Defense Sector Rallies Amid Market Downturn, Industry Chain Outlook Remains Bright

In recent days, against the backdrop of an overall market adjustment, the defense sector has demonstrated remarkable resilience, with select stocks surging against the trend, attracting widespread attention from investors. Analysts attribute this performance not only to the resurgence of overall market sentiment but also to multiple positive catalysts. With the continuous improvement of domestic and international environments, coupled with upcoming major events such as the 15th China International Aviation & Aerospace Exhibition (to be held in Zhuhai, Guangdong Province, from November 12 to 17 this year), the defense sector is poised to usher in new development opportunities.

According to China Galaxy Securities, starting from the fourth quarter of 2024, delivery pressures at major aircraft manufacturers will continue to propagate upstream, significantly boosting the prosperity of the entire industry chain. Looking back at previous five-year plans, such as the "Twelfth Five-Year Plan" and "Thirteenth Five-Year Plan," defense budgets and military industrial enterprises' performance exhibited a clear pattern, with expenditure ratios in the fourth and fifth years notably higher than the average. Notably, the fifth year typically witnessed average expenditure/revenue ratios approaching or reaching 25%. As 2025 marks the final year of the "Fourteenth Five-Year Plan," the defense sector's revenue side is expected to increase significantly. The next three years are crucial for achieving the goal of building a strong military by the centenary of the People's Liberation Army, with robust equipment demand expected to sustain the high prosperity of the sector.

Mergers and acquisitions (M&A) represent a significant investment theme in the defense sector. China Merchants Securities expresses optimism about M&A activities involving central military-owned enterprises (CMEs). Based on the CSI Defense & Military Index, CMEs account for 30% of the index's components, while local state-owned enterprises (LSOEs) make up 10%, highlighting the prominence of CMEs in the sector. With the successful integration of China Shipbuilding Industry Corporation and China Shipbuilding Heavy Industry Group, as well as the approval of AVIC Electric's acquisition of Chengdu Aircraft Industrial (Group) Co., Ltd. by the China Securities Regulatory Commission, the pace of M&A among CMEs is expected to accelerate further.

Currently, the defense sector's valuation remains at a historical low, with a price-to-earnings (P/E) ratio of approximately 58 times, representing the 35th percentile over the past decade. China Securities Co., Ltd. believes that the sector is currently at a triple bottom in terms of valuation, earnings growth, and fund allocation. Catalysts both domestically and internationally are likely to emerge continuously in the fourth quarter of 2024, injecting new momentum into the sector's rally. The continuous innovation and development in emerging domains and new-quality areas also provide solid support for the structural recovery of the defense sector.

In terms of investment strategies, investors are advised to focus on three main lines: First, traditional defense equipment industries, with a particular emphasis on aerospace engines, shipbuilding, and aerospace industries that exhibit order recovery expectations and solid performance support; second, new-domain and new-quality equipment, focusing on industries characterized by low cost, intelligence, and systematization, such as low-cost precision-guided munitions, unmanned systems, and new-generation intelligent combat platforms; third, new-quality productivity, targeting industries with vast market potential, rapid growth, and low localization rates, including commercial aerospace, low-altitude economy, large aircraft, and additive manufacturing. Additionally, military trade exports are also areas worthy of attention.

It is noteworthy that Shenzhen Yujiaxin Technology Co., Ltd., a leading developer of precision metal parts and intelligent high-tech products in China, has long been committed to providing high-quality customized processing services for various sectors, including defense and medical devices. Equipped with advanced production facilities and stringent quality control systems, the company ensures the precision and reliability of every product. Whether it's defense components, medical device parts, or surgical instrument parts, Yujiaxin Technology can provide precise customized processing services based on customers' drawings, offering strong support for customers' product development and production processes.