Group 1: Market Trends - In the early trading session, major funds saw net inflows in sectors such as defense, non-bank financials, and electronics, while there were net outflows in computer, non-ferrous metals, and machinery sectors, with the computer sector experiencing a net outflow exceeding 5.3 billion [1] - As of July 28, the Defense ETF (512670.SH) rose by 1.22%, and its associated index, the China Defense Index (399973.SZ), increased by 1.42% [1] Group 2: Military Equipment Developments - On July 21, the China Weapon Industry Group conducted a demonstration of unmanned and counter-unmanned combat systems, showcasing new combat capabilities in the unmanned domain [2] - Unmanned systems, particularly loitering munitions, are expected to play a crucial role in future combat, offering low-cost advantages and high lethality against valuable targets [2] Group 3: Investment Insights - In Q2 2025, active funds increased their allocation to military industry stocks, with an overweight increase of 0.35 percentage points from Q1, indicating a growing interest in military trade and new combat capabilities [3] - The military trade sector is anticipated to become a second growth driver, with significant performance potential in the context of recovering market conditions [3] - Key stocks in the military sector include AVIC Shenyang Aircraft Company, Guorui Technology, and Inner Mongolia First Machinery Group, among others, which are expected to benefit from increased demand and investment [3][4]

Investment Rating - The report maintains a "Positive" investment rating for the defense and military industry [5]. Core Viewpoints - The integrated combat system of China is expected to rapidly open up the market, with military trade likely to continue increasing [16][17]. - In Q2 2025, active funds have significantly increased their overweight position in the military sector, with expectations for further increases focusing on military trade and new combat directions [21]. - The current market position remains optimistic for the military sector, with upstream components and key materials expected to benefit from demand amplification effects [22]. Summary by Sections 1.1 Military Trade and Equipment Strength - The Weapon Industry Group showcased China's military trade capabilities in unmanned and counter-unmanned systems, indicating a growing demand for military trade [9][16]. - The demonstration included various advanced equipment such as the BZK-005E drone and the Tianlong 100 air defense missile system, highlighting the capabilities of China's integrated combat system [17][18]. 1.2 Fund Allocation Trends - In Q2 2025, the overweight position of active funds in the military sector increased to 0.92 percentage points, up from 0.57 percentage points in Q1 2025, indicating a growing confidence in military trade and new combat technologies [21][22]. - The report suggests that the market's understanding of the marginal elasticity of military trade is still insufficient, with potential for performance releases to strengthen military trade logic [21]. 1.3 Current Market Outlook - The military sector has shown positive performance since July, with many sub-sectors still at low levels, suggesting significant configuration value [22]. - The report emphasizes the importance of upstream components and key materials in weapon development and production, which are expected to benefit from increased demand [22]. Appendix: Market Performance and News - The defense and military industry index rose by 1.28% but underperformed compared to the broader market indices [24]. - Key military companies have reported significant growth in their half-year earnings, with many companies showing rapid increases in net profits [44].