The US defense budget in 2023 will reach 813.3 billion US dollars, a record high. The Biden Administration recently submitted a defense budget application for fiscal year 2023 to Congress, with a total budget of $813.3 billion, a year-on-year increase of 5.9%, including $773 billion for the Ministry of defense, a year-on-year increase of $58 billion, an increase of 8%. In terms of services, the air force budget accounts for 30.3%, the Navy budget accounts for 29.9%, the army budget accounts for 22.9%, and the defense wide budget accounts for 16.9%. Among them, the air force and the navy have the highest year-on-year growth rates, with 6.1% and 4.8% respectively. At the same time, the US “2022 national defense strategy” report described China as “the most important strategic competitor and the biggest challenge facing the Ministry of defense, and will take urgent actions to maintain and strengthen deterrence”.
With the global arms expansion, the development of the military industry has entered a fast lane. Fierce shocks and drastic changes are taking place in the world. The growth of military spending in many countries in 2022 is higher than expected, and the military strategy is expanding. Among them, Germany will significantly increase its defense spending in 2022, including approving 100 billion euros of special funds, and increasing the proportion of defense spending in GDP to 2% from 2024; Japan abolished the requirement that its defense budget should not exceed 1% of China’s GDP and further relaxed the restrictions for future military capacity-building; Australia paves the way for its military expansion by promoting the “China Threat Theory”. In addition, many countries have made a radical shift in their national defense policies and clearly regarded China as a strategic competitor and a serious threat. As one of the major economies in the world, “a strong country must have a strong army”, and it is particularly important for China to have a military force matching its economic strength. We believe that in the short and medium term, China’s military spending growth is expected to maintain a growth rate of 6% – 8%, while the growth rate in key areas such as the air force, Navy, rocket force and informatization may reach 15% – 25%; In the long run, the smooth implementation of the medium and long-term goals of military construction in the future, especially the large-scale assembly of information and intelligent equipment, is inseparable from the strong support of national defense expenditure. Therefore, the rapid growth of national defense budget is highly deterministic. Under the background of the decline of GDP growth, the proportion of GDP of military expenditure may gradually rise.
Investment suggestion: the medium and long-term growth of the military industry is highly deterministic, and it is suggested to trade time for space. Under the background of Russia Ukraine conflict and fed interest rate hike, market risk appetite decreased sharply, risky assets retreated sharply, and valuation risk was further released. We believe that it coincides with the annual report and the first quarterly report window. We suggest paying attention to the performance and continuously identifying high growth stocks and stocks with performance exceeding expectations. Suggested “four dimensions” configuration: 1) aviation industry chain, including Avic Jonhon Optronic Technology Co.Ltd(002179) ( Avic Jonhon Optronic Technology Co.Ltd(002179) . SZ), Nanjing Quanxin Cable Technology Co.Ltd(300447) ( Nanjing Quanxin Cable Technology Co.Ltd(300447) . SZ), Baoji Titanium Industry Co.Ltd(600456) ( Baoji Titanium Industry Co.Ltd(600456) . SH), Guangdong Shenglu Telecommunication Tech.Co.Ltd(002446) ( Guangdong Shenglu Telecommunication Tech.Co.Ltd(002446) . SZ); 2) Missile industry chain, including Beijing Relpow Technology Co.Ltd(300593) ( Beijing Relpow Technology Co.Ltd(300593) . SZ), Chengdu M&S Electronics Technology Co.Ltd(688311) ( Chengdu M&S Electronics Technology Co.Ltd(688311) . SH), Chengdu Zhimingda Electronics Co.Ltd(688636) ( Chengdu Zhimingda Electronics Co.Ltd(688636) . SH); 3) The beneficial targets of localization promotion include Nancal Technology Co.Ltd(603859) ( Nancal Technology Co.Ltd(603859) . SH), Unigroup Guoxin Microelectronics Co.Ltd(002049) ( Unigroup Guoxin Microelectronics Co.Ltd(002049) . SZ) and China Zhenhua (Group) Science & Technology Co.Ltd(000733) ( China Zhenhua (Group) Science & Technology Co.Ltd(000733) . SZ); 4) The targets of performance growth improvement by SOE reform include Avic Xi’An Aircraft Industry Group Company Ltd(000768) ( Avic Xi’An Aircraft Industry Group Company Ltd(000768) . SZ), Tianjin 712 Communication & Broadcasting Co.Ltd(603712) ( Tianjin 712 Communication & Broadcasting Co.Ltd(603712) . SH), Avicopter Plc(600038) ( Avicopter Plc(600038) . SH) and China Marine Information Electronics Company Limited(600764) ( China Marine Information Electronics Company Limited(600764) . SH).
Risk warning: the risk that the 14th five year plan and military industry reform are not as expected.
