1. What is the fundamental reason behind the strength of the military industry sector in 2021? Why has there been a callback this year? What changes have taken place in the investment logic of the military industry?
We believe that in 2021, the military industry has officially become an institutional preference growth sector (the allocation proportion of public fund positions exceeds the industry standard allocation proportion). For 2022, at the current stage of declining risk appetite, the logic of military investment has not changed much, but focuses more on the mining of medium and long-term fundamentals (batch production of new models, expansion of business fields and categories, localization, long-term improvement of governance) and the consideration of valuation rationality. In terms of investment logic, professional investors are expected to focus on the possible improvement of the growth center and the possible extension of the growth period on the basis of reasonable valuation. The target is expected to focus on industry leaders and private enterprises with technological advantages.
2. Since the market bottomed out and rebounded on April 27, the national defense industry has increased by more than 19% in all primary industries. What are the drivers of the recent rebound in the military industry sector?
(1) the first quarter report disclosed in April performed well.
(2) the valuation at the end of April is as low as 0% of the five-year valuation quantile, which is at the bottom of the historical valuation. After rebounding 19%, the valuation quantile of the military industry sector is still only 0.99%.
3. The companies in the military industry sector have successively completed the disclosure of the 2021 annual report and the 2022 first quarterly report. How about the first quarterly report as a whole and whether the prosperity of the industry meets the expectations?
The prosperity of the industry met expectations and exceeded expectations in some areas. In the first quarter of 2022, the total operating revenue was 82.795 billion yuan (+ 14.60%), and the net profit attributable to the parent company was 7.99 billion yuan (+ 23.94%). In the next quarter, the performance still achieved high economic growth under a high base, and the net interest rate also continued to benefit from the boost of scale and volume (from 8.92% in 2021q1 to 9.65%). Subsequently, with the elimination of the impact of raw materials, the optimization of governance and the batch production of new models, the profitability of the sector is expected to continue to increase.
4. Since this year, the conflict between Russia and Ukraine has continued to ferment. At present, there seems to be no sign of easing. How will it evolve in the future? Does this mean that the world has begun a new round of arms race? What impact does this have on China’s military industry?
On March 22, 2021, we published an in-depth report “summary of world defense development in 2020”, which deeply analyzed the new breakthroughs and development of national defense of various countries in 2020. The conclusions include “restart of global self-research on armaments in 2020” and “the future plans of national defense of major military countries in the world reached a new high”. A new round of global equipment cycle may have been started in 2020. This Russian Ukrainian war is an acceleration of this trend. For China, we believe that China will seize this catch-up opportunity, and the development of multi generation equipment may overlap. In the subsequent three development periods of 2025, 2027 and 2035, there may be two major tasks of catching up and surpassing. The rigid demand of such a national strategy is the guarantee of the high prosperity of the military industry. 5. From the perspective of growth and valuation, what is the general position of the valuation, future performance growth and its matching of the military industry sector this year?
From the perspective of growth and valuation, peg is still at a low level, that is, relative to the compound parent net profit in the next three years. At present, the valuation of the sector is low (in the case of neutral risk appetite and liquidity, the traditional definition of growth rate and valuation level is 1xpeg, but often due to the scarcity of enterprise value and the abundance of liquidity in the whole market, the industry or enterprise can obtain a higher peg level).
\u3000\u30006. Last year, it was proposed that 2022 will be the year of centralized release of production capacity. Who are the enterprises with the largest capacity growth?
The most obvious increase in capacity in 2022 is the aeroengine industry chain, Aecc Aviation Power Co Ltd(600893) in the second half of 2021, a total of 7 important projects under construction have been completed or put into operation. We expect 2022 to be the capacity release stage of relevant projects; Meanwhile, a total of 11 important projects under construction of the company are nearing completion and are expected to be completed and put into operation in 2022. The Aecc Aviation Power Co Ltd(600893) revenue of 2022q1 aircraft engine leader was + 44% year-on-year, and the delivery of aircraft engine downstream showed an accelerated upward trend.
7. What do you think of the next investment opportunities of military industry this year? Is it the logic of performance repair and high prosperity revalidation? What are the changes in investment opportunities in various fields of China’s military industry in the future? Which segment is more predictable?
We are optimistic about the follow-up investment opportunities in the military industry sector. Q1 shows that the confirmation of the high boom trend of downstream enterprises and the acceleration of midstream enterprises provide opportunities for military heavyweights, and the index level market is worth looking forward to. In addition, the next investment logic of this year mainly focuses on the mining of medium and long-term fundamentals (batch production of new models, expansion of business areas and categories, localization and long-term improvement of governance). We believe that logically, professional investors are expected to focus on the possible improvement of the growth center and the possible extension of the growth period on the basis of reasonable valuation. The target is expected to focus on industry leaders and private enterprises with technological advantages.
Focus on four highlights and investment directions:
(1) for the industry as a whole, rigid demand guarantees growth rate: under the characteristics of planned economy, the military industry has strong comparative advantages: strong demand rigidity is predictable, and it has the ability to guarantee supply under the epidemic situation (strategic production guarantee industry).
(2) the establishment of a longer growth period drives the double-click effect of performance and Valuation: the medium-term renewal of mature models (the expected establishment of a longer growth period), the intensive entry of new models into the pre batch production stage, and the enterprises in all links of the industrial chain have the possibility of performance exceeding expectations and the extension of the duration of medium and high-speed growth;
(3) reforming the deep water area and strengthening governance improvement: China’s state-owned assets reform or entering the deep water area is expected to carry out market-oriented mechanism reform in fields other than the general assembly of non strategic weapons (excluding state-owned enterprises of strategic resources).
(4) the horizontal and vertical expansion of the industry, and a large number of new business categories may appear: the large-scale cooperation of the industrial chain continues to deepen (the horizontal and vertical expansion of new businesses of middle and upper reaches enterprises) corresponds to the subdivided industries, which are concentrated in the fields of aviation aircraft manufacturing, engine manufacturing, active devices and information technology.
Risk tip: market volatility risk; Military order rhythm risk; The development and installation of new equipment did not meet expectations.
