1. Market review this week
This week, the Shenwan defense industry index fell by 5.22%, the Shanghai Composite Index fell by 4.00%, the gem index fell by 3.03%, the Shanghai and Shenzhen 300 index fell by 4.22%, and the rise of the defense industry sector ranked 23rd among the 31 Shenwan level industries. The biggest increase was 2.22% on Thursday (March 10), and the biggest decrease was 3.96% on Tuesday (March 8). As of Friday's closing, the PE (TTM) of Shenwan national defense and military industry sector was 57.37 times, the aviation equipment in each sub sector was 60.97 times, the aerospace equipment was 57.30 times, the ground military equipment was 51.53 times, the military electronics was 45.65 times and the navigation equipment was 124.77 times. At present, the PE (TTM) quantile of Shenwan national defense military industry index in the past ten years is 23.05%, and the PE (TTM) quantiles of aviation equipment, aerospace equipment, ground military equipment, military electronics and navigation equipment are 19.92%, 18.36%, 23.83%, 12.30% and 67.38% respectively.
2. The third round of negotiations between Russia and Ukraine failed to achieve the expected results, and the geopolitical tension may continue in Europe. On the 7th local time, the third round of negotiations between Russia and Ukraine continued to discuss political and military contents, but failed to achieve the expected results. Only some positive results were achieved on the issue of humanitarian corridors, and the two sides agreed to continue the negotiations. At present, Russia has basically defeated Ukraine's organized defense, but the progress of the war is slower than expected. With the continuous fermentation of the conflict between Russia and Ukraine, the defense policies of European countries have been significantly adjusted recently: Germany has significantly increased its defense budget for the first time since the reunification of the two Germany; Sweden, Finland, Switzerland, Austria and other countries that have maintained neutrality in geopolitical relations for a long time have significantly changed their defense positions; The EU announced that it would increase its military assistance to Ukraine and double its aid funds. In the Asia Pacific region, the Australian government announced two major military expenditures this week: on Monday (7th), it announced that it would invest at least 10 billion Australian dollars to build a new nuclear submarine base on the east coast; It was announced on Thursday (10th) that a third of the army will be expanded in the next 18 years, which is Australia's largest military expansion in peacetime. We believe that the changes of the century and the epidemic situation of the century are intertwined and superimposed, the world turbulence and changes continue to intensify, strong military strength is an important guarantee for national security, and the logic of the head of the military industry has been verified again.
3. The J-10 CE was exported to Pakistan for the first time, and China's military trade market is expected to grow further. According to the aviation industry official micro report, on the 11th local time, the Pakistani air force held the first batch of 6 J-10 CES, 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, It is another important milestone in the export of China's aviation high-tech equipment. According to SIPRI research data, China's arms exports accounted for only 5.2% of the global market from 2016 to 2020, ranking fifth in the world, which is not consistent with China's current status as a military power. Compared with China's military products market, the military trade market has broad space, high profit margin and short development cycle. It is expected to become an important window for the dividend of high-end technology and talents of China's military products. As the global geopolitical situation continues to be tense, the scale of China's military trade market is expected to grow further, focusing on high-quality targets such as missiles and UAVs.
4. The 2021 annual report and the first quarterly report of 2021 are about to be released intensively, and the high prosperity of the sector is expected to be verified again. This week, many companies in the sector released the performance express of 2021, of which, Avic Heavy Machinery Co.Ltd(600765) performance increased by 159.05% year-on-year, China Zhenhua (Group) Science & Technology Co.Ltd(000733) performance increased by 146.60%, Zhuzhou Hongda Electronics Corp.Ltd(300726) performance increased by 69.07%, Tianjin 712 Communication & Broadcasting Co.Ltd(603712) performance increased by 31.58% year-on-year, and Avic Shenyang Aircraft Company Limited(600760) performance increased by 14.56% year-on-year. We believe that the upstream components and midstream manufacturing continue to grow at a high rate, the performance of some links continues to exceed expectations, and the high prosperity of the industry is being conducted in an orderly manner from top to bottom. The 2021 annual report and the first quarterly report of 2021 will be released intensively, and the long-term improvement of the industry fundamentals is expected to be verified again. Since the beginning of the year, Shenwan national defense military industry index has been corrected by 20.67%. At present, the historical quantile of PE (TTM) is 23.05%. The sector is now in a cost-effective area, and the super military industry is at the right time.
5. Key recommendations this week
1) focus on recommending military electronic components with sustained and high performance: China Zhenhua (Group) Science & Technology Co.Ltd(000733) , Zhuzhou Hongda Electronics Corp.Ltd(300726) , Beijing Yuanliu Hongyuan Electronic Technology Co.Ltd(603267) , Unigroup Guoxin Microelectronics Co.Ltd(002049) .
2) recommend midstream aviation manufacturing targets with scale effect gradually emerging and comprehensive supporting capacity expected to be greatly improved: Avic Heavy Machinery Co.Ltd(600765) , Chengdu Ald Aviation Manufacturing Corporation(300696) , Chengdu Haoneng Technology Co.Ltd(603809) , Anhui Yingliu Electromechanical Co.Ltd(603308) .
3) focus on recommending the overall and key systems of weapons and equipment with monopoly and scarcity and huge long-term growth space: Avic Shenyang Aircraft Company Limited(600760) , Aecc Aviation Power Co Ltd(600893) , Avicopter Plc(600038) , Aecc Aero-Engine Control Co.Ltd(000738) , Wuhan Guide Infrared Co.Ltd(002414) and Aerospace Ch Uav Co.Ltd(002389) .
4) it is suggested to pay attention to the beneficiary objects of the mixed reform of state-owned enterprises: Chengdu Spaceon Electronics Co.Ltd(002935) , Avic Xi'An Aircraft Industry Group Company Ltd(000768) , Avicopter Plc(600038) , Guizhou Space Appliance Co.Ltd(002025) and Sun Create Electronics Co.Ltd(600990) .
Risk warning: the release and delivery of military orders are not as expected; Performance growth is less than expected; The reform of state-owned enterprises did not advance as expected.
