1. Market review this week
This week, the Shenwan national defense industry index fell 3.06%, the Shanghai Composite Index fell 1.63%, the gem index rose 0.73%, the Shanghai and Shenzhen 300 index fell 1.98%, and the national defense industry sector ranked 22nd among the 28 Shenwan level industries. As of Friday’s closing, the PE (TTM) of Shenwan (2021) national defense and military industry sector was 64.70 times, the aerospace equipment in each sub sector was 65.16 times, the aviation equipment was 69.04 times, the ground military equipment was 57.59 times, the navigation equipment was 142.24 times and the military electronics was 51.12 times.
2. The annual report performance forecast will be released intensively, and the high prosperity of the sector is expected to strengthen again
At present, the PE (TTM) quantile of Shenwan national defense military industry index in the past decade is 42.19%. In terms of molecular sectors, the PE (TTM) quantiles of marine equipment, ground military equipment, aviation equipment, aerospace equipment and military electronics are 76.17%, 31.05%, 32.03%, 33.40% and 30.47% respectively. The valuation of aviation and aerospace sectors with high prosperity is still in a historically low position, which deserves special attention. In the upstream of aviation, Western Superconducting Technologies Co.Ltd(688122) issued a fixed increase announcement, raising a total of 2.013 billion yuan, mainly for capacity expansion. In the middle reaches of aviation, Chengdu Ald Aviation Manufacturing Corporation(300696) released the performance forecast. The net profit attributable to the parent company in 2021 is expected to reach 250-260 million yuan, with a year-on-year increase of 83% – 90%, mainly benefiting from the rapid increase in the demand for aviation equipment. We believe that China’s advanced fighter technology has a high maturity. With the accelerated loading of domestic aviation equipment, the industry will be in the stage of continuous production of new capacity and accelerated release of performance in the next two to three years. The performance forecast of the annual report will be intensively released soon. It is expected that the performance of upstream components and raw material targets representing the prosperity of the industry will continue to maintain high growth, and the high prosperity of the sector is expected to be strengthened again. The main focus of this round of military investment is the significant improvement of the industry fundamentals. At present, the prosperity of the industry continues to improve, and the sector has increased its adjustment recently, It is suggested to focus on high-quality growth targets that are wrongly killed due to market sentiment.
3. During the 14th Five Year Plan period, the construction of new equipment is expected to accelerate and the prosperity of the industry is expected to continue to rise
China’s CCTV military official WeChat reported that in the morning of January 14th, the US Navy “Carle” Vincent appeared in the west of Spratly Islands, the western front of the forenoon of the South Sea. After the satellite seized many of the other ships, the US carrier 2022 was more than 10 days ahead of last year. In 2021, four aircraft carrier strike groups of the U.S. military entered and left the South China Sea 10 times in total, and the activity intensity almost doubled compared with that in 2020. We believe that strong military strength is an important guarantee for national security. At this stage, China’s national defense strength lags far behind that of the United States. The construction of new equipment is expected to accelerate during the 14th Five Year Plan period, and the prosperity of the military industry will continue to rise.
4. Key recommendations this week
1) recommend military electronic components with low valuation and high performance flexibility: China Zhenhua (Group) Science & Technology Co.Ltd(000733) , Zhuzhou Hongda Electronics Corp.Ltd(300726) , Beijing Yuanliu Hongyuan Electronic Technology Co.Ltd(603267) .
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) and Wuhan Guide Infrared Co.Ltd(002414) .
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) , Aerospace Ch Uav Co.Ltd(002389) , 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.
