China Securities Co., Ltd.: The military industry sector has released its semi-annual report forecast, with a notable increase in shipbuilding and stabilization in aviation engine companies.

China Securities Co., Ltd. has released a research report stating that several companies in the defense and military industry have recently announced their half-year performance forecasts. Due to a decline in new orders for the traditional military industry sector, military information companies are generally experiencing varying degrees of performance decline. Overall, the growth points for the defense and military sector in the first half of the year primarily stemmed from shipbuilding and military trade, and this trend is expected to continue in the second half. Key points from China Securities Co., Ltd. are as follows: 1. Recently, multiple companies in the defense and military industry have released their half-year performance forecasts. Due to a decline in new orders for the traditional military sector, military information companies are experiencing varying degrees of performance decline. Overall, the growth points for the defense and military sector in the first half of the year mainly came from the shipbuilding and military trade sectors, a trend expected to persist in the second half. 2. We believe that China's military industry has evolved from a model that relied solely on domestic demand to a new development pattern driven by three engines, resulting in more diversified and sustainable growth momentum. The structure of "domestic demand as a foundation, foreign trade expansion, and civil use feeding back into the military" is profoundly reshaping the landscape and boundaries of China's military industry. The industry is shifting from "cyclical growth" to "comprehensive growth." The first curve of domestic military demand (the basic foundation): focuses on "preparing for war and equipment modernization," with demand coming from stable growth in the national defense budget and upgrades of equipment (such as batch production of key models during the 14th Five-Year Plan). Strong deterrence from high-end precision and systematic unmanned low-cost solutions is the primary growth direction. The second curve of military trade going global (new engine): leveraging cost-performance advantages, systematic operational capabilities, and geopolitical strategic cooperation ("Belt and Road"), China's military trade share continues to rise, becoming an important global supplier and achieving a win-win in strategic influence and economic benefits. The third curve of military technology transitioning to civil use (new boundaries): cutting-edge military technology spilling into civil sectors fosters commercial aerospace, low-altitude economy, future energy, deep-sea technology, and large aircraft, creating trillion-level Shenzhen New Industries Biomedical Engineering, driving the development of new processes, new materials, and new devices, and forming a virtuous cycle of "military technology for civil use, feeding back into the military." With valuation recovery and the beginning of a new cycle, the military industry is expected to regain upward momentum. The current military industry is at a turning point from performance expectations to performance realization. Since September 24, 2024, the sector has seen a maximum increase of 50%, reflecting new cycle growth expectations, entering the phase of performance realization in 2025, and the sectors structural and differentiated characteristics may become more pronounced. Currently, the price-to-earnings ratio of the China Securities military sector is 59.50 times, primarily due to event catalysts and improvements in the industry fundamentals. On May 10, the Pakistani JF-17 "Thunder" fighter jet destroyed the Indian S-400 air defense system, and in light of the India-Pakistan conflict, the military sector showed sustained strength. On May 11, the People's Daily published an article titled "Accelerating the Liberation and Development of New Quality Combat Forces," further increasing market attention on the military industry. On June 24, the State Council Information Office confirmed that on September 3, there will be a military parade at Tiananmen Square to commemorate the 80th anniversary of victory in the war, focusing on showcasing new equipment, including unmanned clusters and hypersonic missiles, increasing market attention on equipment iteration processes and scale of deployment. The renewed tensions in the Middle East, combined with heightened anticipations for the military parade, have raised fund risk appetite, driving concentrated releases in military sector sentiment. China has numerous commercial aerospace rockets planned for launch; multiple positive factors are pushing the military sector to rise in the short term. Currently, the sector is at a dual bottom of performance growth and capital allocation, and domestic and foreign catalytic factors may continue to emerge, injecting new momentum into the sector's rise. Continuous catalysis in new domain and new quality fields suggests actively seizing structural rebound opportunities while awaiting the arrival of the next cycle. Investment Strategy: Build systems, expand outward, transition from military to civilian. China's military industry has evolved from a model that relied solely on domestic demand to a new development pattern driven by three engines, resulting in more diversified and sustainable growth momentum. The structure of "domestic demand as a foundation, foreign trade expansion, and civil use feeding back into the military" is profoundly reshaping the landscape and boundaries of China's military industry. The industry is shifting from "cyclical growth" to "comprehensive growth." The first curve: domestic military demand (the basic foundation): focuses on "preparing for war and equipment modernization," with demand coming from stable growth in the national defense budget and upgrades of equipment (such as batch production of key models during the 14th Five-Year Plan). Strong deterrence from high-end precision and systematic unmanned low-cost solutions is the primary growth direction. The second curve: military trade going global (new engine): leveraging cost-performance advantages, systematic operational capabilities, and geopolitical strategic cooperation ("Belt and Road"), China's military trade share continues to rise, becoming an important global supplier, achieving a win-win in strategic influence and economic benefits. The third curve: military technology transitioning to civil use (new boundaries): cutting-edge military technology spilling into civil sectors fosters commercial aerospace, low-altitude economy, future energy, deep-sea technology, and large aircraft, creating trillion-level Shenzhen New Industries Biomedical Engineering, driving the development of new processes, new materials, and new devices, and forming a virtuous cycle of "military technology for civil use, feeding back into the military." Risk Tips: 1. Defense budget growth may fall short of expectations; in recent years, the defense budget has maintained relatively stable growth, and military policies are improving, but there exists the possibility that changes in national policies and strategies could reduce defense budget expenditures. 2. Weapon and equipment deliveries may fall short of expectations; in the post-pandemic period, combined with regional tensions, the global economic and trade chain has been significantly impacted, leading to risks of project delays and inability to complete construction on time in industries such as shipbuilding. 3. Progress of relevant reforms may fall short of expectations; the government's judgments and guiding ideologies regarding future situations determine the development prospects of the industry. National macroeconomic policies and industrial development policies significantly influence the strategic direction, industrial choices, and investment and acquisition directions of military enterprises.