Military industry investment includes three main growth lines:
Growth path 1: The domestic military industry mainly benefits from the increase in the demand for downstream military orders.
Growth path 2: overseas military trade, mainly benefiting from the increased demand for weapons and equipment from overseas customers amid the turbulent global situation.
Growth path 3: Military-civilian integration expands the application field of military products and opens up the market space for military technology.
1. Domestic military industry: Select a track combining "future combat equipment" and "expendable equipment"
1.1 Missiles: The first choice for combat readiness capability, the CAGR may reach more than 30% in the next 5 years
During the "14th Five-Year Plan" period in the future, missiles are military equipment with fast growth and high certainty. From the "12th Five-Year Plan" to the "14th Five-Year Plan", the prosperity of military equipment has improved in turn: ship equipment (the peak period of ship construction will enter the second half), aviation equipment (mainly the third and fourth generation aircraft) during peak delivery periods). We believe that missile equipment will grow faster in the future "14th Five-Year Plan". We estimate that the current missile market size is expected to reach about 100 billion yuan, and the compound growth rate in the next five years is expected to reach more than 30%.
From the perspective of industry comparison, we value the consumption attributes of missiles, which can enjoy a higher valuation premium compared to aircraft and ships. We believe that the military industry is a typical ToG industry, with a military population of only 2 million downstream, and the installation space for equipment such as tanks and ships is constantly being compressed. The missile weapons, on the one hand, account for a large proportion of the value of aircraft and ships; on the other hand, they are consumables, which are not limited by the number of military population, and the market space and growth rate are more impressive. We believe that it should enjoy a high valuation premium, which is a subdivision that is worth paying attention to in the military sector.
From the perspective of the industrial chain, we believe that we should look for targets with core competitiveness. Mainly divided into two categories:
1) Complete missiles: The core competitiveness is reflected in the scarcity of military assembly qualifications and high status in the industry chain. my country's complete missiles are mainly distributed in aerospace science and technology, science and industry groups, aviation industry groups, and local military state-owned enterprises such as Hongda Blasting, as well as high-tech enterprises. Germany Infrared and other very few people joined the military enterprises.
2) Missile core components or materials: Its core competitiveness is mainly reflected in technological competitiveness, etc. We believe that missile core accessories include: engines, seekers, materials, etc., and industry participants include military industry groups and civilian-joined military enterprises.
To sum up, from the perspective of the industry, we predict that the current market size of missile equipment may reach 100 billion yuan, and the compound growth rate in the next five years will reach more than 30%, which is very prominent in many industries. The proportion of missile business in the main business of each listed company varies, and specific analysis is required for specific companies.
We recommend focusing on:
1) The direction of the whole missile. The core logic is that the qualifications for final assembly are scarce and the status of the industry chain is high.
The grand blast, the layout of two types of military and trade missiles, the HD-1 supersonic cruise missile and the JK series of ultra-small guided missiles. HD and JK, two major military trade missiles, can be used as options. At present, the export projects of the two types of missiles have been approved, and the HD-1 has been finalized. In the future, the implementation of military trade orders will gradually enlarge the options, and the growth rate of options will increase in the later stage. quick. In addition, Hongda Blast is a military trade missile, and its gross profit margin may be higher.
Gaode Infrared is a civilian-joined military enterprise that develops the very rare missile weapons in my country. A complete scientific research system has been established from the bottom core chip, dozens of sub-system research laboratories to the overall research institute of missile weapon systems. According to the company's announcement, the company took the lead in successfully developing a certain type of complete weapon system, and has now officially undertaken the development task of this type of complete weapon system.
2) Missile core components and material direction. The core logic is that product technical barriers are high. We especially recommend missile chip or electronic related companies, mainly for supporting the guidance cabin. Radar guidance cabin accounts for about 40% of the missile value ratio. Military integrated circuits are mainly in the guidance cabin part. There are three growth logics for military chip or electronic companies: industry growth, domestic substitution, and informatization rate improvement, which is a strong alpha. Preferred. We mainly recommend: Zhenhua Technology, Ziguang Guowei, Yaguang Technology, Tianjian Technology. For materials, we recommend Feilihua, which is the leading supplier of quartz fibers and products for domestic aerospace in my country. Quartz fiber is the mainstream material for airborne and missile-borne radomes, providing good high strength and wave transmittance.
1.2 Aero-engines: The increase in the volume of military aircraft drives the demand, and the increase in the intensity of actual combat training increases the consumption
The aero-engine industry chain includes R&D and design, raw material preparation, parts manufacturing, sub-system manufacturing, complete machine assembly, complete machine testing and maintenance support; my country has basically established a complete aero-engine development and production system. The list of listed companies in my country's aviation engine industry chain is as follows.
The growth logic of the domestic military aero-engine industry chain: the increase in the volume of military aircraft will drive the supporting demand for aeroengines, and the increase in the intensity of actual combat training will increase the consumption of aeroengines. We believe that the aero-engine industry chain has ushered in an era of substantial volume growth, and we focus on recommending main engine manufacturers with scarce qualifications for core final assembly, as well as component manufacturers that have obtained batch models and have core technical barriers. Aero-engine main engine manufacturers, we mainly recommend, Aero Engine Power; raw material and component manufacturers, we mainly recommend, Yingliu Co., Ltd., Gangyan Gaona.
1.3 Unmanned equipment: profoundly changing the face of war, the first choice for future combat equipment
Unmanned combat is profoundly changing the face of warfare and is one of the first choices for future combat equipment. With the rapid development of the new military revolution, human warfare is changing to the form of information-based warfare, and unmanned warfare has become one of the important development trends. Various unmanned combat platforms have begun to emerge in local wars, showing huge development potential and bright application prospects. They are increasingly valued by countries and have a strong development momentum. Unmanned equipment has many successful cases in many modern wars. Various unmanned combat equipment began to emerge in local wars, such as unmanned aerial vehicles, underwater unmanned submersibles and surface unmanned boats, all of which assisted the US military in completing important tasks in the Iraq War. We believe that unmanned equipment will show greater development potential in future wars.
Military unmanned equipment has many advantages such as low casualty rate, low cost and flexible configuration. Unmanned equipment can ① have no casualties; ② design is mission-centric; ③ low cost; ④ high concealment and many other aspects. Unmanned equipment can be flexibly configured on the battlefield, and will play an important role in various fields such as land, sea, air, and sky. After many actual combat tests, unmanned equipment is no longer limited to traditional modes such as reconnaissance and surveillance, and plays an increasingly important role in military strikes, information confrontation, early warning and other fields. We believe that unmanned equipment has great potential in reconnaissance, firepower and support, the three most important key elements of warfare. In the future, in the non-contact warfare dominated by intelligent long-range attack weapons, unmanned equipment will become a subversive technical equipment that changes the rules of future warfare, and will also become an important force in the national military game.
As an emerging equipment type, the future growth logic of unmanned equipment is mainly reflected in two aspects:
1) In the military field, the application scenarios of unmanned equipment in war are constantly expanding, the consumption attribute is strong, and the demand space is large. As a "consumable" item, unmanned equipment has the attribute of "consumable". Since the destruction of unmanned equipment will not cause casualties, and the direct loss is much smaller than that of manned combat platforms; in addition, the performance of modern warfare missiles, radars and other offensive weapons and combat auxiliary equipment is becoming more and more advanced, greatly increasing the risk of equipment being destroyed. Take UAV as an example, as a "combat tool" is a typical consumable. In recent years, there have been continuous reports of UAV being shot down or damaged on the battlefield.
2) In the civilian field, unmanned equipment will play an irreplaceable role in surveying and mapping, inspection, exploration, meteorology, logistics, environmental monitoring, post-disaster rescue, underwater salvage and many other aspects in the future.
Unmanned equipment - unmanned aerial vehicle, especially recommended aerospace rainbow. Aerospace Rainbow is the core asset of my country's military drones, with the most complete product pedigree. It is the first unit in my country to achieve batch export of drones and the largest export volume. The type spectrum of the Rainbow series UAV is the most complete in the domestic UAV product spectrum. The mature products include the Rainbow-3 mid-altitude multi-purpose UAV system, the Rainbow-4 medium-altitude long-endurance UAV, and the Rainbow-5 mid-altitude and high-altitude UAV. Long-endurance drones, Rainbow-804D vertical take-off and landing fixed-wing drones, etc. The products have been exported to many countries and have successfully obtained a large number of international and domestic market orders. It is the first batch of drones in my country and the largest export volume. It has been competing with large companies in the United States, Israel, Europe and other countries on the international stage, and its cumulative sales in the past ten years have ranked among the top three in the global market. There are three growth paths for Aerospace Rainbow: domestic installation, military trade orders, and entry into the civilian market.
Unmanned equipment - underwater unmanned submersibles, China's coastal defense is mainly recommended. China's coastal defense is the main force in the construction of my country's underwater attack and defense system, the only supplier of communication sonar equipment for my country's navy, the core supplier of special equipment for underwater weapon systems, and the leading unit in my country's underwater detection and confrontation field. It will fully benefit from the Navy Large-scale construction of marine defense systems such as equipment, submarine monitoring networks, and underwater unmanned equipment.
1.4 Aviation equipment: During the "14th Five-Year Plan" period, military aircraft will be built in large quantities, and the industry chain can be cross-verified
It is expected that the development trend of the Air Force in the future "14th Five-Year Plan" will still be the cross-generational construction of main combat equipment. The Chinese Air Force is moving from the traditional sense of homeland air defense and support for land and sea operations to the strategic goal of "air and space integration, both offensive and defensive". This strategic change has become the main driving force for the accelerated development and deployment of new equipment. Under the goal of building a strategic air force in the new era, we will shift from “defense” to “offensive”, take informatization as the development direction and strategic focus, vigorously develop advanced fighter jets, strategic transport aircraft/bombers, and improve in-depth attack capabilities, long-range projection/strike capabilities and Three-dimensional offensive and defensive capabilities, make up for the intergenerational gap, realize intergenerational replacement, and improve the degree of informatization and automation. As a result, investment opportunities related to aviation equipment come from two aspects: "replenishing quantity" and "improving quality".
The growth of the military aircraft industry has been cross-validated in the industry chain. On the one hand, the revenue growth rate of military aircraft factories such as AVIC Shenyang Aircraft Co., Ltd. and Zhongzhi Co., Ltd. has increased significantly in the past two years; on the other hand, we can verify the military aircraft industry through the growth of aircraft parts and airframe materials carbon fiber industry upstream of the military aircraft industry chain. Aileda (military aircraft parts), Zhongjian Technology (military aircraft carbon fiber), and AVIC Composites (military aircraft carbon fiber prepreg) have maintained synchronous growth in revenue in recent years.
Taking the aviation carbon fiber industry as an example, the structure of my country's aviation carbon fiber industry chain is clear, and the cross-validation shows that the industry is highly prosperous. The upstream carbon fiber of my country's aviation carbon fiber industry chain is concentrated in private enterprises such as Guangwei Composites and Zhongjian Technology, and the downstream is concentrated in the subsidiaries of AVIC, such as Chengfei and Shenfei, as well as COMAC. Prepreg and other products. AVIC Composites and Aviation Industry Group signed a related party transaction agreement to supply prepreg to its entire machine plant. From 2015 to 2019, the customers of related party transactions were mainly companies under the aviation industry group such as Shenyang Aircraft Corporation. In 2019, the related party transaction amount was 1.712 billion yuan. The 2015-2019 CAGR was 14.98%. The corresponding company's revenue/net profit increased from 1.079/106 billion yuan in 2015 to 1.946/298 million yuan in 2019.
The largest customer of Zhongjian Technology and Guangwei Composite Materials is AVIC Hi-Tech, which can reflect the downstream aviation boom. The revenue of Zhongjian Technology/Guangwei Composite Materials from AVIC Hi-Tech increased from 0.41/292 million yuan in 2014 to 178/754 million yuan in 2019, mainly from carbon fiber and fabrics sold to AVIC Hi-Tech, which verified the downstream aviation demand Growth through midstream prepregs ultimately leads to upstream carbon fiber and fabric growth.
1.5 Military electronics: superimposing the triple growth logic of industry growth, domestic substitution and informatization rate improvement
Mechanized warfare based on matter and energy is gradually evolving into information warfare based on information, the decisive role of traditional weapons and equipment in warfare is gradually weakening, and electronic information equipment has completely changed modern warfare.
Driven by a new round of technological revolution and industrial transformation, the application of cutting-edge technologies such as artificial intelligence, quantum information, big data, cloud computing, and the Internet of Things in the military field is accelerating, and the international military competition pattern is undergoing historic changes. Military high-tech centered on information technology is changing with each passing day, and the trend of long-range precision, intelligence, stealth and unmanned weapons and equipment is more obvious. In this context, electronic information equipment represented by display control, radar, communication, navigation, etc. is playing an increasingly important role, and military electronics are also changing the fate and combat effectiveness of traditional weapon platforms to a great extent. This is mainly reflected in the following aspects:
Military electronics-related companies are strong alphas in the military industry. Military electronics mainly include military integrated circuits, military electronic components, etc. There are three growth logics: the "14th Five-Year Plan" weapon and equipment construction, the penetration rate of national defense informatization, and the independent and controllable acceleration of the domestic substitution process. Therefore, military electronics-related companies The growth rate is significantly higher than that of downstream OEMs. From the performance point of view, in 2019, the typical military electronic components listed company's military business revenue growth rate reached 18.95%, significantly higher than the typical military OEM growth rate of 8.14%; the growth rate difference between upstream components and downstream OEMs in 2020H1 bigger.
One of the growth logics of military electronics is the heavy construction of weapons and equipment. We will comprehensively advance the modernization of weapons and equipment, accelerate the development of mechanization, informatization, and intelligent integration, and comprehensively strengthen military training and preparations to ensure the realization of the goals and tasks of national defense and military modernization. The construction of weapons and equipment, especially information equipment, is an urgent task, which is the direct source of demand for the military electronics industry.
The second logic of the growth of military electronics is to increase the informatization rate of weapons and equipment. Modern warfare has transitioned from mechanization during World War II to information warfare, and national defense electronic information equipment is becoming more and more important. In 2010, the informatization equipment of the U.S. Army exceeded 50% of the total equipment, and the informatization degree of naval and air force equipment has reached more than 70%, while the overall informatization level of our military weapons and equipment is still in its infancy. my country has clearly promoted the composite development of mechanization and informatization in national defense construction.
The third logic of military electronics growth is to accelerate the process of domestic substitution independently and controllably. Some high-end chips in my country rely on imports, and it is imperative to increase the localization rate. U.S. export controls have increasingly highlighted the importance of autonomy and control. In 2018, the U.S. government issued a document on the basis of the original "Export Administration Regulations" to impose export controls on 44 Chinese military-industrial enterprises, involving microwave radio frequency and other electronic fields with strong military and civilian versatility . On April 11, 2019, 37 Chinese enterprises were newly added export control. In the absence of some domestic technologies, the process of localization cannot be delayed.
IGBT chip: my country's military market has been completed by foreign companies
