Industry Rating - The report maintains an investment rating of "Outperform" for the industry [1]. Core Insights - The future battlefield will be centered around data, algorithms, and computing power, with fully AI-enabled human-machine integrated forces being essential for gaining the upper hand in future conflicts [2][8]. - The global military drone market is experiencing rapid growth, projected to exceed $50 billion by 2032, with a compound annual growth rate (CAGR) of 13.15% from 2024 to 2032, driven by advancements in AI-enabled drone technology [2][45]. Summary by Sections Military AI and Drone Technology - The integration of AI and unmanned technologies is transforming modern warfare, as evidenced by the significant potential demonstrated in the Russia-Ukraine conflict [3]. - Companies like Palantir and Anduril Industries are leading the charge in military AI innovation, with plans to form a commercial consortium to capture a larger share of the $850 billion annual U.S. defense budget [3][39]. - The military drone market is expected to grow from $16.07 billion in 2024 to $47.16 billion by 2032, with North America being the largest market [45][44]. Unmanned Combat Operations - Unmanned combat operations are categorized into reconnaissance, harassment, precision strikes, saturation attacks, and support enhancements, marking a shift towards a drone-centric combat paradigm [29]. - The report highlights the effectiveness of drones in the Russia-Ukraine conflict, where drones accounted for 42.47% of vehicle strikes, surpassing traditional artillery [33]. AI-Driven Decision Making - The concept of "human-machine integration" is crucial, where human commanders will still play a central role in decision-making, while machines will assist through data processing and real-time analysis [7]. - AI technologies are enhancing military capabilities by providing real-time data processing and autonomous decision-making, significantly improving operational efficiency [8][39]. Key Companies to Watch - The report suggests focusing on key players in military AI chips and data analytics, including KST, Fudan Microelectronics, and others [4]. - Companies like Palantir and Anduril are highlighted for their innovative approaches in AI and unmanned systems, with significant contracts and partnerships in the defense sector [85][97].

Investment Rating - The report maintains an "Outperform" rating for the defense and military industry [6]. Core Insights - The report emphasizes that AI is reshaping future warfare, highlighting a global trend towards military intelligence and the significant impact of AI technologies on battlefield decision-making and operational efficiency [3][16]. - The ongoing competition among major powers in military AI applications is driving the transformation of military systems towards data-driven and autonomous decision-making [26][27]. Summary by Sections 1. Military AI as a Strategic High Ground - Military AI is defined as the deep application of artificial intelligence technologies in defense and military sectors, focusing on autonomous decision-making and intelligent perception [16]. - The report identifies the Russo-Ukrainian conflict as a pivotal moment for AI in warfare, marking it as the "year of AI combat" [3][19]. 2. AI Empowering the Military Industry - AI enhances military operations through improved intelligence analysis, decision-making, autonomous equipment, simulation training, and digital maintenance of equipment [4][11]. - The report outlines three layers of the military AI industry chain: upstream (data and hardware), midstream (technology transformation), and downstream (application scenarios) [4][5]. 3. Global Competition in Military AI - The report discusses how countries are intensifying their efforts in military AI, with the U.S. viewing AI as a core driver for its "Third Offset Strategy" [26][27]. - It highlights the emergence of companies like Palantir, which have demonstrated significant value in military applications, with its market capitalization soaring from $18 billion in early 2023 to $287 billion by Q1 2025 [4][5]. 4. Investment Opportunities - The report anticipates a surge in military orders, particularly in areas like missiles, drones, and data links, driven by the integration of AI into military equipment [5]. - It notes that the military AI sector is expected to see explosive growth in 2025, particularly in intelligent equipment empowered by AI [5]. 5. Industry Data - The defense and military industry comprises 138 constituent stocks with a total market capitalization of 25,859 billion, and a total revenue of 574.5 billion [8]. - The industry has shown strong performance with absolute returns of 15% over one month and 18% over twelve months [8].