2018 Military Industry Stock Investment Logic (1) Performance With the gradual implementation of military reform, deferred orders in the first two years are expected to recover; the batch installation of new sea and air equipment is expected to bring an increase in orders; based on past experience, the five-year plan for equipment construction has been loosened

In the next three years of the 13th Five-Year Plan, equipment construction is expected to accelerate.

In addition, the growth rate of military expenditure in 2017 was the lowest in the past 10 years. It is expected that the growth rate will pick up in 2018, the scale of military expenditure will continue to grow, and the expenditure on weapons and equipment will further increase.

(2) Valuation: The military industry sector ranks among the top of the industry decline list in 2017. Currently, public fund holdings and industry average PE are at historically low levels, and long-term investment value has begun to emerge.

In addition, judging from the recent quarterly reports of 2017 disclosed by public funds, the military industry sector (103 constituent stocks) accounted for 3.07% of the market value of all funds' heavy holdings, a record low in the past three years, and accounted for 1.99% of the market value of active funds' heavy holdings.

%, underweight 0.32%.

(3) The implementation of supporting policies related to the reform of scientific research institutes, military product pricing mechanisms, mixed ownership reform of state-owned enterprises, and military-civilian integration is accelerating.

Allocation strategy: Make a low-level layout for the three turning points of the reform of state-owned assets of military industry state-owned enterprises, the new cycle of military product orders, and military-civilian integration: (1) Military industry reform: 41 restructuring pilots are on schedule, state reform continues to advance, and the military industry will enter the securitization window for military profit-making assets next year

During this period, sector valuations began to move downward.

Popular stocks: Inner Mongolia First Machinery, Aerospace Electronics, China Dynamics, China Shipbuilding (2) New equipment and new orders: Pricing reform is in progress, fundamentals are expected to reach a profit turning point, new equipment fabric production is well prepared, and the new equipment cycle has begun.

Popular stocks: China Direct Holdings, AVIC Black Panther, AVIC Aircraft.

(3) Military-civilian integration: The gap in the interests of military industrial groups has been opened, and bidding is favorable. Next year, the next stage of the military product development chain will enter the fulfillment period, where the false will be eliminated and the true will be retained.

Popular stocks: Hangxin Technology and Golden Shield.