Market in recent week
Defense industry (Shenwan) index (- 3.06%), industry (Shenwan) ranking (25 / 31); Shanghai Composite Index (- 1.63%), Shenzhen Component Index (- 1.35%), gem index (+ 0.73%); Top five increases: Cssc Science & Technology Co.Ltd(600072) (+ 21.02%), Beijing Relpow Technology Co.Ltd(300593) (+ 13.40%), Chengdu Xuguang Electronics Co.Ltd(600353) (+ 10.75%), Avic Heavy Machinery Co.Ltd(600765) (+ 10.47%), Changchun Up Optotech Co.Ltd(002338) (+ 8.86%); Top five declines: Jiangxi Huawu Brake Co.Ltd(300095) (- 15.37%), Beijing Tianyishangjia New Material Corp.Ltd(688033) (- 15.00%), Fushun Special Steel Co.Ltd(600399) (- 14.86%), Sun Create Electronics Co.Ltd(600990) (- 13.05%), Changsha Jingjia Microelectronics Co.Ltd(300474) (- 11.96%).
Important events and announcements
On January 11, Beijing Fjr Optoelectronic Technology Co.Ltd(688272) announced that the company signed the investment intention agreement with northern Guangwei and its shareholder Guangwei holdings. The company plans to increase capital to northern Guangwei in cash and transfer part of the equity of northern Guangwei held by Guangwei holdings. After the completion of the above transaction, the company holds 10% equity of northern Guangwei to strengthen the upstream and downstream integration of the industrial chain, Enhance the control and traction on upstream suppliers and expand the company’s influence in the industry, so as to improve the comprehensive competitiveness of enterprises.
On January 12, the 2022 work conference of AVIC was held in Beijing. On the basis of summarizing the work in 2021, the key tasks in 2022 were deployed by grasping the overall situation, unifying ideas, strengthening measures and overall mobilization.
On January 12, China Cssc Holdings Limited(600150) group disclosed that in 2021, China Cssc Holdings Limited(600150) group undertook 130.15 billion yuan / 25.984 million dwt, completed and delivered 206 ships / 17.081 million dwt, and held orders of 41.953 million dwt, which not only exceeded the annual target, but also accounted for 21.5%, 20.2% and 20.5% (in DWT) of the global market share, ranking first among shipbuilding enterprises in the world. Among them, the contract amount of business undertaking has doubled compared with the annual plan, setting the latest record since 2008.
On January 12, China Cssc Holdings Limited(600150) announced that the company plans to solve the problem of horizontal competition in diesel power business by jointly increasing the capital of China Shipbuilding Industry Group Power Co.Ltd(600482) new company with China shipbuilding industry group and China Shipbuilding Industry Group Power Co.Ltd(600482) and paying cash to China shipbuilding industry group to purchase assets.
On January 12, Beijing Tianyishangjia New Material Corp.Ltd(688033) announced that the company plans to raise a total of no more than 2.369 billion yuan by issuing shares to specific objects. After deducting the issuance expenses, it will be used for the industrialization construction project of high-performance carbon ceramic actuator, the construction project of automatic intelligent weaving production line of carbon material products and the supplementary working capital project.
On January 13, Chengdu Xuguang Electronics Co.Ltd(600353) announced that the company planned to acquire 8% equity of xuci company held by Guangzhou zhishuo trading partnership (limited partnership) for 5.6132 million yuan, and increase capital to xuci company for 10.5247 million yuan. After the completion of this transaction, the registered capital of the target company was 34.5 million yuan, and the company held 50.43% equity of the target company in total. After the acquisition, xuci company became the holding subsidiary of the company. On January 13, Cssc Science & Technology Co.Ltd(600072) announced that the company planned to purchase 100% shares of China haizhuang, 10% minority equity of lingjiu electric, 44.64% minority equity of Luoyang Shuangrui, 88.58% equity of CSSC wind power and 100% equity of Xinjiang Haiwei held by the counterparty by issuing shares. After the completion of this transaction, the company will directly hold 100% shares of China haizhuang and 100% shares of Xinjiang Haiwei, and will jointly hold 100% shares of lingjiu electric, 100% shares of Luoyang Shuangrui and 100% shares of CSSC wind power through direct and indirect means.
On January 13, Westone Information Industry Inc(002268) announced that the company signed the entrusted service contract for personal information security compliance service project with Zhejiang Century Huatong Group Co.Ltd(002602) sun Shengqu company. The company will provide personal information security compliance services for Shengqu company to ensure that Shengqu company can establish and maintain a personal information security compliance system. The service period is three years, and the total contract amount is 120 million yuan (including tax).
On January 14, Costar Group Co.Ltd(002189) announced that the company and ordnance equipment group, Ordnance Research Institute, Automation Research Institute, Wujiu Institute, Chang’an Wangjiang, Hunan Yunjian and other units planned to jointly invest 2.6 billion yuan to establish Hangzhou Zhiyuan Research Institute Co., Ltd. Among them, the Ordnance Equipment Group invested RMB 2 million in cash, accounting for 70% of the equity. The company, Ordnance Research Institute, Automation Research Institute, Wujiu Institute, Chang’an Wangjiang and Hunan Yunjian invested RMB 100 million in cash, accounting for 3.84% of the equity respectively. It will help the company to strengthen technical research and industrial chain cooperation related to intelligent systems, develop new market fields, and expand other markets based on the market in Hangzhou.
On January 15, Aecc Aviation Power Co Ltd(600893) announced that during the period from December 22, 2021 to January 13, 2022, aviation industry group reduced 24379358 shares of the company through centralized bidding transactions, accounting for 0.92% of the total shares of the company.
Investment advice
I. core view
Since the beginning of the year, the military industry has fallen by 10.30% and the industry has fallen the first, as if at the beginning of 2021 (the military industry fell by 10.20% in January last year). The market sentiment has taken a sharp turn and become fragile. On November 21 last year, we raised several hidden worries in the weekly report “poor consensus and expectation”, including: (1) under the background of the development of the industry of trading volume for price, for companies with single products and customers, the profit margin may decline significantly in the short term (we think it is more likely that the performance will be concentrated in 2022); (2) In September 2021, the “scissors gap” between China’s PPI (+ 10.7%) and CPI (+ 0.7%) further expanded. For the military industry, it is more difficult to transmit the price rise pressure to the downstream in the short term, and the impact on companies in the midstream may be gradually reflected; (3) The short-term increase is large, and there is a demand for cash in profit-making funds; (4) The degree of consensus is high, and it is difficult to find poor expectations.
Obviously, the above several relatively unfavorable factors are known rather than unknown uncertainties. At that time, the market as a whole ignored bad news and had high enthusiasm. However, with the current market style switching from growth to value and rapid adjustment in the short term, the market paid more attention to and carefully considered all possible signs of bad, and was suspected of excessive concern. Therefore, the market was alarmed for a moment. And began to worry about the fulfillment of the annual report performance in 2021 and the subsequent sustainable growth of the first quarter report in 2022.
Our view is that there are no substantive “bad” factors at present. During the recent correction period, in fact, more “positive” are already in preparation (see the following for details):
① central military enterprises have successively held 2022 work meetings to highlight the continuation of the high outlook of the military industry;
② the “scissors gap” between CPI and PPI has narrowed, and the pressure of price rise in the middle reaches of military industry has eased;
③ issue the mobilization order of the whole army for training for five consecutive years;
④ geopolitical events occur intensively, which may stimulate market sentiment at any time;
⑤ the reform of state-owned enterprises has entered a crucial year;
⑥ the annual report performance forecast is gradually disclosed to further enhance the confidence of the military industry;
⑦ the reduction pressure has been basically released;
According to calculations, the average PE of core military companies is currently about 30 times that of 2023, corresponding to about 20 times that of 2025, and there is no bubble in the overall valuation of the industry.
Once again, we reiterate our medium and long-term view. We tend to believe that the military industry is more likely to be a benign “advance, two retreat and one” with a bottom down.
At the current time point, our judgment is that the current large-level adjustment is unrealistic. The valuation of the military industry has become cheap and has entered the configuration range with cost performance again. In the face of irrational adjustment, it is more necessary to be rational and calm at the current stage. The space for further deep adjustment is limited. Although it still takes time for confidence recovery and style transformation, the bottom is approaching and has entered the stage of time for space. It is not appropriate to be overly pessimistic and blindly kill.
For “bad”, we have made the following analysis in the last weekly report “let’s see what else is bad”:
For the so-called “bad” factors, we should face up to and analyze whether they are previously unknown bad and whether they are really bad. If they are irrational decline and oversold caused by the cognitive deviation of short-term “bad”, isn’t it another good opportunity for allocation? The fundamentals are both spear and shield. Only when we firmly grasp the spear and hold the shield can we have a bottom in our heart when falling, dare to choose the opportunity to attack, and adhere to independent thinking, judgment and persistence based on value, so as to obtain excess returns more easily. So, bad geometry, look at them one by one.
① style switching under the background of steady growth
New energy and military industry led the decline, while real estate and home appliances led the rise. Under the background of steady growth, there has been a trend of style switching recently. At the same time, the logic of comparative advantage of deterministic growth in the military industry has indeed weakened in the short term, which needs to be recognized. However, China is facing great downward pressure on the economy. Military industry is one of the few high boom tracks. It is called comparative advantage, so it is dynamic. The short-term weakening at a certain stage is inevitable, but sustained growth is certain. In the long run, the comparative advantage is still significant. Such hard strength is the real foundation.
② US liquidity tightening
Overseas liquidity is tightening, while China’s liquidity is easing. We believe that the impact of overseas liquidity tightening on A-Shares is short-term. Under the support of China’s loose liquidity, the overall market risk appetite is still conducive to the military industry.
③ factors affecting military price and profit margin
The profit margin decreased slightly and slowly due to the exchange of volume for price, but the profit still maintained rapid growth. This factor can be considered as pricein. In addition to the price factor, the military equipment procurement process, the use of socialized production capacity by main engine plants, and reducing the threshold for people to join the army all aim to improve the overall efficiency and capability of the military industry. Therefore, it is one-sided or even wrong to understand a certain policy or factor only as the restriction on the military industry and the reduction of profit level. All factors are to meet the unprecedented strong demand for military products, and the high-quality development of the industry will inevitably require a large number of high-quality supply subjects to give them a healthy and good growth environment and incentive space as much as possible, so as to ensure the stability, robustness and efficiency of the military industry supply chain.
More “good” are in the process of breeding:
1. The work meetings of central military enterprises have been held one after another, highlighting the continuation of the high outlook of the military industry
As the core participants in each segment of China’s military industry, the performance growth of the top ten military central enterprises has guiding significance for the overall prosperity of the military industry. From the performance in 2021 and the business performance and reform objectives in 2022 disclosed by AVIC, the overall performance of the military industry is expected to continue the growth trend in the first year of the 14th five year plan in 2022, and the continuous deepening of reform is expected to improve the profitability of listed companies. On January 12, 2022, AVIC’s 2022 work conference was held in Beijing. On the basis of summarizing the work in 2021, it grasped the overall situation, unified thinking, strengthened measures and overall mobilization, and deployed the key tasks in 2022. It includes the following points:
In terms of operating performance:
① in 2021, AVIC exceeded the set targets. In 2021, AVIC achieved an annual net profit of 16.83 billion yuan (+ 8%), a total profit of 21.99 billion yuan (+ 6%) and EVA 103.3% 500 million yuan (+ 23.7%), all exceeding the set goals. Achieve “2323” balanced delivery.
② the performance target of AVIC in 2022 continues the year-on-year growth rate in 2021. In 2022, AVIC aims to achieve a net profit of 18.2 billion yuan (+ 8.14%), EVA 10.8 billion yuan (+ 4.35%), and the total profit matches the growth rate of net profit.
Reform:
① in 2021, the reform will achieve phased results
In 2021, the total labor productivity of AVIC will be 340000 yuan (+ 12.6%), completing 90.4% of the overall task of reform, exceeding the stage objectives, and completing key reform tasks such as “double hundred enterprises” and “demonstration enterprises of scientific reform”.
② continue to deepen reform in 2022
In 2022, the reform objectives of AVIC include fully completing the three-year action task of state-owned enterprise reform, and the growth of total labor productivity shall not be less than 8%.
2. The “scissors gap” between CPI and PPI has narrowed, and the pressure of price rise in the middle reaches of military industry has eased
In December 2021, China’s PPI (YoY + 10.3%, mom -2.6pcts) and CPI (YoY + 1.5%, mom -0.8pcts) narrowed after reaching a new high in October. Under the background of high base in 2021, we expect the narrowing trend of scissors difference to remain unchanged in the future. For the military industry, due to the time difference in price transmission, the upstream cost pressure is gradually transmitted to the midstream (for example, if Gaona Aero Material Co.Ltd(300034) discloses that the price of electricity increases and the price of upstream raw materials increases, the company can increase the price of its own products accordingly). However, under the narrowing trend of “scissors gap”, the price pressure borne by companies in the midstream will be gradually relieved. At the same time, The above factors will also weaken the repression on the valuation of the military industry.
3. The military training mobilization order has been issued for five consecutive years, resulting in rapid growth of military demand and strong certainty
Since 2018, Xi Jinping chairman has issued training mobilization orders to the whole army for five consecutive years, which fully reflects the importance he attaches to military construction, especially practical training. In the opening instruction issued in the first week of 2022, words such as “focusing on the change of science and technology”, “war training coupling” and “scientific and technological training” appeared for the first time, which fully reflected that the actual combat level is expected to be further improved, and the military’s demand for the “quality” and “quantity” of China’s weapons and equipment will maintain a rapid growth.
4. Geopolitical events occur intensively, which may stimulate market sentiment at any time
The world is in a great change that has not been seen in a century, and geopolitical tensions. Recently, the border situation in Ukraine has been tense. Biden promised that the United States will make a “decisive response” when the border situation between Russia and Ukraine deteriorates. At the same time, Russia has sent peacekeeping forces to Kazakhstan, which is in a state of emergency, and many countries have accelerated the research and development or assembly of high-end weapons and equipment to deal with the changes in the international situation. The hypersonic missile tested by North Korea accurately hit the target 700 kilometers away; While developing electromagnetic guns to intercept hypersonic weapons, Japan signed a defense and security cooperation agreement with Australia. India launched its third “enemy Destroyer” nuclear submarine and introduced maritime reconnaissance and anti submarine combat aircraft.
5. Reform has become an important logic of military industry, but it is suggested to pay attention to some risks
Reform (asset securitization, asset injection, Institute restructuring, mixed ownership reform, employee stock ownership, equity incentive and other action measures, which can improve or expected to improve the asset quality and profitability of listed military companies), was once one of the important logics of the military industry and an important factor supporting the high valuation of the military industry in the past. For a long time, the capital market has been full of expectations for the asset restructuring of the military industry, and asset injection has also become an important logic for several market starts in history. However, in recent years, because the reform process is difficult to achieve overnight and it is difficult to realize the expectation of rapid cash in the capital market, the logic of reform seems to have been accepted by the market
