Key investment points
National defense and military industry: net profits attributable to parent companies in 2023 and 2024Q1 sectors declined by 10% and 19% respectively
1) Short term pressure on the performance of the sector: according to the statistics of 135 stocks in the military industry sector, excluding 11 ships, the remaining 124 companies will achieve 423.4 billion in revenue in 2023, up 7% year on year, and 29 billion in net profit attributable to the parent company, down 10% year on year; In 2024Q1, the revenue was 79.4 billion yuan, a year-on-year decrease of 2%, and the net profit attributable to the parent company was 6 billion yuan, a year-on-year decrease of 19%. Affected by personnel adjustment, order postponement and supply chain price reduction, the performance of the sector is under short-term pressure.
2) In the short term, the profitability of the sector continues to decline. In the first quarter of 2024, the overall gross profit margin of the sector excluding ships will be 23.9%, a year-on-year decrease of 1.8 pct; The net interest rate was 7.8%, a year-on-year decrease of 1.6 pct.
3) In the long run, the profitability of the sector has corrected to the starting point of the last cycle in 2019. From 2019 to 2023, the overall gross profit margin of the sector excluding ships will be 22.9%, 23.8%, 24.1%, 23.5% and 23.2% respectively; The net interest rates were 5.7%, 8.4%, 9.0%, 8.4% and 7.0% respectively. Under the catalysis of new orders, quality and efficiency improvement, the profitability of the sector is expected to bottom out and rise in the second half of 2024, entering a new upward cycle.
Segment splitting: the performance of ships has increased significantly, aviation equipment has remained stable, and military electronics has declined significantly 1) Ships: the revenue of 2023 and 2024Q1 has increased by 26% and 52% respectively; Net profit attributable to the parent company was turned positive and increased by 207%; The gross profit margin was 11.2% and 10.9%, up 2.2 pct and -1.8 pct year on year respectively; The net interest rate was 1.7% and 1.9%, up 2.2 pct and 1.2 pct respectively year on year. The trend of the ship sector is positive, and the performance needs to be further released.
2) Aviation equipment: the revenue of 2023 and 2024Q1 will increase by 17% and 9% respectively; Net profit attributable to the parent company increased by 13% and 6% respectively; The gross profit margin was 18.2% and 19.3%, up 0.6 pct and - 0.5 pct year on year respectively; The net interest rate was 7.1% and 8.4%, down 0.2 pct and 0.2 pct respectively year on year. Among them, the revenue of aircraft engine manufacturers in 2023 and 2024Q1 increased by 9% and 3% respectively; Net profit attributable to the parent company increased by 17% and 18% respectively; The gross profit margin was 4.7% and 5.7%, down 0.4 pct and 0.1 pct year on year respectively; The net interest rate was 3.8% and 4.5%, up 0.2 pct and 0.6 pct respectively year on year. The sector maintained steady growth boosted by aircraft engine manufacturers.
3) Military electronics: the revenue of 2023 and 2024Q1 dropped by 3% and 15% respectively; Net profit attributable to the parent company decreased by 29% and 46% respectively; The gross profit margin was 36.2% and 36.6%, down 1.5 pct and 2.5 pct respectively year on year; The net interest rate was 7.4% and 7.8%, down 3.6 pct and 4.4 pct respectively year on year. Military electronics, as the upstream of the industrial chain, suffered a significant decline in performance due to the impact of value-added tax, price cuts, etc.
4) Space equipment: the revenue of 2023 and 2024Q1 dropped by 2% and 25% respectively; Net profit attributable to the parent company decreased by 43% and 51% respectively; The gross profit margin was 21.0% and 20.9%, up 0.1 pct and 0.6 pct respectively year on year; The net interest rate was 5.2% and 5.0%, down 3.4 pct and 2.4 pct respectively year on year. The main reason for the volatility of the sector is that the asset securitization rate is low and the "extension" growth potential is large.
5) Army equipment: revenue of 2023 and 2024Q1 dropped by 20% and 17% respectively; Net profit attributable to the parent company decreased by 27% and 30% respectively; The gross profit rate was 23.3% and 20.2%, up 3.2 pct and -1.5 pct year on year respectively; The net interest rate was 6.9% and 4.2%, down 0.7 pct and 1.2 pct respectively year on year. The short-term performance of the plate fluctuates and is expected to gradually improve in the future.
The 12 word core logic of national defense and military industry: "endogenous extension, domestic demand and foreign trade, military and civilian products" 1) The "endogenous" growth trend of national defense and military industry is strong. Under the catalysis of "scale effect/equity incentive/small core and large cooperation/pricing reform/large order+large advance", the operating efficiency of enterprises will also continue to improve.
2) The "extension" growth direction is clear: the reform of state-owned enterprises continues to deepen, and the securitization of military assets/core military products reorganization and listing in the future is expected to set off a new round of climax, focusing on the restructuring process of military industrial groups.
3) "Civil products+foreign trade" will provide impetus for growth: China's tanks/UAVs/trainers/fighter planes and others have global competitiveness, and the demand for foreign trade is gradually rising; The speed of domestic large aircraft/civil aviation engine related civil products will also be increased if they can be controlled independently; Pay attention to commercial aerospace, low altitude economy and satellite industry chain.
Investment suggestions: the prosperity of the sector is expected to rise, and it is optimistic that ships, aircraft, low altitude economy, informatization and other sub fields will benefit from the rising cycle of civilian ships and breakthroughs in naval equipment; The aircraft will benefit from the large-scale military aircraft model and the "new installation+maintenance" of Avionics, and the growth rate is expected to rise; The large aircraft industry chain will benefit from mass production acceleration and localization substitution; Low altitude economy is driven by both policy support and technological development; Military informatization benefits from the creation of new strategic arms.
1) Ships: China Shipbuilding, China Shipbuilding Defense, China Power, Yaxing Anchor Chain, China Heavy Industry, China Coastal Defense, China Shipbuilding Science and Technology, and Hailanxin.
2) Aircraft: AVIC Corporation, AVIC Xi'an Aircraft, AVIC Shenyang Aircraft, AVIC Power, AVIC Control, Hongdu Aviation, Aerospace Rainbow, UAV, AVIC Heavy Aircraft, AVIC High tech, AVIC Airborne, Western Superconductor, Triangle Defense, AVIC Science and Technology, Huaqin Science and Technology, Baoti Co., Ltd., and Steel Research Gaona.
3) Low altitude economy: China Direct, Weihai Guangtai, China UAV, Aerospace Rainbow, Zongzong, Rice Information, Sichuan Jiuzhou, Sci Tech Electronics, CITIC Haizhi, Zhongke Xingtu, Tiancheng Automatic Control, Andavil.
4) Informatization: Zhenhua Technology, AVIC Optoelectronics, Ziguang Guowei, Aerospace Appliance, Northern Navigation, Ruichuangwina, Gaode Infrared, Zhimingda, New Thunder Energy, Torch Electronics, Hongyuan Electronics, Jingpin Special Equipment, Hollywood.
Risk tips: 1) The pace of equity incentive and asset securitization is lower than expected; 2) The delivery of important products was not as expected.
