Key investment points
1. Market review this week
This week, the Shenwan national defense industry index fell 2.28%, the Shanghai Composite Index rose 2.19%, the gem index rose 1.10%, the Shanghai and Shenzhen 300 index rose 2.43%, and the national defense industry sector ranked 30th among the 31 Shenwan level industries. The biggest increase was 1.43% on Wednesday (March 30) and 2.14% on Thursday (March 31). As of Friday's closing, the PE (TTM) of Shenwan national defense and military industry sector was 56.19 times, the aviation equipment in each sub sector was 60.67 times, the aerospace equipment was 57.06 times, the ground military equipment was 53.09 times, the military electronics was 43.45 times and the navigation equipment was 128.72 times. At present, the PE (TTM) quantile of Shenwan national defense military industry index in the past ten years is 18.95%, and the PE (TTM) quantiles of aviation equipment, aerospace equipment, ground military equipment, military electronics and navigation equipment are 19.73%, 18.16%, 26.37%, 8.01% and 71.48% respectively.
2. The US defense budget in fiscal year 2023 exceeded US $800 billion, and the attention of the military industry sector increased
On March 28 local time, the Biden government announced the budget proposal for fiscal year 2023, which plans to invest US $813.3 billion in defense and national security spending, with a year-on-year increase of 4.1%. In terms of strategic objectives, the US military will take consolidating and strengthening " The Pacific Securities Co.Ltd(601099) regional defense strength" as its primary task and apply for $6.1 billion for the "Indo Pacific deterrence initiative". In terms of R & D investment, the draft budget plans to invest US $130 billion in R & D, the largest so far, with a year-on-year increase of 9.5%. In terms of equipment procurement, the US military will accelerate equipment upgrading: (1) the air force plans to retire about 150 aircraft and purchase 61 F-35 fighters, 24 f-15ex fighters and 15 kc-46 air tankers; (2) The Navy plans to retire 24 ships and purchase 9 new ships; (3) In terms of the army, it focuses on the Asia Pacific direction, and 82% of the army's science and technology funds are used for its six modernization priorities; (4) In terms of nuclear weapons, the US military will invest $34.4 billion in the modernization of nuclear forces. We believe that the United States has significantly increased military spending and continued to shift its strategic focus to the Asia Pacific region. At present, China's geopolitical security situation is relatively severe. China's defense budget in 2022 is 1.45 trillion yuan, about 227898 billion US dollars (at the exchange rate of 6.36), which is only 28.02% of the US defense budget in fiscal year 2023. It does not adapt to the international status and security strategic needs. China's military spending has great room for long-term improvement. During the 14th Five Year Plan period, the construction of new equipment is expected to accelerate and the industry fundamentals are expected to continue to improve.
3. Avic Xi'An Aircraft Industry Group Company Ltd(000768) significantly increase the deposit limit, and the company may receive large advance payment in 2022
Avic Xi'An Aircraft Industry Group Company Ltd(000768) March 28 announced that the financial business lines of the company and its subsidiaries and aviation industry finance in 2022 will be significantly adjusted. Among them, the deposit limit will be increased from 14 billion yuan to 75 billion yuan, an increase of 435.71%, the loan limit will be increased from 8 billion yuan to 15 billion yuan, an increase of 87.50%, and the comprehensive credit line will be increased from 10 billion yuan to 17 billion yuan, an increase of 70.00%. We believe that the company is a leading enterprise in the field of medium and large aircraft for military and civil use. The substantial increase of deposit limit may indicate that large orders are about to be landed. The company may receive large advance payment in 2022, and the high prosperity of aviation sector will be verified again.
4. Many companies in the sector expect the related party transactions to increase, and the industry boom continues to rise
This week, several companies in the sector released performance forecasts for 2022, among which, North Industries Group Red Arrow Co.Ltd(000519) performance increased by 148.14% - 189.50% year-on-year, Guoguang Electric Co.Ltd.Chengdu(688776) performance increased by 50.85% - 63.58%, Wuxi Paike New Materials Technology Co.Ltd(605123) performance increased by about 60.77% year-on-year, and Avic Shenyang Aircraft Company Limited(600760) performance increased by about 47.50% year-on-year. This week is a week of sectors, and multiple companies on the sectors of the sectors of the week. As for connected purchases, in terms of the amount of associated purchases, the amount of procurement expected to be made to affiliates in 2022 is set at 60037 China Avionics Systems Co.Ltd(600372) \ \the; In terms of related sales, China Avionics Systems Co.Ltd(600372) , Jiangxi Hongdu Aviation Industry Co.Ltd(600316) , Aerospace Ch Uav Co.Ltd(002389) , Addsino Co.Ltd(000547) , Avic Jonhon Optronic Technology Co.Ltd(002179) , Avic Shenyang Aircraft Company Limited(600760) the sales to related parties in 2022 are expected to increase by 38.64%, 68.23%, 93.27%, 3.57%, 37.55% and 74.23% respectively compared with the actual amount in 2021. We believe that the high performance growth of several listed companies in the first quarter and the expected increase in the volume of related party transactions indicate that the prosperity of the industry continues to rise. The Shenwan national defense and military industry index has callback of 23.59% since the beginning of the year. At present, the valuation of the sector has fallen to the bottom area since May 2020, which now has a large margin of safety. It is recommended to over allocate military industry.
5. Key recommendations this week
1) focus on recommending upstream military electronic components and raw materials with sustained and high performance: China Zhenhua (Group) Science & Technology Co.Ltd(000733) , Unigroup Guoxin Microelectronics Co.Ltd(002049) , Western Superconducting Technologies Co.Ltd(688122) .
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) , Wuxi Paike New Materials Technology Co.Ltd(605123) .
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) .
Risk warning: the release and delivery of military orders are not as expected; Performance growth was less than expected.
