At the beginning of 2023, the military industry will give people a different feeling.
On December 23, 2022, Zhongzhi Holdings announced that it will inject 100% equity of Changfei Group and Hafei Group into the listed company. After the reorganization is completed, Zhongzhi Holdings will become the only final assembly platform for military helicopters.
On January 10, Zhongzhi shares resumed trading, with a huge intraday volume, but finally closed down, and the market was unmoved.
The next day, another big news came out that Chengfei Group decided to go public through the back door of AVIC. This time, the market finally couldn’t hold back anymore, and AVIC went straight up at a speed of 20cm every day for eight days, without giving people a chance to get on the car. Such a grand occasion has never appeared in the history of the GEM.
Perhaps even I was frightened by this “crazy” rise. On February 14, AVIC suddenly stated that “the possibility of insider trading cannot be ruled out”, and public opinion was in an uproar. But even so, the company’s stock price still rose 13.8% throughout the day.
What is the inside story behind the burning oil?
【Asset securitization bonus】
The Prophet of Spring River Plumbing Duck.
About two years ago, a researcher went to a certain military industrial enterprise for research, and the reception leader said excitedly: “I have been in this industry for decades, and I never dared to think that a military industrial enterprise would have the future it is today.” The future, a very important part of which comes from the securitization of military industry assets.
In the era of planned economy, state investment has formed a large number of technological achievements, and these high-quality accumulated assets have not been fully utilized. Now that the state-owned enterprise reform is in full swing, a very important task is to inject external assets into the platform of listed companies, which can not only activate the accumulated assets, but also promote the growth of state-owned enterprises.
Compared with other fields, the military industry has its particularity, so the restructuring has not been ideal for a period of time. For example, the National Defense Science, Technology and Industry Bureau is responsible for the restructuring of scientific research institutes, but this is only a bureau-level unit under the Ministry of Industry and Information Technology, and some scientific research institutes may involve the level of the Central Military Commission, which is not convenient for work coordination.
But judging from the current situation, high-level determination is great, and these problems may no longer be problems. On January 5, the State-owned Assets Supervision and Administration Commission held a meeting of heads of central enterprises, clearly emphasizing the need to take advantage of the momentum and organize a new round of deepening and upgrading of state-owned enterprise reforms.
Judging from past experience, the improvement of the level of asset securitization has greatly promoted the market-oriented operation of military enterprises.
Taking Aviation Industry Group as an example, since 2015, listed companies such as AVIC Shenfei, AVIC XAC, AVIC Hi-Tech, and Baosheng have undergone asset restructuring. After the restructuring, the quality of operation has been greatly improved. Keep improving. In 2015, the total assets of the Aviation Industry Group were 400.3 billion yuan, and now it has already exceeded one trillion yuan.
This year is the state-owned enterprise reform has entered a new round of implementation period, and the new incentive policies have come into effect at the same time. Stronger enthusiasm may promote the injection of military industrial assets into a new climax. Zhongzhi and AVIC are just the beginning.
In this regard, the opportunity logic of the capital market mainly revolves around two lines.
First, the valuation gap between the primary and secondary markets leaves a lot of room for stock prices to recover.
Taking this time AVIC’s swallowing up of Chengfei as an example, AVIC’s tradable shares are 591 million shares. Based on the calculation of not less than 10% of the circulation after the issuance, its acquisition of Chengfei can issue a maximum of about 5.3 billion shares. The asset appraisal of Chengfei has not yet been completed, but the issue price has been determined to be 8.39 yuan per share. Based on this calculation, the highest valuation of Chengfei is 44.4 billion.
However, regardless of the size of assets or revenue, Chengfei is the sum of Xifei and Shenfei, and the valuation of the latter two companies in the secondary market is 70 billion and 110 billion respectively.
If the secondary market prevails, then AVIC after being merged into Chengfei is at least a company with a market value of 100 billion, and there is a huge room for repair in the middle.
Second, many of the assets currently freed outside the body are of very high quality and have accumulated a lot of technology. Once market-oriented operations are launched in the later stage, it is likely to bring huge benefits to the company.
Hikvision is a good example. The company was originally an enterprise under the 52nd Institute of China Electric Power Research Institute. Later, it was pushed onto the stage of market economy in rounds of state-owned enterprise reforms. The company was established at the end of 2001, and launched video and audio compression boards to the market the following year. In 2003, its revenue exceeded 100 million yuan, becoming the domestic leader in the board field. After listing in 2010, the market value rose from less than 30 billion to a maximum of 600 billion, twenty times in ten years.
Looking forward, the current level of asset securitization is not high, and companies with high-quality assets under their banners have the greatest opportunities, such as Aerospace Science and Industry Corporation.
Among the major military industrial groups in China (Shipbuilding Group, Electronic Technology, Electronic Information, Aerospace Science and Technology, Aerospace Science and Industry, Aviation Industry, Ordnance Industry, Ordnance Equipment, China National Nuclear Corporation), CASIC is the one with the lowest asset securitization rate. Only 15%.
Another attractive point of CASIC is that it is engaged in missile research, which can be said to be at the core of the military industry. The company can be traced back to the Fifth Research Institute of the Ministry of National Defense established in October 1956. It is China’s first missile research institution and the cradle of China’s missile industry. The first director is the famous Qian Xuesen.
At present, the three scientific research institutes under the group have subordinate listed companies, namely the Second Academy, the Third Academy and the Tenth Academy of Aerospace Science and Industry, among which the asset securitization level of the Second Academy is the lowest. The only listing platform of the Second Academy of Aerospace Science and Technology is Aerospace Changfeng, which will also be the main position for the capital operation of the Second Academy of Aerospace Sciences. At present, the company has a small market value and sufficient potential.
In addition, the Aerospace Science and Industry Group also has a number of listed companies such as Aerospace Electric, Aerospace Chenguang, Aerospace Information, Aerospace Science and Technology, and Aerospace Development, which are also worthy of attention.
[New situation requires new thinking]
Although AVIC has gone crazy, the overall attention of the military industry has not achieved the expected effect, and this is largely caused by past investment experience.
For a long period of time, the overall performance of the military industry was indeed not good. Its impermanent nature of skyrocketing and plummeting caused many investors to suffer a lot, and they were even labeled as “scumbags”.
It’s a bit like the story of “Wolf is Coming”. I was “fooled” too many times before, and when the opportunity came, I lost interest.
From a macro perspective, the rise of China’s military industry is an inevitable historical process.
After decades of reform and opening up, we have long adhered to the national policy centered on economic construction. At that time, the development of the military industry was not the main task. Today, China is already the second largest economy in the world. Although we still insist on peace and development, the tree wants to be calm but the wind keeps on. In order to preserve our economic achievements, we must have a “dog-beating stick” in our hands. The evolution of the world situation in 2009 has already explained everything.
The more critical issue is that, in terms of the relative ratio of economic level to military expenditure, China still has a lot of room for improvement among the major powers.
According to the statistics of the Stockholm International Peace Research Institute (SIPRI), from 2012 to 2021, China’s defense expenditure accounted for an average annual ratio of 1.3% of GDP, compared with 3.6% for the United States and 4.2% for Russia.
A more critical issue is that the worldwide arms race is intensifying.
In the 2023 fiscal year, the U.S. defense budget will reach 850 billion U.S. dollars, which will set a new record for the post-war U.S. defense budget even if inflation is taken into account. The United States’ current investment in military power has far exceeded all contingencies such as the Korean War, the Vietnam War, the Gulf War, and the Afghanistan War.
The strongest bull stocks in 2023 are likely to come from the military industry
Naturally, China cannot turn a blind eye or turn a deaf ear to all this.
According to the data of the Ministry of National Defense, in 2022, my country’s national defense expenditure budget will be 1.47608 billion yuan, a year-on-year increase of 7%, returning to the 7% growth level after many years.
Looking through the financial reports of military enterprises, contract liabilities remain high, inventories, construction in progress, etc. continue to grow, including injecting external assets into listed companies, accelerating market-oriented operations, and promoting the reform of the military product pricing system. All these signals indicate that the country has great determination to build a strong military industry. In addition to the self-supply for national defense mentioned above, foreign trade may also be a new path.
According to the “2021 Top 100 Global Arms Production and Military Service Companies List” released by SIPRI, the total global arms sales in 2021 will reach 592 billion US dollars, of which the United States will account for 51%, and China will rank second with 18%. From 2016 to 2020, China’s arms exports accounted for only 5.2% of the world’s total arms exports.
The strongest bull stocks in 2023 are likely to come from the military industry
After the Russia/Ukraine conflict, the United States, NATO and Russia put a large amount of weapons on the Russia/Ukraine battlefield. China is expected to undertake some of Russia’s military trade customers and non-NATO customers of the United States.
In addition, there is an unspoken fact that if China wants to open commercial channels to the west, safety and stability are the first priority, so it has to use military industry. The advantage of military trade is that it has large profit margins, which directly promotes the profitability of listed companies.
The world situation is undergoing profound changes, and the understanding of the military industry should also break out of the shackles of the original thinking.
We have a bold guess that in 2023, the sector with the most bull stocks in the A-share market is likely to be military industry.