China Securities Co., Ltd.: The shipbuilding sector has shown rapid growth in performance, focusing on new opportunities for structural growth.

China Securities Co., Ltd. released a research report stating that the overall performance of the shipbuilding industry is showing a downward trend, with the sector's performance nearing the bottom. The industry's performance is expected to bottom out and rebound by 2025. The defense industry sector is showing many positive signals, with core companies announcing contract notices, and their performance is expected to stabilize. Related party transactions are expected to increase by 2025, indicating that the defense industry fundamentals have begun to accelerate their recovery. In terms of allocation, it is suggested to focus on three investment themes: traditional defense, new domains and qualities, and reform going global. Key points from China Securities Co., Ltd. include: As of January 27th, out of the 88 companies in the defense industry sector covered by the firm, 88 companies have disclosed their 2024 performance forecasts. Looking at the disclosed data, the overall performance of the industry is declining. Apart from some companies in the shipbuilding and aviation sectors, it is expected that the net profit attributable to the mother in various sub-sectors will experience significant declines in 2024, with some companies facing losses. Due to the large cyclical upturn in the civilian ship sector, core companies in the shipbuilding sector have achieved significant profit growth. The sector's performance is nearing the bottom, and the industry's performance is expected to bottom out and rebound by 2025. Since the end of 2024, the defense industry sector has shown many positive signals, with core companies issuing contract notices, their performance expected to stabilize, and forecasted increased related party transactions for 2025, indicating that the defense fundamentals have begun to accelerate their recovery. In terms of allocation, it is suggested to focus on three investment themes: Firstly, traditional defense should focus on industries with order recovery expectations and performance support, such as the aero engine industry, shipbuilding industry, and aerospace industry. Secondly, in the realm of new domains and qualities, regarding new types of warfare, it is recommended to focus on industries characterized by low-cost, intelligence, and systemization, including low-cost precision-guided munitions, unmanned systems, and new generation intelligent combat platforms. In terms of new quality production, it is suggested to focus on industries with broad application market space, rapid growth, and low domestication rates, mainly in commercial aerospace, low-altitude economy, and large aircraft. For new technologies, attention should be paid to MEMS devices, additive manufacturing, and ceramic-based composite materials. Lastly, in the direction of reform going global, it is suggested to focus on relevant companies with expectations of asset integration and competitiveness in the arms trade market. Risk warnings: 1. Defense budget growth is lower than expected; in recent years, defense budgets have maintained stable growth, with favorable defense policies. However, there is a possibility of reduced defense spending due to changes in national policies and strategies. 2. Delayed delivery of weapons and equipment; in the post-pandemic period, coupled with regional tensions, the global economic and trade chain faces significant disruptions. Industries like shipbuilding may face risks of delayed construction and delivery. 3. Slow progress in related reforms; the national judgment on future situations and guiding ideology determines the industry's development prospects. National macroeconomic policies and industrial development policies have a significant impact on the strategic direction, industry selection, and investment and acquisition direction of defense enterprises.