Summary of Military Industry Conference Call Industry Overview - The military industry sector has seen significant growth since early May, ranking second among Shenwan's primary industries, driven by domestic policy cycles, geopolitical tensions, and rising security demands, as well as China's enhanced international military trade status [1][2][3]. Key Points and Arguments Macro Level Insights - China's military expenditure has maintained single-digit growth for the past decade, with room for improvement in its GDP proportion. The year 2025, marking the end of the 14th Five-Year Plan, is expected to see concentrated order deliveries, boosting domestic demand [1][3]. - The military sector's valuation is not at extreme levels, with a PE ratio around the 75th percentile and a PB ratio at the 60th percentile over the past decade, indicating potential for profit recovery [3][6]. Mid-Level Insights - The military sector's prosperity is improving, with components from upstream to military electronics and equipment showing signs of recovery. For instance, the revenue growth rate of leading MLCC companies in Taiwan has rebounded, and the price decline of sponge titanium has narrowed [1][4]. Micro Level Insights - The first quarter reports indicate that some sub-sectors are entering a replenishment phase, with significant increases in orders for aviation equipment and military electronics. There are clear signs of accelerated capacity clearance, with a decrease in companies under cash flow pressure [1][4]. Investment Dynamics - Public funds show a significant underweight in the military sector, with allocation ratios returning to levels seen since 2016, indicating a non-crowded investment environment. Retail investors, financing, and ETF funds have shown notable net inflows, particularly during key events [1][5]. Historical Concerns - Historical concerns regarding the military sector include weak profitability, limited market space, and unpredictable policies. For example, the military expenditure growth rate has been around 7.3% over the past decade, with defense spending remaining stable as a percentage of GDP [8][9]. Future Outlook - The military industry is expected to continue its growth trajectory, with significant orders anticipated in the coming years. The focus will be on the recovery of the 14th Five-Year Plan orders and military trade growth logic [6][19]. - The development of unmanned systems and advanced weaponry is a key area of focus, with significant advancements in various platforms, including aerial, ground, and underwater systems [15][21]. Investment Strategy - The current investment strategy should focus on sectors experiencing recovery, particularly in upstream military electronics and missile supply chains. The military sector is likely transitioning from the first to the second phase of its growth cycle, presenting opportunities for investment [7][19]. Conclusion - The military industry is poised for continued growth, supported by favorable macroeconomic conditions, improving profitability, and strategic government policies. Investors are encouraged to explore opportunities within this sector, particularly in areas aligned with technological advancements and military modernization efforts [18][30].

Group 1: Military Industry Insights - The military industry is experiencing accelerated domestic prosperity and an opening international market, with a historical win rate of 70%-80% in July-August over the past decade [1][2] - The current military industry is at a critical juncture with the transition of the "14th Five-Year Plan" and the preparation for the "15th Five-Year Plan," which is expected to release pent-up downstream demand significantly [3][4] - Major events such as military parades serve as important catalysts for the military sector, with historical data showing substantial returns leading up to such events [4] Group 2: Global Military Spending Trends - Global military spending is on the rise, with Japan planning to invest 43 trillion yen (approximately 290 billion USD) from FY2023 to FY2027, marking a 63.5% increase compared to previous years [9] - South Korea's defense budget is set to increase to 80 trillion won (approximately 60 billion USD) by 2028, reflecting a 7% annual growth rate [9] - The European Union is mobilizing 800 billion euros for defense investments, while the U.S. defense budget is projected to exceed 1 trillion USD for the first time in FY2026 [9] Group 3: Technology Sector Analysis - The AI technology sector is currently positioned low in terms of market valuation, with potential for further recovery and expansion [12][18] - The TMT (Technology, Media, and Telecommunications) sector has shown signs of recovery, becoming a prominent market driver [12] - Significant profit upgrades have been observed in various AI sub-sectors, particularly in upstream computing power and downstream applications such as financial technology and drones [18][19]

Group 1 - The defense and military industry sector has seen significant growth, with stocks like Guoke Military rising over 12% and several companies hitting the daily limit up [1] - The National Defense Military ETF (512810) experienced a 3% increase during trading, with a transaction volume exceeding 59 million yuan and a turnover rate of 9.55%, leading the market among similar ETFs [1][2] - The ETF's share price was reduced from approximately 120 yuan to around 60 yuan after a split, making it more accessible for investors [3] Group 2 - Advanced fighter jets like J-10CE and J-35 are expected to be strategic assets for China's military trade, enhancing domestic equipment research and development [3] - The military trade sector is anticipated to benefit from a global arms race and industry recovery, with a focus on military trade, military electronics, and consumable ammunition as key investment themes [3] - The National Defense Military ETF (512810) tracks the CSI Military Index and is designed to provide efficient exposure to the defense sector, combining traditional and new military capabilities [3]

Core Viewpoint - The 2025 Paris Air Show, scheduled from June 16 to June 22, will see significant participation from Chinese companies across key sectors such as special materials, engines, and complete aircraft manufacturing, which is expected to catalyze investment enthusiasm in the military industry [1] Industry Summary - The Chinese military industry is anticipated to benefit from dual drivers: the transformation of the global military development environment and endogenous growth driven by strong planning [1] - Geopolitical conflicts and trade frictions are increasing uncertainty in international relations, leading to a sustained rise in military demand and enhancing the strategic position of the military industry [1] - The military industry exhibits stronger anti-cyclicality compared to traditional industries, showcasing rigidity and stability [1] - Short-term drivers such as accelerated technological iteration, approaching key strategic nodes, and the upcoming five-year planning cycle are expected to maintain an upward trend in industry prosperity [1] Company Summary - The J-10C fighter jet has demonstrated its capabilities by shooting down three 4.5-generation Rafale jets during the India-Pakistan border conflict, garnering global attention and leading to potential foreign trade orders, including interest from the Indonesian government [2] - The overall tone for military enterprises this year aligns with achieving the established goals of the "14th Five-Year Plan," with demand recovering from the upstream sector [2] - The military industry in China is transitioning from "import dependence" to "independent innovation" and even "foreign trade export" [2] - The military ETF (512660) has gained significant investor attention, achieving historical highs in both share size and net value performance, indicating a strong market interest in the military sector amid increasing geopolitical uncertainties [2]

Group 1 - The A-share market experienced slight adjustments on June 17, with the military industry sector showing significant movements, particularly the aerospace ETF (159227) which briefly turned positive, highlighting stocks like Zhongbing Hongjian, AVIC Shenyang Aircraft, Guobo Electronics, and Great Wall Military [1] - The 55th Paris Air Show, held from June 16 to 22, showcased China's aviation industry, featuring military aircraft such as the J-20, J-35A, J-10CE, Y-20, Z-20, and Z-10ME, indicating a strong ambition for transformation from a technology follower to a leader in the field, which may boost China's military trade [1] - The aerospace ETF (159227) closely tracks the National Aerospace Index, leading in scale among similar indices, with the defense and military industry accounting for 96.2% of the index, indicating a higher concentration in aerospace and defense equipment compared to other indices [1] Group 2 - According to AVIC Securities, themes such as low-altitude economy, commercial aerospace, deep-sea technology, large aircraft, and military intelligence have been highly active since the beginning of the year, suggesting that these new military domains will continue to deepen and evolve [2] - The military industry's fundamentals are expected to improve continuously, with active themes and performance boosts likely to drive the overall military market in the near future [2]

Investment Rating - The report rates the defense and military industry as "Recommended" [1] Core Viewpoints - The J-10C fighter jet is expected to lead China's military trade, becoming a prominent symbol of China's military exports [11] - The potential demand and development space in the military trade market are anticipated to exceed market expectations, with various companies positioned to benefit [11] Summary by Sections Events - Indonesia is evaluating the feasibility of purchasing Chinese-made J-10 fighter jets, influenced by the aircraft's performance in the India-Pakistan conflict and its competitive pricing compared to Western counterparts [2] - Recent reports highlight the J-10's development and achievements, with significant interest shown at the Langkawi International Maritime and Aerospace Exhibition [2] - Pakistan's government announced the acquisition of 40 J-35 fifth-generation stealth fighters and other military equipment from China [2] Analysis and Judgments - The J-10 is poised to continue the success of previous Chinese military exports, moving from low-end markets to mid-high-end markets [3] - The J-10CE is positioned as a cost-effective option for developing countries, competing against established models like the F-16 and MiG series [4] - The J-10CE is expected to gain more international interest, particularly in Southeast Asia, South America, and the Middle East [5] Global Military Trade Landscape - The military trade landscape is shifting towards integrated solutions rather than just hardware sales, with increasing demand for comprehensive military systems [6] - Countries like South Korea are emerging as significant players in the global arms market, challenging traditional military powers [6] Industry Development - The J-10CE's capabilities, including advanced avionics and weapon systems, are expected to drive growth in the military supply chain [7] - The use of advanced materials and engines in the J-10CE enhances its performance and operational capabilities [7][8] Investment Recommendations - Key beneficiaries of the J-10's success include: - AVIC Chengdu Aircraft Industry Group, a core manufacturer of fighter jets [11] - Zhongjian Technology, a leader in high-end carbon fiber for aerospace applications [11] - Guorui Technology, a leader in military radar systems [11] - AVIC Shenyang Aircraft Corporation, known for its advanced fighter jets [12] - Hongdu Aviation, a core manufacturer of training aircraft with significant export potential [12]

Group 1 - France is recognized as a traditional industrial power, with a strong defense industry comprising over 400 military enterprises, making it one of the few countries capable of independently developing and manufacturing complete strategic nuclear weapon systems and aerospace systems [2][3]. - The Rafale fighter jet is a flagship product of the French military industry, with Dassault Aviation being a prominent player. In 2016, India signed a contract worth $8.7 billion for 36 Rafale jets, and in April of this year, a new contract was signed for 26 Rafale M naval fighter jets at a price of €6.5 billion [3][4]. - Concerns have arisen regarding the performance of the Rafale in combat, particularly after reports of losses in real-world scenarios, leading to potential order reductions from countries like Saudi Arabia and Greece [4][18]. Group 2 - Analysts argue that the issues with the Rafale's performance are more related to the Indian Air Force's operational integration rather than the aircraft itself, highlighting the importance of a complete combat system [5][6]. - Dassault Aviation's CEO has indicated plans to increase production rates in response to geopolitical demands, with expectations to deliver three Rafale jets per month by next year and four per month by 2028-2029 [17][31]. - The global arms market is experiencing a surge, with France's defense exports reaching a historical peak of €27 billion in 2022, positioning France as the third-largest arms exporter with a market share of 6.9% [16][30]. Group 3 - The Indian government has been actively promoting the Rafale's capabilities, despite controversies surrounding the procurement process, which has faced allegations of corruption and price increases [23][25]. - The geopolitical landscape has allowed France to secure numerous defense contracts, as countries seek alternatives to U.S. and Russian military equipment [14][30]. - The development of the Future Combat Air System (FCAS) is crucial for Dassault and Europe, as the company faces challenges in keeping pace with advancements in fifth-generation fighter technology [30][31].