Core Viewpoint - The military industry sector is experiencing significant activity, with the military ETF (512660) rising over 3.8% and showing strong trading volume, indicating increased investor interest [1]. Funding and Investment Trends - Recent data shows a notable increase in the scale and share of passive funds, with accelerated net inflows into the military ETF (512660), which currently has a scale exceeding 13.7 billion yuan and a share growth of over 36% since the beginning of the year [1]. - The military ETF tracks the CSI Military Industry Index (399967.SZ), which encompasses various sub-sectors such as aviation equipment, military electronics, naval equipment, and aerospace equipment, reflecting the overall performance of military industry companies [2]. Market Dynamics and Future Outlook - The frequency of geopolitical conflicts has increased, making China's advanced weaponry a priority for other nations, which may enhance China's global military trade market share [1]. - The military sector's gross and net profit margins have rebounded in Q1 2025, supported by both international and domestic conditions that are likely to improve annual performance [1]. - As China approaches the end of its 14th Five-Year Plan, there is a pressing need to complete previously delayed national defense construction tasks, with future demand expected to be released in light of the 2027 centenary of the military and the 2035 modernization goals [1]. - China's military expenditure as a percentage of GDP is below 1.5%, lower than the average of major military powers, indicating substantial room for growth in defense spending [1]. - The military sector is expected to see high certainty in domestic demand growth, driven by the "14th Five-Year Plan push," "centenary military goals," and "self-reliant domestic substitution" [1].

Investment Rating - The report rates the defense and military industry as "Overweight" indicating a positive outlook for the sector [3][29]. Core Insights - The defense and military industry is expected to enter a new cycle driven by geopolitical conflicts, enhancing China's military trade focus and opening international markets for Chinese military products [5][3]. - The ongoing tariff conflicts highlight the comparative advantages of the military industry, with increased emphasis on self-sufficiency and potential growth in military investments [5][3]. - The fundamental changes in the military sector are solidifying the basis for industry growth, with a focus on quality and quantity improvements as the military approaches its centenary goals [5][3]. - There is a recommendation to increase attention on military stocks, particularly those related to precision-guided weapons, underwater capabilities, AI/robotics, and traditional aircraft supply chains [5][3]. Market Review - Last week, the Shenwan Defense and Military Index rose by 6.33%, outperforming major indices such as the Shanghai Composite Index, which increased by 1.92% [6][3]. - The top five performing stocks in the defense sector included Chengxi Aviation (59.26%), Hwa Wo (48.85%), and Lijun (36.49%) [6][14]. - Conversely, the bottom five performers were Platinum (−4.26%), Lingyun (−4.00%), and Guangdong Hongda (−2.52%) [6][15]. Valuation Changes - The current PE-TTM for the Shenwan military sector is 75.10, indicating it is in the upper range historically, with a valuation percentile of 65.46% since January 2014 [15][19]. - The aerospace and aviation equipment sectors are noted to be at relatively high valuation levels since 2020 [15][19]. Key Valuation Targets - The report lists key valuation targets, including companies like Feili Hua, Tianqin Equipment, and Aerospace Electronics, with projected earnings growth and PE ratios indicating potential investment opportunities [21][24].