China Securities Co., Ltd.: The inflection point of structural growth has arrived, optimistic about military investment opportunities in Q1 2025.

China Securities Co.,Ltd. released a research report stating that the fundamentals of the military industry sector have begun to accelerate recovery. Various catalysts in Q1, especially order announcements, are expected to continue to materialize. Currently, investing in the military industry sector offers high cost-effectiveness, and the turning point of the new and old cycles has emerged. It is recommended to increase holdings during the sector's pullback. The military industry may usher in a second round of structural cycle recovery. The future growth of the industry mainly presents structural characteristics, with stable growth in traditional areas and the potential for growth in new and high-quality fields far exceeding the industry average. It is recommended to tilt towards leading companies in new fields and traditional leaders with growth potential. Since the end of 2024, the military industry sector has shown many positive signals, with core companies releasing contract announcements and their performance stabilizing, indicating that the fundamentals of the military industry have begun to accelerate recovery. In terms of contracts, Weihai Guangwei Composites signed a procurement contract with customer A totaling 366,361.67 million yuan, covering the period until 2026. Jiangxi Guoke Defence Group signed a sales contract with a military unit for a total of 738,734,000 yuan (including tax). North Navigation Control Technology's performance forecast shows stable performance in Q4. Key points from China Securities Co.,Ltd. include: - The fundamentals of the military industry sector have begun to accelerate recovery, and various catalysts in Q1, especially order announcements, are expected to continue to materialize. - Since the end of 2024, the military industry sector has shown many positive signals, with core companies releasing contract announcements and their performance stabilizing. The transaction volume is expected to increase in 2025, indicating that the fundamentals of the military industry have begun to accelerate recovery. - Weihai Guangwei Composites signed a procurement contract with customer A totaling 366,361.67 million yuan, covering the period until 2026. Jiangxi Guoke Defence Group signed a sales contract with a military unit totaling 738,734,000 yuan (including tax). North Navigation Control Technology's performance forecast shows stable performance in Q4. Jiangxi Hongdu Aviation Industry is expected to sell products and goods to related parties for 8.52 billion yuan in 2025, a 26.26% increase from the expected amount in 2024 and a 95% increase from the actual amount in 2024. - Currently, investing in the military industry sector offers high cost-effectiveness, and the turning point of the new and old cycles has emerged. It is recommended to increase holdings during the sector's pullback. - In the civil sector, industries such as commercial aerospace will also see rapid development in 2025. - 2025 marks the tenth year of development for China's private rocket companies, with significant progress in the reusable rocket field. In 2024, three types of rockets underwent VTVL trials, including a rocket from Aerospace Hi-Tech Holding Group's Eighth Institute, the Zhuque 3 VTVL-1 from OneSpace, and the Stardust 1 from Deep Blue Aerospace. - Looking ahead to 2025, the development of various models such as Zhuque 3, Tianlong 3, Li Jian 2, Hyperbola 3, Zhishen Xing 1, and Nebula 1 is accelerating, with the first flight expected. Among them, the heavy-lift Long March 12B, Zhuque 3, Nebula 1, and Tianlong 3 will all be strong contenders for China's first reusable rockets, providing powerful launch support for the high-density launches of the Qiansailing and GW constellations. - In 2024, China's two giant constellations (GW and G60) were officially deployed, marking the start of a new era of normalized constellation deployment in 2025. Other commercial constellation deployments are progressing orderly. - The military industry is entering a new cycle of growth. - The military industry has become a cyclical growth sector, with a typical cycle lasting five years. The previous cycle was from Q3 2019 to Q2 2024, and the new cycle is expected to be from Q3 2024 to Q2 2029, currently in the early stages of the new cycle. - A typical five-year cycle is usually divided into a three-year growth phase and a two-year downturn. The previous growth phase was from Q3 2019 to Q2 2022, and the previous downturn was from Q3 2022 to Q2 2024. The forecasted new growth phase is from Q3 2024 to Q2 2027, and the new downturn phase is from Q3 2027 to Q2 2029. - With gradual implementation of military personnel adjustments and related institutional reforms, orders are expected to gradually increase in the later stage of the 14th Five-Year Plan, with backlog accumulation and new demand. The industry's order growth in 2024 and performance growth in 2025 are expected to stabilize and increase. The military industry has gradually entered a new cycle, transitioning from "rising prices and quantities" to the "increasing quantities and stable prices" stage, from "platform expansion" to "building systems and filling gaps," and from "comprehensive growth" to "structural growth," potentially opening a second round of structural cycle recovery. - It is recommended to focus on leading companies in new fields and traditional leaders with growth potential, as the industry's future growth mainly presents structural characteristics, with stable growth in traditional areas and the potential for growth in new and high-quality fields far exceeding the industry average. - It is recommended to focus on three investment themes: 1. Traditional military industry sectors, with a focus on the aviation engine industry, shipbuilding industry, and aerospace industry that have expected order recoveries and performance support. 2. New and high-quality fields, with a focus on industries related to new types of warfare that revolve around low-cost, intelligence, and systemic characteristics, including low-cost precision-guided ammunition, unmanned systems, and new generations of intelligent combat platforms. Specifically, intelligent combat platforms comprise subsystems for communication and command, situational awareness, electronic warfare, and precision guidance. In terms of new quality productivity, emphasis should be placed on industries with broad application market spaces and industry potential.In rapidly growing industries with low domestication rates, the main focus is on commercial aerospace, low-altitude economy, and large aircraft. In terms of new technologies, it is recommended to pay attention to MEMS devices, additive manufacturing, and ceramic-based composite materials.Third is to reform the direction of going abroad, and it is recommended to focus on companies with expectations of asset integration and competitiveness in the military trade market. Risk warning: 1. Defense budget growth lower than expected: In recent years, the defense budget has maintained relatively stable growth, with favorable military industry policies. However, there is a possibility that changes in national policies and national strategies may reduce defense budget spending. 2. Market demand fluctuations: Military products involve the special nature of national defense security, and the country has implemented strict control over the procurement of military products. Military procurement has a high degree of planning. If the procurement plan for equipment models is below expectations, the performance of relevant companies in the industry chain will be affected. 3. Progress of related reforms below expectations: The country's judgment on the future situation and guiding ideology determines the industry's development prospects. National macroeconomic policies and industrial development policies have a significant impact on the strategic direction, industrial selection, and investment and acquisition direction of military industry enterprises. 4. Pressure of raw material costs: The raw materials of weapon structure parts and components are easily affected by various factors such as international situations and macroeconomics. If raw material prices rise significantly, it will squeeze enterprise profits. 5. Increased competition risk: In recent years, the country has encouraged private companies to participate in the military supply chain. New entrants may squeeze the market share of existing companies in the industry, negatively impacting their performance. 6. Risk of product price decline: Under the guidance of low-cost procurement by the military, there may be a decrease in product prices, resulting in the performance of companies falling below expectations.