Core view:
Event: the military industry sector fell sharply by 5.81% this week. Since the beginning of 2022, the national defense industry index has retreated by 16.08%, and the excess return is – 12.82% compared with the Shanghai and Shenzhen 300.
There are three main reasons for the callback of the military industry sector:
1) overall valuation correction of growth track. Since the beginning of the year, with the increase of the expectation of the Federal Reserve to shrink the table, global liquidity concerns have emerged, superimposed on the short-term demand of growth stocks for the release of valuation risk, and the relevant tracks have generally fallen. Due to the particularity of poor information transmission in the military industry sector, investors’ confidence was insufficient, and the decline was the largest in CITIC’s primary industry;
2) the cancellation of the military value-added tax reduction policy has increased the performance uncertainty of the sector. Recently, the news about the cancellation of the reduction and exemption policy of military value-added tax in the market continued to ferment. Although the implementation rules have not yet been implemented, the panic has worsened the weak market in the military industry sector;
3) the performance of some military central enterprises is lower than expected, and the funds may deliberately avoid the performance disclosure window. Recently, the performance forecast and express report of Listed Companies in the military industry sector in 2021 have been gradually released. The net profit of Avic Shenyang Aircraft Company Limited(600760) and Avic Electromechanical Systems Co.Ltd(002013) in 2021 increased by 14.56% and 17.18% respectively, which was lower than expected, causing the market to worry about the performance growth of the middle and lower reaches of the sector, which means obvious avoidance.
In view of the above problems, our views are as follows:
First of all, we believe that the growth track, especially the military sector, remains high-profile, and the substantial release of short-term valuation risks has brought a rare layout window for new funds;
Secondly, in view of the problem of military value-added tax, we believe that the existing military value-added tax reduction and exemption policies are not perfect, local policies are not unified, the identification of duty-free military products is cumbersome, the process is lengthy, and the unfairness of different enterprises in the same link of the industrial chain is prominent. Abolishing the value-added tax reduction policy fundamentally eliminates this unfairness. In addition, most of the upstream and a small number of midstream enterprises in the military industrial chain have rarely enjoyed value-added tax relief for many years, and even the cancellation has little impact on this field. In fact, the relevant detailed rules on how to withdraw the preferential policies have not yet been implemented, and the impact on middle and downstream enterprises needs to be observed. We believe that the probability of “procurement with tax” will become the reform direction of military procurement in the future. Therefore, the cancellation of value-added tax reduction policy has limited impact on the performance of the sector;
Thirdly, according to table 2, as of January 21, 22 listed companies in the military industry sector have disclosed their performance express or forecast for 21 years. Excluding 8 companies whose performance is greatly affected by civil products and with more impairment provision, the average growth rate of net profit attributable to parent company of the remaining 14 listed companies is about 63.7%, which basically verifies the high outlook of the military industry. Among them, China Zhenhua (Group) Science & Technology Co.Ltd(000733) Upstream companies such as Unigroup Guoxin Microelectronics Co.Ltd(002049) and Avic Heavy Machinery Co.Ltd(600765) performed well. The short-term performance of some central military enterprises such as Avic Shenyang Aircraft Company Limited(600760) and Avic Electromechanical Systems Co.Ltd(002013) is not as expected, which can not reflect the growth expectation of the whole military industry sector, let alone change the long-term good expectation of the sector.
Standing at the current time point, how to see the future performance of military industry?
In the short term, first of all, according to table 1, the performance trend of “advance, retreat and one” of the military industry index in the past two years is obvious. The adjustment range of this round of index has reached 16.4%. Last week, it showed the trend of accelerating to catch up with the bottom. We tend to think that the adjustment space of this index is no more than the increase of 20% in the previous round; Secondly, the current valuation quantile of the defense and military industry sector is 40.7%, and the valuation level has retreated to a safer position. In the medium term, as the second year of the 14th five year plan for equipment procurement, bidding is expected to be intensively implemented in 2022. With the continuous release of industrial capacity and downstream demand, the prosperity of the industry is expected to continue to rise. With the acceleration of state-owned enterprise reform in 2022, the valuation system of military central enterprises may be reshaped, and the valuation improvement is expected. In the long run, the “Centennial goal of building the army” is nearly late, and the “Centennial change” is bound to accelerate the modernization process of our army and usher in the golden age of industry development.
“The hairpin stays in the dowry while flying”, it is suggested to increase the position on bargain hunting. With the gradual stabilization of the military industry index, we give priority to companies with better future performance in the upstream of the industrial chain, including China Zhenhua (Group) Science & Technology Co.Ltd(000733) (000733. SZ), Avic Heavy Machinery Co.Ltd(600765) (600765. SH), Unigroup Guoxin Microelectronics Co.Ltd(002049) (002049. SZ), Guangdong Shenglu Telecommunication Tech.Co.Ltd(002446) (002446. SZ) and Nanjing Quanxin Cable Technology Co.Ltd(300447) (300447. SZ); Secondly, from the medium and long-term perspective, recommend the targets that may be “wrongly killed”, including Avicopter Plc(600038) (600038. SH), Beijing Beimo High-Tech Frictional Material Co.Ltd(002985) (002985. SZ), Tianjin 712 Communication & Broadcasting Co.Ltd(603712) (603712. SH); Finally, recommend the beneficial targets of state-owned enterprise reform, including China Marine Information Electronics Company Limited(600764) (600764. SH), Addsino Co.Ltd(000547) (000547. SZ).
Risk tip: the risk that the landing of military orders is less than expected, and the risk that the landing of value-added tax policies is less than expected.
