Multiple positive factors have combined with an increase in market risk appetite. We are optimistic about the market situation of the military industry sector in August and September and focus on the "two main lines".

We are firmly optimistic about the sector opportunities in 2019 and adhere to the dual main lines of "reform + growth": 1) Growth logic: In July 2018, we proposed that "the fundamentals have reversed and the turning point has arrived" and judged that military procurement will be the year from 19 to 20

Peak period.

In 19Q1, the military industry's revenue YOY+18%, net profit attributable to parent companies YoY+67%, high advance receipts, and significant improvement in cash flow.

The interim report season is approaching, and early views are expected to be verified, and we are optimistic about the performance of aerospace, new materials, informatization, etc.

2) Reform logic: In early 2019, the shipbuilding industry reorganization incident kicked off the reform. On July 1, the two ships officially announced their strategic reorganization, and the market's attention to the military industry reform quickly increased.

We believe that as the military industry reform continues to advance, the capital operations of major military industry groups are expected to accelerate in the second half of 2019. The merger of North and South Shipbuilding, the restructuring of scientific research institutes, etc. will catalyze the sector market.

Viewpoint: Pay attention to the growth and counter-cyclical attributes of the military industry.

Since July, uncertainties in the external international situation have increased. We believe that the military industry sector has both hedging and counter-cyclical attributes, but the market does not fully understand this.

1) 2019 is the 70th anniversary of the founding of New China, and it is also a critical year to achieve the 2020 national defense construction goals.

On July 24, the white paper "China's National Defense in the New Era" was released, emphasizing confidence in strengthening the military and marking the entry of national defense into a new era.

2) Equipment procurement has been intensified, and the counter-cyclical trend of the military industry has been strengthened: After the military reform, we have judged that the fundamentals of the military industry will usher in a full recovery in 18-20 years.

According to the white paper, the growth rate of military spending in 2019 (+7.5%) and the degree of tilt toward equipment (equipment spending accounts for about 41%) exceeded expectations. Based on the military budget of about 1.19 trillion yuan in 2019, it is expected that 488 billion yuan will be invested in equipment.

purchase.

As the new generation of fighters, helicopters, and ships are accelerated, we believe that OEMs, core supporting equipment, informatization, new materials and other fields will benefit.

At the same time, against the background of slowing economic growth, the countercyclical nature of the military industry will be further strengthened.

In 2019Q2, the holdings of military industry funds decreased slightly. We expect that the improved interim results will boost confidence, and new materials/components will be the focus.

1) The interim report season is approaching, so pay attention to blue chip stocks: As of August 2, 64 military industry companies have disclosed performance forecasts, of which 13 were predicted to be added and 18 were slightly increased, with a good news rate of about 58%; based on the average of the upper and lower limits of net profit growth

According to calculations, there are 26 companies with performance growth rates ≥15%, and 11 companies with performance growth rates between 0-15%.

New material stocks such as Baoti Co., Ltd. (+224%), Gangyan Gaona (+83%), Guangwei Composite Materials (+40%), Dali Technology (+175%), Amap Infrared (+40%)

Other stocks in the infrared field performed well.

2) Recently, 19Q2 fund data has been released, and positions in new materials and informatization targets have been increased: the proportion of the 19Q2 fund's heavy position in the military industry is 0.88%, -0.33pct compared with 19Q1, and the industry ranking is 23/29; the overweight ratio of the sector is -0.62%, month-on-month

-0.18pct, close to the 13Q3 level.

In terms of individual stocks, there has been little change in the fund's heavyweight targets. Core white stocks such as AVIC Optoelectronics and China Direct Holdings are more favored by institutions; positions such as Steel Research Gaona and Higer Communications have been significantly increased, and hot spots have shifted to new materials, informatization and other booming areas.

.

Stock selection ideas and beneficiary targets: 1) Prosperity upside combination ("core supporting + final assembly" growth white horse with both offense and defense): AVIC Optoelectronics, Aerospace Electric, and China Direct Holdings.

2) State-owned enterprise reform portfolio (expected asset securitization, mixed-ownership reform, equity incentives, etc.): AVIC Electromechanical, Aerospace Electronics, Inner Mongolia First Machinery.

3) Scientific research value revaluation portfolio (military informatization, independent controllability, new materials): Zhenhua Technology, Torch Electronics, Sichuan Electronics, and Feilihua.

Risk warning: 1) The intensity of military industry reform is less than expected; 2) The orders of military industry enterprises fluctuate greatly.

(Source of the article: Guosheng Securities) Solemn statement: The purpose of publishing this information is to spread more information and has nothing to do with the position of this site.