Against the backdrop of continued improvement in industry fundamentals, the valuation of the A-share defense industry index fell to an eight-year low. Military industry revenue and profits have hit new highs, and military expenditure growth will return to 7% in 2022. Securities Times·Databao launched the "Bottom Seeder" series on the national defense and military industry, scanning the areas where defense equipment expenditures are focused on and looking for directions in the next two years.
Industry valuations fell to the lowest level in nearly eight years
According to Databao statistics, since 2022, the national defense and military industry index has been continuously correcting. After falling to a nearly 23-month low of 1140.83 points on April 26, market sentiment was boosted again and the industry index rebounded. From this year to April 26, the national defense and military industry index has fallen by 41.25% cumulatively, ranking second to last among the Shenwan first-level industries, only slightly higher than the 41.66% of the electronics industry.
Also falling with the index are industry valuations. On April 26, the overall rolling price-to-earnings ratio of the national defense industry was 41.44 times, and its valuation was at its lowest level since 2014. According to calculations by AVIC Securities, the median price-to-earnings ratio of core military companies corresponds to about 32 times in 2022 and about 15 times in 2025. The industry PEG (price-to-earnings ratio relative to earnings growth ratio) is close to 1, which is cheap enough.
The valuation of the national defense and military industry index has fallen, mainly due to the continued impact of rising energy prices, repeated epidemics and other factors. However, the fundamentals of the national defense and military industry industry have not changed significantly. Databao statistics show that in recent years, the revenue of the national defense and military industry has grown steadily, with the annual growth rate remaining above 6%. In 2021, industry revenue exceeded 500 billion yuan for the first time, with the annual growth rate reaching 12.77%, the highest in the past five years.
In terms of net profit, the national defense and military industry performed equally well. Except for 2019, the sector's net profit has shown an overall upward trend in the past five years. Especially in 2020, the end of the "Thirteenth Five-Year Plan", the sector's performance growth rate was as high as 79.62%, and the net profit was close to 25 billion yuan; in 2021, the sector's net profit continued to increase steadily by more than 10% to 27.715 billion yuan, compared with 13.915 billion yuan in 2019. Nearly doubled.
In comparison, the US arms giant Lockheed Martin achieved revenue of US$67.044 billion in fiscal year 2021, a year-on-year increase of 2.52%; net profit was US$6.315 billion, a year-on-year decrease of 7.58%. Northrop Grumman achieved revenue of US$35.667 billion, a year-on-year decrease of 3.08%; net profit was US$7.005 billion, a year-on-year increase of 119.66%.
Military expenditure growth returned to 7%
According to data from the Ministry of National Defense, the national fiscal budget for defense expenditure in 2022 is 1,476.081 billion yuan, an increase of 7.1% over the previous year’s budget execution, which is higher than The main expected target for China's economic and social development in 2022 is 5.5%. In 2021, my country's military expenditure accounted for only 1.18% of GDP. China's defense expenditure still has considerable room for growth, and may be higher than GDP growth for a long time in the future.
In recent years, the proportion of defense expenditures used for equipment expenses has increased year by year. From 2010 to 2017, my country's equipment expenditure increased from 177.359 billion yuan to 428.835 billion yuan, with an average annual compound growth rate of 13.44%. The proportion of equipment expenditure in military expenditure increased by 7.9 percentage points to 41.11%.
The Ministry of National Defense stated that it will promote the construction of our military’s weapons and equipment to a new level from a new starting point. AVIC Securities believes that the core logic of the demand-side development of the military industry during the "14th Five-Year Plan" is mainly focused on the rapid increase in the "quality" and "quantity" demand for third- and fourth-generation backbone equipment, especially offshore defense and long-range strike equipment. The aerospace field (as well as related upstream materials and military electronics fields) is expected to become a key area of ??military equipment investment in the military industry.
Limited disturbance from external factors
Since March, the geopolitical conflict between Russia and Ukraine has become the focus of global attention. The stock prices of U.S. arms giants took advantage of the news and surged to record highs. Since February 23, the stock prices of Northrop Grumman and Lockheed Martin have increased by 16.36% and 13.46% respectively; General Dynamics began to pull back in late April and still has an increase of 4.93%; Raytheon Technology’s stock price It continued to pull back after the high, and has now wiped out all gains.
After the A-share military index closed up 6.68% from February 23 to March 1, it entered a downward range with the market on March 2, and began to rebound slightly after April 26. Golden Eagle Fund believes that the geopolitical conflict between Russia and Ukraine has no obvious benefit to the fundamentals of the defense industry, but the war has suddenly increased the uncertainty of the global industrial chain and suppressed market sentiment.
The China Merchants Fund stated that as the peripheral geopolitical situation continues to be tense and escalates, the national defense and military industry has once again received increased attention, and the industry's prosperity is expected to continue to rise.
The profitability of military industry stocks is stable, and the net profits of 29 stocks continue to grow
According to Databao statistics, the average return on net assets of the national defense and military industry in 2021 will be 4.92%, and institutions predict that the average net profit of the industry in 2022 will be 4.92%. The return on assets will reach 6.46%, a year-on-year increase of 1.54 percentage points. At the same time, institutions unanimously predict that the industry’s net profit compound growth rate will reach 39.65% in the next two years.
The "14th Five-Year Plan and 2035 Long-Range Goals" proposed for the first time the centenary goal of achieving the founding of the army by 2027, and proposed "accelerating the modernization of weapons and equipment, accelerating the upgrading of weapons and equipment and the development of intelligent weapons and equipment." Our country’s weapons and equipment have entered a period of accelerated construction.
According to data treasure statistics, a total of 29 military industry stocks have achieved continuous growth in net profit for five consecutive years. Two stocks with a market capitalization of 100 billion are listed, namely Aircraft Power and AVIC Shenyang. In absolute terms, the net profits of 6 stocks in 2021 will exceed 1 billion yuan, with AVIC Optoelectronics and AVIC Shenyang Aircraft leading the list in net profit, reaching 1.991 billion yuan and 1.696 billion yuan respectively.
Starting from changes in net profits, the net profits of 7 stocks in 2021 increased by more than 50% year-on-year, and Zhenhua Technology and Triangle Defense doubled year-on-year. Extending the timeline, compared with the net profit in 2017, the profits of 22 stocks have doubled. AutoNavi Infrared is the leader, with a net profit increase of 18 times. Zhenhua Technology, Hongyuan Electronics, Gangyan Gaona, Parker New Materials, Guanxiang Technology has increased by more than 4 times.
In the first quarter, the domestic epidemic situation recurred and it was the off-season for military industry deliveries. However, the overall performance of the industry was excellent and the prosperity was improving. In the first quarter, the net profit of 25 stocks increased by more than 50%, and the net profit of 16 stocks doubled. Northern Navigation's net profit increased by as much as 26.34 times, mainly due to the recognition of investment income from the disposal of subsidiaries; Hitec and Guanglian Airlines increased by more than 10 times. Judging from the consensus forecasts of more than five institutions, the net profits of Zhongjian Technology and Zhongbing Hongjian are expected to double in 2022; Aerospace Rainbow, Jingjiawei and Triangle Defense are also expected to achieve more than 50% growth.
In terms of funds, from January to April this year, Beishang Capital added a total of 30 shares, and the increase in 20 shares exceeded 20%. The position of Inner Mongolia No. 1 aircraft increased by 314.95% compared with the end of last year; the positions of Shanghai Hanxun, Dawn Aviation, Aerospace Electric, Zhongzhi Co., Ltd., Tianhai Defense and Torch Electronics increased by more than 100%. Judging from the proportion of foreign capital holdings in circulating A-shares, Kuang-Chi Technology and Beimo High-tech account for more than 3.2%; AVIC Mechanical and Electrical, Guangwei Composite Materials, Zhongzhi Co., Ltd., and Hongda Electronics account for more than 2.8% of circulating shares.