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Defense Industry Analysis Summary

Date: July 2023
Source: East Wind Securities Research Institute

Upstream and Downstream Expansion

• The defense industry experienced a significant price increase of 288% in the last five trading days, ranking fourth among 31 sectors. This growth was mainly driven by order expectations cleared after the end of inspections and ongoing reforms, with military aircraft产业链 as the focal point. Upstream materials (e.g., core material stocks like Fibertech, Western Materials) and downstream assembly stocks (e.g., AVIC Xi Fei, AVIC Shenhua) saw strong performance due to valuation repair and order influx.

Two-Phase Growth Outlook

• The industry is currently at a bottom configuration point and is expected to evolve in two phases: first, overall valuation repair due to oversold conditions; second, structural differentiation, prioritizing companies with earnings performance support. Upstream segments benefit from stable capital inflows, while downstream gains from large orders and new program tests. State-owned enterprise (SOE) reforms are likely to attract more funds and boost the sector.

Key Drivers and Watched Targets

• Primary drivers: Incremental orders, fund inflows, and thematic advantages in national security.
• Target stocks categorized into four themes:
  • AVIC-related stocks (e.g., AVIC Xi Fei, Jianghang Equipment) for reform gains.
  • New order/concept stocks (e.g., Northern Navigation, 712, Aerospace Electronics).
  • Upside-upstream stocks (e.g., Platinum Power, Huatian Technology).
  • Military export potential stocks (e.g., drone and missile platforms, related companies like China Shipbuilding).

Risks

• Key risks include delays in Chongqing M&A approvals, subpar performance, and unmet reform expectations.