Market Overview - The military equipment, genetically modified organisms, seed industry, chemical raw materials, and PEEK materials sectors experienced gains, while the film and television, gaming, and Nvidia concept stocks declined [2][3]. - On May 7, all three major stock indices closed higher, with the Shanghai Composite Index at 3342.67 points, up 0.8%; the Shenzhen Component Index at 10104.13 points, up 0.22%; and the ChiNext Index at 1996.51 points, up 0.51% [2]. Sector Performance - The military equipment sector rose by 5.33%, with notable stocks like Morningstar Aviation hitting the daily limit and Tongyi Aerospace increasing by over 25% [4]. - The genetically modified organism sector also saw significant gains, with Qiu Le Seed Industry rising by 17% and Kangnong Seed Industry increasing by over 10% [5]. - Conversely, the film and television sector saw widespread declines, with companies like Shanghai Film and Light Media experiencing varying degrees of drop [5]. Capital Flow - Main capital flows showed a net inflow into defense, military, basic chemicals, and banking sectors, while there was a net outflow from computer, electronics, and non-bank financial sectors [6]. - Specific stocks that attracted net inflows included Zongshen Power, AVIC Chengfei, and Chifeng Gold, with inflows of 727 million, 454 million, and 391 million respectively [6]. Institutional Insights - Dongfang Securities noted that significant policy easing is expected, with monetary policy rates accelerating to catch up with actual rates, indicating a stable economic outlook [7]. - Huatai Securities highlighted a recovery in consumer spending during the May Day holiday, with robust growth in various provinces and cities, particularly in tourism and hospitality sectors [7].

Group 1 - The China Securities Military Industry Index (399967) has shown a strong increase of 4.24% as of May 7, 2025, with notable gains in constituent stocks such as AVIC Chengfei (302132) reaching a 20% limit up, and Zhongyun Drone (688297) rising by 16.37% [1] - The leading military ETF (512680) has also increased by 4.23%, marking its third consecutive rise, with a trading volume of 87.04 million yuan and a turnover rate of 2.31% [1] - The latest scale of the military ETF has reached 3.686 billion yuan, a new high for the year, with the latest share count at 3.544 billion, also a six-month high [1] Group 2 - The top ten weighted stocks in the China Securities Military Industry Index as of April 30, 2025, include China Shipbuilding (600150) and Guoke Technology (002625), accounting for a total of 37.03% of the index [2] - Positive signals have emerged in the military sector since 2024, with expectations of increased contract announcements and related transaction amounts in 2025, indicating a recovery in the military fundamentals [2] - According to GF Securities, the EU's defense industrial strategy is shifting towards self-sufficiency, aiming for 50% of defense equipment procurement to be sourced internally by 2030, which may benefit qualified Chinese companies with production capacity [2]

Group 1 - The Central State-Owned Enterprises Technology Leading Index (932038) has seen a strong increase of 2.05%, with notable gains in constituent stocks such as AVIC Chengfei (302132) up 19.31%, Aerospace Rainbow (002389) up 10.02%, and Guobo Electronics (688375) up 8.53% [1] - The Central State-Owned Enterprises Technology Leading ETF (562380) has also risen by 2.36%, marking its third consecutive increase, with the latest price reported at 0.87 yuan [1] - Over the past year, the Central State-Owned Enterprises Technology Leading ETF has accumulated a total increase of 9.14%, with an average daily trading volume of 709.56 million yuan [1] Group 2 - China's defense budget has maintained an increase of around 7%, with defense spending accounting for less than 1.5% of GDP, which is below the average level of major military powers [2] - There is significant growth potential for China's defense spending, which is expected to outpace GDP growth in the long term [2] - The military industry is anticipated to emerge from a two-year period of stagnation, entering a phase of performance improvement and valuation enhancement, particularly in advanced fighter jets, low-altitude economy, domestic large aircraft, satellite internet, and deep-sea technology sectors [2]

Core Viewpoint - The company reported a significant decline in revenue and net profit for Q1 2025, primarily due to external factors affecting contract signing and supply progress, while maintaining an improved gross margin [1] Financial Performance - Q1 2025 revenue was 5.834 billion, a year-on-year decrease of 38.55% [1] - Net profit attributable to shareholders was 431 million, down 39.87% year-on-year [1] - Deducted non-recurring net profit was 421 million, a decline of 41.33% year-on-year [1] - Gross margin for Q1 2025 was 12.65%, an increase of 0.55 percentage points year-on-year [1] - Net profit margin was 7.38%, a decrease of 0.14 percentage points year-on-year [1] Expense Analysis - The operating expense ratio for Q1 2025 was 2.99%, an increase of 0.51 percentage points year-on-year [1] - Sales expense ratio was 0.07%, up 0.06 percentage points year-on-year [1] - Management expense ratio was 3.12%, an increase of 1.29 percentage points year-on-year [1] - R&D expense ratio was 0.18%, down 0.95 percentage points year-on-year, with R&D expenses at 11 million, a significant decrease of 89.98% [1] - Financial expense ratio was -0.38%, compared to -0.49% in the same period last year, mainly due to reduced interest income [1] Balance Sheet and Cash Flow - Contract liabilities showed recovery, increasing by 53.09% to 5.4 billion compared to the beginning of the year, mainly due to increased advance payments [2] - Net cash flow from operating activities increased by 7.728 billion year-on-year, primarily due to higher cash received from sales of goods and services [2] Incentive Plan - The company announced a second phase of its stock incentive plan, granting 7.8305 million shares to 223 employees at a price of 32.08 per share [3] - The unlocking conditions include a compound annual growth rate of non-recurring net profit of no less than 15% from 2023 to 2025, and specific return on equity and EVA targets [3] - The estimated expense for the initial stock grant is 169.0605 million [3] Profit Forecast - The company forecasts net profit attributable to shareholders for 2025, 2026, and 2027 to be 3.741 billion, 4.273 billion, and 4.923 billion respectively, corresponding to PE ratios of 31, 28, and 24 [3]

Summary of the Conference Call Industry Overview - The military industry is showing a downward trend, but the decline is narrowing, indicating signs of bottoming out. The revenue realization in the components segment is catalyzing the industry, with expectations for improved conditions in Q2 [2][4][10]. - The Longjiang Military Group categorizes over a hundred companies into main tracks (military aircraft engines, missiles) and new directions (new equipment, military trade, military-to-civilian transitions). The upstream components are recovering first, with improvements in cash flow and inventory for main manufacturers [2][5][6]. Key Insights - Q2 is expected to see a focus on emerging segments such as rocket forces, navy, army, and information support troops, with significant development potential following management system optimizations [2][8]. - The military industry is anticipated to accelerate recovery in 2025, driven by mobilization orders and systemic improvements, with missiles becoming a preferred investment choice [2][10]. - Military trade is benefiting from optimized national military trade management and global political changes, becoming a crucial aspect of the defense technology industry's international expansion [2][12][13]. Company-Specific Highlights AVIC Shenyang Aircraft Corporation (沈飞) - Selected as the "gold stock" for May due to low holdings, minimal competition, low valuation, and potential. The lack of disclosed 2025 operational targets enhances its safety margin and presents a contrarian investment opportunity [2][3][15][16]. - The company is currently valued at a static P/E ratio of around 30 times, which is at the lower end of its historical valuation range. Expectations for increased production tasks in 2025 are based on improved cash flow and contract signing [17][20]. - Future growth is supported by new aircraft models entering production phases, with a projected ROE close to 20% and significant asset scarcity [18][21]. Tunan Co., Ltd. (图南股份) - Tunan has shown improvement in Q1 2025 after a significant decline in Q4 2024. The company is expected to achieve approximately 330 million yuan in revenue in 2025, with a compound annual growth rate of 35% to 40% over the next two years [2][29]. - The company specializes in high-temperature alloy materials, with a strong focus on casting and deformation alloys, and is gradually extending its business into downstream products [23][26]. - Tunan's profitability is expected to improve significantly, with projections indicating a doubling of revenue and profit over the next three years [28][29][30]. Additional Important Points - The military industry is experiencing a structural shift with a focus on unmanned systems and advanced technologies, which will likely reshape operational dynamics and market opportunities [21][22]. - The management of military companies is increasingly focused on optimizing production and expanding capacity to meet future demands, particularly in the context of national defense strategies [20][14]. - The competitive landscape in the military sector remains relatively stable due to strong regulatory frameworks, which may provide a clearer path for companies to capitalize on emerging opportunities [11][12].

Investment Rating - The report maintains a "Positive" investment rating for the defense and military industry [3] Core Insights - The industry is experiencing a bottoming out phase due to multiple factors, but signs of improvement were observed in Q1 2025, particularly in upstream components and new directions [11][13] - Profitability has slightly fluctuated due to various influences, with ROE constrained by asset efficiency and net profit margin needing improvement [53][56] - Traditional main tracks show clear signs of recovery, while new directions are in the early stages of industrialization but exhibit initial growth potential [90][91] Summary by Sections Industry Overview - The military industry faced a decline in revenue and profit growth in 2024, but Q1 2025 showed a narrowing of profit decline to -24.6% [19][20] - The main track's revenue growth was affected by contract signing and delivery schedules, with a notable profit drop in Q4 2024, followed by a recovery in Q1 2025 [20][21] Main Track Performance - Upstream components are showing early signs of recovery, with revenue growth rates for upstream, midstream, and downstream segments varying significantly [25][29] - Downstream manufacturers experienced short-term performance pressure due to contract signing delays, but some companies like Hongdu Aviation showed strong growth [29][30] Profitability Analysis - The overall profitability of the military sector slightly decreased in 2024, with a marginal improvement in Q1 2025 [56][58] - The main track's profitability was impacted by price adjustments and demand fluctuations, with a slight recovery noted in Q1 2025 [58][61] New Directions - New directions in the industry, such as military trade and new equipment, are showing upward trends in Q1 2025, indicating potential for growth [101][110] - Specific segments like infrared and ammunition within new equipment are experiencing significant revenue growth, reflecting high market demand [104][110] Future Outlook - The report emphasizes the importance of selecting companies with enhanced product capabilities, increased penetration rates, and higher average transaction values as the industry approaches the end of the 14th Five-Year Plan [117][118] - Key investment opportunities are identified in companies like Aerospace Electric and Feiliwa, which are expected to benefit from the upcoming military spending and technological advancements [117][118]

Investment Rating - The report maintains a "Positive" investment rating for the military industry [2] Core Insights - The military sector is experiencing a bottoming out and marginal recovery, with new directions showing superior performance [9][15] - The J-35 supply chain is entering a phase of prosperity, with increased production capacity supporting the launch of new models [52][73] - The report highlights the importance of contract liabilities and inventory stability as indicators of demand recovery in the industry [27][95] Summary by Sections Military Sector Overview - The military sector's revenue growth from 2021 to Q1 2025 shows a decline, with a notable drop in net profit in 2024, but a recovery trend is observed in Q1 2025 [18][19] - The main track of the military sector includes traditional aircraft, engines, and missiles, with revenue growth rates declining but showing signs of recovery in Q1 2025 [19][23] J-35 Supply Chain - The J-35, China's second stealth fighter, is expected to have a strong export potential due to its competitive pricing and fully domestic production [55][61] - The company plans to invest 11 billion yuan in local relocation and production capacity expansion to support new model production [73][81] New Directions in the Industry - New directions such as military trade and new equipment are showing upward trends in revenue and profit growth, indicating a recovery in demand [38][48] - Companies like Tunan Co. are focusing on advanced metal materials and innovative business models to capture growth opportunities in the defense sector [99][102] Financial Performance - The report indicates that major manufacturers like AVIC Shenyang Aircraft Corporation have seen significant increases in contract liabilities, suggesting a positive outlook for future demand [27][95] - The financial metrics for the military sector show a narrowing of profit declines in Q1 2025, with a focus on maintaining stable inventory levels [19][28]

Core Viewpoint - The China Aircraft Strength Research Institute, established 60 years ago, has significantly contributed to the development of key national aircraft such as the J-20, Y-20, C919, and AG600, supporting the innovation and advancement of aviation weaponry [1][2]. Group 1: Historical Development - The Strength Research Institute, created in 1965, is the only center in China for aircraft strength research, verification, and certification, responsible for ground strength validation tests for new and modified aircraft [2]. - The completion of the H-6 aircraft destruction test in 1968 marked China's capability to conduct large aircraft strength verification, ushering in a new era for the country's aviation strength sector [2]. - Over the past 60 years, the institute has developed a comprehensive testing capability system covering various types of military and civilian aircraft [2]. Group 2: Innovations and Achievements - The institute has focused on meeting equipment development needs and has achieved several "firsts" in both domestic and international contexts, including the establishment of a large-scale climate environment laboratory for weapon systems [3]. - The climate environment laboratory is the largest and most complex of its kind globally, enabling the simulation of various environmental factors, thus enhancing the efficiency of equipment development [3]. - The laboratory has been instrumental in supporting the development of both military and civilian aircraft, including accelerating the airworthiness certification process for domestic large passenger aircraft [4]. Group 3: Specific Projects - The AG600 amphibious aircraft, the largest of its kind globally, successfully passed rigorous testing and verification, with the Strength Research Institute playing a crucial role throughout its development cycle [5]. - The C919 aircraft project has seen significant contributions from the institute, including overcoming technical challenges and conducting high-altitude tests in its climate environment laboratory [6]. - The institute pioneered the indoor testing of engine performance under snow conditions, marking a significant advancement in aircraft testing methodologies [6].

Investment Rating - The investment rating for the company is "Buy" (maintained) [2] Core Views - The company reported a revenue of 5.834 billion yuan in Q1 2025, a year-on-year decline of 38.55%, with a net profit attributable to shareholders of 431 million yuan, down 39.87% year-on-year [5][6] - The decline in revenue is attributed to external factors such as contract signing progress and supply chain issues, but ongoing fundraising projects are expected to enhance the company's capabilities in weaponry and equipment construction [6] - The company aims to complete its annual tasks in 2025, which is a critical year in the "14th Five-Year Plan," with projected net profits for 2025-2027 of 3.743 billion yuan, 4.323 billion yuan, and 5.051 billion yuan, representing year-on-year growth rates of 10.3%, 15.5%, and 16.8% respectively [7] Financial Summary - The total market capitalization of the company is 117.6 billion yuan, with a closing price of 42.66 yuan [2] - The company’s revenue for 2024 is projected at 42.837 billion yuan, with a year-on-year decrease of 7.4%, followed by a recovery with expected growth of 10.0% in 2025 [9] - The projected P/E ratios for 2025, 2026, and 2027 are 31.41, 27.19, and 23.27 respectively, indicating a potential for valuation improvement over the forecast period [7][9]

Investment Rating - The investment rating for the company is "Buy" and is maintained [7] Core Views - The company's revenue and performance have declined due to external factors such as contract signing progress and supply chain issues, but overall profitability remains high. The company's operational quality has significantly improved year-on-year, with sufficient inventory to support short-term production [2][11] - In Q1 2025, the company achieved a revenue of 5.834 billion yuan, a year-on-year decrease of 38.55%, and a net profit attributable to the parent company of 431 million yuan, down 39.87% year-on-year. Overall performance is in line with expectations [6][11] - The company's contract liabilities and advance payments increased compared to the beginning of the period, indicating ongoing capacity expansion to meet the demand for new models [2][11] Summary by Sections Financial Performance - In Q1 2025, the company's gross margin improved to 12.65%, with a net profit margin of 7.38%. The cash flow from operating activities increased by 77.28 million yuan compared to the same period last year, indicating a significant improvement in overall operational quality [11] - The company’s contract liabilities increased by 53% to 5.4 billion yuan, and advance payments rose by 58% to 3.275 billion yuan, reflecting clearer downstream demand and ongoing capacity expansion [11] Earnings Forecast and Valuation - The company is expected to achieve net profits of 3.956 billion yuan, 4.732 billion yuan, and 5.577 billion yuan for the years 2025, 2026, and 2027, respectively, with year-on-year growth rates of 17%, 20%, and 18%. The corresponding price-to-earnings ratios are projected to be 30, 25, and 21 times [11]