Investment Rating - The report maintains an "Outperform" rating for the defense and military industry, indicating a positive outlook for investment opportunities in this sector [2]. Core Insights - The defense equipment industry is expected to enter a new order-driven growth cycle as the "14th Five-Year Plan" becomes clearer and is implemented, leading to a recovery in performance and a revaluation phase for the military sector [2][38]. - The military aviation equipment, particularly military aircraft and engines, remains a core strength of the military sector, while new domains characterized by smart technology and unmanned equipment are anticipated to become key growth areas under the "14th Five-Year Plan" [2][38]. - The military trade is expected to provide sustained momentum for the domestic military industry [2][38]. Summary by Sections Fund Holdings - As of Q3 2025, public funds' total market value in the defense and military industry reached 101.36 billion, a quarter-on-quarter increase of 1.66%, ranking 14th among 31 industries [4][12][17]. - The concentration of holdings has increased, with the top ten stocks accounting for 54.14% of total holdings, reflecting a trend of capital flowing towards leading companies [22][25]. - The holdings of state-owned enterprises decreased to 68.49%, while private enterprises increased to 31.51%, marking a two-year high for private holdings [22][25]. Fund Preferences - Public funds show a preference for heavyweights in military electronics, materials, and leading manufacturers in the aviation sector, with significant investments in companies like AVIC Shenyang Aircraft Corporation and AVIC Engine [25][29]. - Active funds particularly favor upstream electronic and material companies, as well as downstream aviation assembly enterprises, with a notable focus on military electronics as a core foundation for future warfare [29][30]. Investment Recommendations - The report suggests focusing on several key areas for investment: 1. Aviation Equipment: AVIC Shenyang, AVIC Engine, AVIC Chengfei, AVIC Xi'an, etc. 2. Military New Materials: Feilihua, Guangwei Composite, Tunan Co., Guangqi Technology, etc. 3. Military Electronics: Fudan Microelectronics, Hongda Electronics, AVIC Optoelectronics, Ruichuang Micro-Nano, Newray, etc. 4. New Domains: Zhenlei Technology, Mingsheng Electronics, Zhongke Xingtai, Jingpin Special Equipment, Lianchuang Optoelectronics, Zhongwu Drone, Ruike Laser, etc. 5. Military Trade: AVIC Shenyang, Guangdong Hongda, Gaode Infrared, Inner Mongolia First Machinery, etc. [2][38].

Investment Rating - The report gives a "Buy" rating for the company, marking its first coverage [7]. Core Viewpoints - Guotai Group is positioned as a regional leader in the civil explosives industry, with a diversified layout that includes military new materials and rail transit automation, which supports growth [1][15]. - The company's revenue and net profit are expected to recover as downstream demand gradually increases, with a stable performance in civil explosive product sales and significant breakthroughs in military new materials [2][25]. - The military budget in China is projected to grow, which will likely enhance the demand for military equipment, benefiting the company's product offerings [3][33]. Summary by Sections 1. Regional Leader in Civil Explosives - Guotai Group focuses on an integrated civil explosives business, including industrial explosives and blasting services, while also expanding into military new materials and rail transit automation [1][15]. - As the only civil explosive manufacturer in Jiangxi Province, the company holds a significant market advantage [1]. 2. Focus on Civil Explosives with Stable Profitability - In the first three quarters of 2024, the company achieved revenue of 1.704 billion yuan, a decrease of 5.92% year-on-year, and a net profit of 219 million yuan, down 3.16% year-on-year [2][25]. - From 2021 to 2023, the company's revenue grew from 1.988 billion yuan to 2.541 billion yuan, with a CAGR of 13.06% [2][25]. - The company expects to maintain revenue and profit growth trends due to its diversified business layout and improving downstream demand [2][25]. 3. Multi-Dimensional Layout in Military Products - China's military budget for 2024 is set at 1,665.54 billion yuan, reflecting a year-on-year increase of 7.2% [3][33]. - The company is expanding its production capacity for energetic materials, with a new production line expected to significantly enhance its output [3][39]. - The military new materials business is anticipated to benefit from the increasing proportion of equipment expenditure in the military budget [3][40]. 4. Industry Supply-Side Concentration and Infrastructure Projects - The civil explosives industry is experiencing a steady upward trend, with increasing supply-side concentration [4][50]. - The construction of major infrastructure projects, such as the Gan-Yue Canal, is expected to boost downstream demand for civil explosives [4][54]. - The company has reported strong sales performance, with significant increases in production capacity utilization and sales rates [4][54].