Review of national defense industry in 2021: after a sharp correction at the beginning of the year, the national defense industry sector gradually opened a bull market, and each segment track performed well. Under the strong support of the 14th five year plan, military enterprises have full orders, large contract liabilities have been gradually implemented, the performance growth is highly predictable, and the investment value has been further highlighted.
Prospect of national defense industry in 2022: we believe that the military aircraft and aeroengine industry chain has a relatively high prosperity. Aviation equipment is the sector with the largest revenue scale, the fastest growth rate, the largest increase in contract liabilities and the most deterministic equipment volume among the secondary sectors of national defense and military industry. Facing the complex surrounding situation, China’s aviation equipment has ushered in a key period of multi model batch production, which is a concentrated release after decades of technology R & D accumulation and precipitation under strong demand. 1) Military aircraft industry chain: ① China has entered the threshold of strategic air force, the corresponding strategic air force equipment will be continuously improved, and there is a strong demand for large aircraft, advanced fighters, helicopters and other equipment; ② There is still a big gap between the Chinese air force and the United States in terms of quality and total quantity. In the future, we will pay equal attention to the quality improvement of the replacement of old and new equipment and the overall and large-scale total quantity improvement; ③ 20 series and other multi-type equipment have been finalized and entered the batch production stage. The large contract liabilities of military enterprises show that the orders are full and worry free. During the “14th five year plan” period, they will drive the enterprise’s revenue and profit to rise steadily. 2) Aeroengine industry chain: ① the batch production of military aircraft and the consumption of military training and preparation accelerate to boost the demand for Aeroengines; ② It is imperative to speed up the independent research and development of aeroengines and the independent and controllable domestic substitution of core equipment; ③ The expansion and production expansion of aeroengine main engine plant has been basically completed, and the delivery volume will be increased under the guidance of strong demand in the future.
The investment logic of national defense and military industry: 1) on the policy side, the “14th five year plan” focuses on “accelerating the modernization of national defense and the army, realizing the unity of rich country and strong army” and “ensuring the realization of the Centennial goal of building the army in 2027”, which provides super fundamental support for the national defense and military industry sector; 2) On the demand side, the national defense strength urgently needs to match the economic strength; 2) On the supply side, multi type main battle equipment has entered the stage of finalization and batch production, and the improvement of industrial chain efficiency and production capacity has a large-scale basis.
Investment proposal for national defense industry in 2022: it is suggested to focus on the two main lines of military aircraft and aeroengine. 1) Downstream main engine plants with high scarcity and high profit elasticity: large aircraft – Avic Xi’An Aircraft Industry Group Company Ltd(000768) , fighter – Avic Shenyang Aircraft Company Limited(600760) , helicopter – Avicopter Plc(600038) , aeroengine – Aecc Aviation Power Co Ltd(600893) ; 2) Steadily growing midstream electromechanical system and forging field: Avic Electromechanical Systems Co.Ltd(002013) , Avic Heavy Machinery Co.Ltd(600765) ; 3) Upstream superalloys with higher technical barriers: Gaona Aero Material Co.Ltd(300034) .
Risk warning: product R & D and delivery are not as expected; Production capacity improvement is less than expected; Policy changes.
