intention on the company’s investment and construction of the project of “expansion of special power supply, industrialization of high reliability SIP power microsystem products and construction of R & D center” in Nanshao Town, Changping District. This investment is conducive to meet the company’s business expansion and capacity layout expansion, and enhance the company’s core competitiveness.
On March 11, Beijing Bdstar Navigation Co.Ltd(002151) announced the repurchase report, which proposed to use its own funds to repurchase the company’s shares for employee stock ownership plan or equity incentive. The share repurchase price shall not exceed 50 yuan / share, and the total repurchase funds shall not be less than 150 million yuan (inclusive) and not more than 200 million yuan (inclusive).
On March 11, Tianjin heavy industry, a wholly-owned subsidiary of Bestway Marine & Energy Technology Co.Ltd(300008) signed the construction contract of 1600 ton wind power installation platform with Wuhan shipbuilding Machinery Co., Ltd., with the contract price of 461 million yuan. According to the progress of the project, it is expected to have a positive impact on the company’s business performance from 2022 to 2023.
On March 11, Anhui Truchum Advanced Materials And Technology Co.Ltd(002171) announced that the company and its subsidiaries had recently received a total of 281333 million yuan of government subsidies related to income, accounting for 10.26% of the company’s latest audited net profit attributable to shareholders of listed companies. All subsidies will be included in 2022 to increase the company’s total profit in 2022.
On March 11, the Pakistani air force held the first batch of 6 J-10 CE loading ceremony in Kamla. Pakistani Prime Minister Imran Khan attended the ceremony. This indicates that China’s new generation of aviation main combat equipment has been officially installed in the Pakistani air force, realizing the systematic and organic export of China’s new generation of aviation main combat equipment, which is another important milestone in the export of China’s aviation high-tech equipment.
On March 11, the Indian Ministry of Defense issued a statement saying that India launched a missile at Pakistan due to “technical failure” and “accident” during routine maintenance on March 9.
Investment advice
For investment strategy in 2022, please pay attention to the Research Report on January 21, 2022: “investment strategy of military industry in 2022: the wind rolls the red flag too high”
I. core view
This week, we mainly want to elaborate on the following three aspects.
① military industry ≠ cycle. Although the rise in the price of raw materials has swallowed up the short-term profits of the military industry, it is inaccurate to equate the market general industry with the cycle industry. Especially under the current pessimism, it is difficult to find an anchor for valuation at a time, because under the logic of the cycle industry, a company made a profit of 800 million last year, It is not impossible to make a loss of 200 million this year. We will clarify and analyze this.
② the impact of the conflict between Russia and Ukraine on China’s military industry is far greater than the negative factors.
③ the performance is cashing in and the valuation is cheap.
1. Military industry ≠ cycle
The recent surge in crude oil, natural gas and “demon nickel” has aroused the market’s concern about hyperinflation. The military industry is difficult to survive. It also bears the upstream price rise, and the cost side pressure devours the industry’s profits, which has become an important reason for the recent decline of the military industry. On March 7, Fushun Special Steel Co.Ltd(600399) said that due to the recent short-term rapid rise of nickel and cobalt, orders were suspended. On March 8, superalloy related stocks fell sharply, Gaona Aero Material Co.Ltd(300034) (- 14.93%), Jiangsu Toland Alloy Co.Ltd(300855) (- 10.00%), Fushun Special Steel Co.Ltd(600399) (- 6.75%).
On February 24, the LME nickel index was 24275 and closed at 80000 on March 8. During this period, it once rose as high as 101365. The last rapid rise of nickel can be traced back to 2007. Due to factors such as the strike of nickel miners in 2006, the market was worried about nickel supply, which led to the sharp rise of nickel price and suppressed the gross profit margin of Fushun Special Steel Co.Ltd(600399) . In 2011, titanium ore exporting countries restricted the export of titanium ore one after another, which led to the rapid rise of sponge titanium price, resulting in the decline of Western Superconducting Technologies Co.Ltd(688122) gross profit margin in the short term.
However, the military industry cannot be equated with the cycle industry. Military products have price rigidity, but they also have profit rigidity. Price rigidity means that the price of military products is difficult to adjust flexibly in the short term, which also means that the pressure of price rise is difficult to be fully transmitted to the downstream in the short term, resulting in the possibility of fluctuations in the profit margin of the industry. Profit rigidity refers to that in the long term, the profit margin of the military industry is not closely related to the cost side. The most important thing of military products is to ensure delivery. The military and the state have the bottom line. The reduced profits caused by the increase of cost will be mostly compensated through the price adjustment and supplement of military products in the future. Once the short-term price rise is too fast and the cost pressure is too high, which will affect the production of military products, The temporary price adjustment mechanism will be started.
Titanium alloys for civil use and military use, and Superalloys for civil use and superalloys have different industrial properties. The price rise in the upper reaches can be conducted, which is actually the stability and advantage of the military industry. The supply shock of the military industry is temporary and short-term, so it should not be long-term and amplified.
The contraction of demand, the impact of supply and the weakening of expectation are the triple pressures facing China’s economy. For the military industry, demand cannot shrink, only expand, and expectations will not weaken, only increase. At present, what we are facing is only a supply shock, and it is a temporary supply shock. Part of the supply shock is manifested as cost side pressure, which can be mostly transmitted to the downstream. The other part of the supply shock is manifested as lack of supply, which forces the speed-up of independent control and domestic substitution of military products. If the weak chain is short of chain, the strong chain will supplement the chain. From this point of view, under the conflict between Russia and Ukraine, the trend of anti globalization has intensified, the epidemic situation has been repeated, the downward pressure on the economy has increased, and the Federal Reserve is expected to raise interest rates. The situation is complex, which makes the military industry more uncertain and has significant comparative advantages. Instead of being a cyclical stock, the military industry should show the characteristics of anti cyclical and defensive attributes.
2. The impact of the conflict between Russia and Ukraine on China’s military industry is far greater than the negative factors
① the conflict between Russia and Ukraine may stimulate a new round of global military spending, and it is expected that China’s production and delivery of weapons and equipment will accelerate
The world is in a great change that has not been seen in a century. Many countries have begun to respond to the uncertainty of the global situation by increasing military spending: in 2022, the growth rate of military spending in the United States reached 5.06%, a record high and the largest growth rate since 2018. Military spending in India, South Korea, Japan, Australia and other countries has also broken away from GDP growth data in 2021, reaching a record high.
With the recent outbreak of the Russian Ukrainian war, Germany’s national defense policy has ushered in historic changes. On February 27 local time, German Chancellor Olaf Scholtz said that Germany will spend 100 billion euros on military modernization this year. By 2024, Germany’s annual defense expenditure will account for at least 2% of GDP (about 1.5% in recent years). We expect that the impact of the conflict between Russia and Ukraine is extremely far-reaching and difficult to predict accurately. Only a strong military can ensure national security. In order to deal with great uncertainty, military spending around the world will increase rapidly.
On March 5, the government budget report at the National People’s Congress revealed that China’s military budget in 2022 was 145045 billion yuan, a year-on-year increase of 7.1%, an increase of 0.3 percentage points over last year, the first time that the military budget has exceeded 7% since 2019. In 2021, China’s defense expenditure was 1355758 billion yuan, 100% of the budget. In 2021, the difference between the growth rate of China’s military expenditure and public financial expenditure reached the highest value in 30 years. We expect that the difference (measurable national defense support) will remain at an all-time high in the future.
According to the IMF forecast and the GDP growth rate (and target) of China and the United States in 2022 disclosed in the government report, we calculate that China’s defense budget will account for about 1.20% of GDP in 2022, far less than 3.25% of the United States, which also reflects that China’s defense strength and economic strength still do not match, which is a realistic contradiction and more urgent. We believe that the 2022 military budget is of great significance. On the one hand, at present, it is only the early stage of the comprehensive expansion of the military industry, and the military budget directly reflects the rhythm of national defense construction. On the other hand, in the era of epidemic, there is great uncertainty in the global political, economic and military pattern, and the growth rate of military budget announced by many countries has increased significantly. The 7.10% increase in China’s military budget in 2022 has been regarded as a not low and reasonable growth rate in recent years, which reflects that under the general tone of stability and seeking progress in stability, accelerating the modernization of national defense and the army and realizing the unity of rich country and strong army will still be the main theme of China’s national defense construction. Since the two sessions last year, China has introduced regulations on military equipment test and appraisal, regulations on military equipment ordering and other work systems related to standardizing equipment ordering, highlighting that China’s military spending is working in the two directions of scale, quantity and use efficiency, so as to jointly support the rapid growth of scale and structural transformation and upgrading of China’s national defense construction and the development of military industry. The improvement of “quantity” and “efficiency” of military expenditure will promote the military industry to usher in substantial changes and historic development opportunities in the three dimensions of quantity, quality and structure, and promote the military industry to usher in a period of growth, value and continuous improvement of prosperity in the 14th five year plan. The expectation of high prosperity growth will continue to be consolidated A new era and a great era of fulfillment, verification and strengthening.
② the conflict between Russia and Ukraine has strengthened the security demands of various countries, opened the global military trade market, raised the ceiling of the military industry, and the military trade will become the “second curve” of the military industry
On March 11 local time, the Pakistani air force received the first batch of six j-10ces, marking that China’s new generation of aviation main combat equipment has been officially installed in the Pakistani air force, realizing the systematic and organic export of China’s new generation of aviation main combat equipment, which is another important milestone in the export of China’s aviation high-tech equipment.
With the increasingly mature technology of China’s military industry, the rapid improvement of production capacity and the continuous improvement of supply system, the production capacity of the military industry will meet and exceed China’s military demand at some time. We judge that the flexible military trade market will become a new driving force and acceleration source for the sustained and high growth of China’s military industry in the coming decades.
At the same time, we can also note that since this year, especially after the intensification of the conflict between Russia and Ukraine, overseas listed companies in military trade business have increased significantly, and Loma and Raytheon have recently reached a record high.
The above two aspects are the positive impact of the conflict between Russia and Ukraine on China’s military industry, while the negative impact focuses on the short-term cost pressure. As analyzed above, this is short-term and can be eliminated. Therefore, the impact of the conflict between Russia and Ukraine on China’s military industry should be that positive factors far outweigh negative factors.
3. The performance is cashing in and the valuation is cheap
Recently, listed companies have intensively released performance express or the operation from January to February. As of March 11, 2022, 118 listed companies in the military industry have disclosed the performance forecast of 2021, and the performance of 80 listed companies has increased in advance. In 2020, the median growth rate of net profit of these companies was 27%, the lower limit median growth rate of net profit in 2021 was 33%, the upper limit of growth rate was 38%, and the growth rate increased significantly. We expect that most listed companies in the military industry will further enhance the confidence of the military industry and strengthen the market’s understanding of the value attribute of the military industry.
On March 9, Avic Xi’An Aircraft Industry Group Company Ltd(000768) announced that in order to meet the capital needs of the company’s operation and development, it applied for the use of the bank’s comprehensive credit line of 24 billion yuan, compared with 9 billion yuan in the same period last year. From the substantial increase of credit line of Xi’an airlines, we can also see the progress and speed of relevant business development.
The valuation of the military industry has been at the bottom. As of March 11, 2022, the PE (TTM) of the national defense and military industry (Shenwan) index was 57.37 times, which was at the 9.93% quantile of the past eight years. The average PE of the core military industry companies currently corresponds to about 30 times in 2023 and about 20 times in 2025, which is cheap enough.
In addition, some military industrial enterprises are also part of the military industry, and some of the military industrial enterprises have big single landing, such as the Harbin Xinguang Optic-Electronics Technology Co.Ltd(688011) \ , Beijing Highlander Digital Technology Co.Ltd(300065) , Beijing Starneto Technology Co.Ltd(002829) , etc.
Once again, we reiterate our medium and long-term view. We tend to believe that the military industry is more likely to be a benign “advance, two retreat and one” with a bottom down. At the current time point, our judgment is that the valuation of the military industry has become cheap and has entered the configuration range with cost performance again. In the face of irrational adjustment, the current order
