GF SECURITIES·2026-01-04 11:24Core Insights - The report emphasizes the positive outlook for domestic demand, which is expected to drive the development of new productive forces, as highlighted by the national financial work conference held on December 27-28, 2025 [5][13] - The aerospace sector continues to show high prosperity, with the China Aerospace Science and Technology Corporation achieving a record 73 space launch missions in 2025 [5][14] - The report recommends focusing on companies that align with the "S-curve" evolution, emphasizing supply chain reform, maintenance volume, and trends towards automation and intelligence [5][15] Industry Overview - The defense and aerospace industry is experiencing a significant increase in investment, with a focus on new productive forces and comprehensive human development [5][13] - The report notes the successful IPO acceptance of Blue Arrow Aerospace, which aims to raise 7.5 billion CNY, indicating strong market interest in commercial aerospace ventures [5][14] - The report identifies three key cycles within the industry: the evolution of the "S-curve," expansion of the "S-curve," and a new cycle focusing on emerging industries such as commercial aerospace, AI, and quantum computing [5][15] Company Recommendations - Recommended companies include: - Aero Engine Corporation of China (航发动力): Benefiting from high-end aviation equipment production and potential for domestic engine replacement in the civil aviation market [5][21] - AVIC Xi'an Aircraft Industry Group (中航西飞): A major manufacturer of military and civil aircraft, expected to benefit from modernization and military trade opportunities [5][22] - China Power (中国动力): Positioned to benefit from the recovery of the shipbuilding industry and the transition to dual-fuel engines [5][26] - Aero Engine Control (航发控制): Engaged in the production of control systems for military and civil aviation engines, with a strong competitive position [5][21] - Ziguang Guowei (紫光国微): Focused on the semiconductor industry with a strong emphasis on domestic market growth and AI integration [5][18] Financial Analysis - The report provides detailed financial metrics for key companies, including expected earnings per share (EPS), price-to-earnings (PE) ratios, and return on equity (ROE) for 2025 and 2026 [6] - For example, 航发动力 is projected to have an EPS of 0.34 CNY in 2026 with a PE ratio of 117.74 [6] - 中航重机 is expected to achieve a net profit of 11.21 billion CNY in 2025, with a dynamic PE ratio of approximately 28X [5][24] Market Performance - The report notes that the China Securities Military Industry Index has shown a weekly increase of 2.90%, outperforming major indices such as the Shanghai Composite and Shenzhen Component [5][34] - Year-to-date, the military industry index has increased by 42.34%, indicating strong market performance relative to other sectors [5][34]