Zhongjin Securities released a research report stating that since 2023, influenced by demand adjustments and other factors, the aerospace industry's performance, valuation, and fund holdings have been continuously under pressure. Looking forward to 2H24, the industry's prosperity is expected to marginally improve, and aerospace technology is still one of the few industries with long-term growth certainty. It is recommended to focus on undervalued blue-chip stocks in core segments, and to find new investment opportunities by combining medium-term industry trends with future application space. The recommended investment directions are 1) focus on core targets in core segments that benefit from demand recovery; 2) follow the trend of medium-term industrial iteration, and recommend targets related to unmanned, informatization, and aviation outbound; 3) attach great importance to the potential for future applications and recommend core targets in domestic large aircraft, commercial aerospace, and low-altitude economics.

China International Capital Corporation's views are as follows:

The sector's trend in 1H24 was restrained at first and then rose, with both fund holdings and valuations at a low level.

As of 2024/6/28, the defense and military industry index (CSI) has fallen by 10.6%, and underperformed the market by 10.3 percentage points. The sector trend in 1H24 was restrained at first and then rose, and after experiencing a significant adjustment in January, the sector's index rose by a cumulative 24.8% from 2/5 to 6/28. 1) In terms of valuation, the 33 core targets covered by Zhongjin Securities have a PETTM three-year percentile of 22.64%, while the PETTM three-year percentile of core targets such as AVIC Shenyang Aircraft and AVIC Xi'an Aircraft Industry Group are all below 15%. 2) In terms of fund holdings: the market value of the positions held by active funds in the first quarter of 2024 was 74.556 billion yuan, accounting for 2.86% of their total market value of holdings, and they underweighted the aerospace industry by 0.20 percentage points for the first time in 14 quarters.

The industry has been continuously under pressure for operation, and 2H24 may see recovery in prosperity.

1) In 2023, the sector's net income attributable to shareholders fell by 7.2%, and the net cash flow from operating activities of 3.68 billion yuan reached its lowest level since 2018, with inventory/ accounts receivable turnover rates decreasing by 0.03/0.25 year-on-year. Affected by the periodic adjustment of downstream demand, the industry has been continuously under pressure for operation since 2H23. 2) In 2023, the global defense spending growth rate reached 6.78%, and the proportion of equipment procurement FY2025 in the United States' defense spending reached 27%, both hitting new highs since 2010. The bank believes that the aerospace industry still has strong demand rigidity and long-term growth certainty, and as the impact of industry adjustments gradually weakens, the sector's prosperity is expected to continue to improve in 2H24.

Focus on current demand recovery, follow the trend of medium-term industry, and attach importance to future application space.

The bank believes that the aerospace industry's demand has high independence and long-term certainty, and prosperity recovery may be the main theme of the industry in 2H24. It is recommended to focus on three types of investment directions: 1) focus on core targets in core segments that benefit from demand recovery; 2) follow the trend of medium-term industrial iteration; 3) attach great importance to future application expansion, and recommend core targets in domestic large aircraft, commercial aerospace, and low-altitude economics.

Risk warning: demand recovery is not as expected; the development of emerging industries is not as expected.