On 21 August, the Army Armament Department issued the "proposal on accelerating the Development of Army equipment with High quality, High efficiency, High Speed and low cost," proposing to vigorously promote the competitive procurement of raw materials, sub-system competition and selection, and price reduction in large quantities. Tap potential, control prices and make profits, and achieve overall price optimization through lean management.

It is this document that has triggered a great discussion on the "collection" of the military industrial plate. Is the "gathering" of military industry coming?

In fact, the military industry has been a centralized procurement mode in China since its birth, and the core of this "proposal" does not lie in this.

The proposal points out that the chain of production and procurement should be well managed, supply chain management and production cost control should be strengthened, competitive procurement of raw materials should be vigorously promoted, sub-system competition should be selected, prices should be reduced in large quantities, potential should be tapped, prices should be controlled and profits should be controlled, and the overall optimization of prices should be achieved through lean management. It is necessary to reduce the price as a whole, explore and promote the integrated maintenance guarantee model of "research, production, supply, repair and management", implement the quota allocation of maintenance support funds, and force the design, manufacturing and production links to pay attention to maintenance management. we will further strengthen the awareness of quality, service and cost control.

What's the impact?

Will the "collection" of military industry be slashed like the "collection of medicine"? The answer is: yes.

What is the degree of influence? Industry analysts pointed out that military industry is different from medicine. Military industry attaches great importance to assets, technology, and equipment, so it is impossible to reduce prices on such a large scale as medicine. And China's military industry has always been centralized procurement, so the impact will not be as great as medical collection.

At present, China's aviation field has implemented a large single procurement model, military investors pointed out that the downstream mainframe factory has a strong voice and industrial chain status, will significantly benefit from the procurement mode + pricing mechanism reform, as for the impact of the upper and middle industrial chain needs to be treated differently, for the direction of having core technical advantages and products with scarcity, the purchase price will not be affected basically, such as high temperature alloy steel. At present, it is mainly affected in two directions: carbon fiber materials and machining, and the gross profit margins of related companies have declined. However, due to the significant volume of military aircraft, the relevant listed companies basically achieve volume premium, and the impact of income and profits is limited.

The military industry plate hit a half-year high.

Factors such as the deterioration of the international security situation, the mismatch between national defense construction and economic development, the demand for the maintenance of overseas interests and the lack of contribution to regional public security have led to the increase of national defense pressure, and the urgency and necessity of national defense construction have emerged.

After a period of silence, the defence sector has continued to strengthen since mid-May, during which the defence index soared 35 per cent. Since August, the military industrial plate has continued to go up, standing on the A-share C position. On August 23, the military industrial sector hit a six-month high, with the index up nearly 50% from the low of the year.

For the recent trend of the military industry plate, some public fund managers believe that the improvement of fundamentals is the main determinant of the continuous rise of the plate, and is optimistic about the investment value of high-quality enterprises in the track for a long time.

As of July 30, 10 listed companies in the military sector have issued 2021 semi-annual reports, and the net profits of these listed companies have increased or reversed their losses compared with the same period last year. According to Zhang Yidong, chief global strategist at Societe Generale Securities, "the current military industry is very similar to the new energy vehicles of the past two years, or the new energy of the past." "

Societe Generale Securities pointed out that the current military sector continues to heat up, the core factor is full demand, strong performance, low-lying valuation, horizontal comparison of new energy vehicles in the same high economic direction, the long-term growth of the military sector, a considerable number of target 2022 PE is between 20-40 times, the next 3-5 years annualized growth rate of 30-50% or more.

Lu Zhou, chief analyst of the military industry of West China Securities, said in a live broadcast today that in the future, the market capacity of the military sector and the market capitalization of military stocks will be a trend of steady expansion, and finally achieve the matching of national defense strength and economic strength. The core point of the transformation of military industry plate from theme investment to value investment lies in the integration of military and civilian. The derivation and extension of military and civilian technology and the integration of military and civilian are the long-term logic to support the development of military industry in the future.

Lu Zhou pointed out that the prosperity transmission of the entire military industrial chain has a time difference of about one year, which basically shows a random order, one after another, and the rhythm is obvious, and is currently in the middle stage of prosperity transmission from upstream to downstream. As for the valuation of the military sector, Lu Zhou said that at present, the valuation of the military sector is still undervalued and there is basically no bubble.

Public offering layout in advance

As early as the second quarter of this year, some public offering funds were laid out ahead of schedule and newly entered or increased their holdings of some military industrial stocks.

Data show that the National Security flexible configuration mix of UBS further increased its holdings of AVIC Control in the second quarter, with 30.2004 million shares, compared with 13.0084 million shares in the first quarter, an increase of 17 million shares. At the same time, the new holdings of the stock in the second quarter are Huatai Berry's active growth mix, Xingquan Huihe one-year holding period and other funds.

CIC UBS National Security flexible allocation mixture also further increased its stake in China Direct shares in the second quarter, buying another 1.7867 million to 15.318 million shares on the basis of 13.5313 million shares in the first quarter. At the same time, compared with the 10 funds held in the first quarter, Zhongzhi shares were held by 15 funds in the second quarter, including Wanjia Zhenxuan mixture, Jingshun Great Wall quantitative selection stocks, Boshi Hengsheng one-year holding mix and other funds. However, Dong Chengfei's Xingquan trend Investment mix held 9.69 million shares in the first quarter, but sold all of them in the second quarter.

CAAC Shenfei and Hangfa Power were also greatly increased by public funds in the second quarter. For AVIC Shenfei, in terms of merging funds with fund companies, Wells Fargo Fund holds a total of eight funds, increasing its holdings to 34.32 million shares compared with 28.93 million shares in the first quarter; Yi Fonda Fund also increased its holdings of the stock in the second quarter, from 12.691 million shares in the first quarter to 18.5217 million shares; a number of fund companies, such as GIC UBS Fund, Huaxia Fund, Cathay Pacific Fund, Penghua Fund, and so on, also increased their holdings of the stock.

Public offering for aviation power differences are larger, the second quarter was reduced by some funds, but at the same time there are funds to increase the position of the stock. In terms of reduction, the stock was reduced by Wells Fargo Fund by more than 10 million shares and Cathay Pacific Fund by more than 3 million shares in the second quarter. At the same time, Vermilion Bird Fund, Penghua Fund and so on have increased their holdings of Hangfa Power shares.