Active fund holdings in the military sector are at a relatively low level in history. From the beginning of 2024 to November 25, the CITIC Military Index rose and fell by +8.93%, and the Shenwan Military Index rose and fell by +6.49%, both underperforming the 12.15% increase of the CSI 300 Index. In 2024Q3, the market value and proportion of active funds in the military industry have rebounded, and the overweight has expanded from 0.6pct to 0.77pct, but there is still a lot of room for improvement compared with the overweight of 2.95pct in 22Q3. In

the first three quarters of '24, the revenue and profit of the sector declined, but some upstream links have shown a year-on-year improvement trend in the third quarter. In the first three quarters of '24, the segment's revenue was -9.91% year-on-year, and the net profit attributable to the parent company was -34.19% year-on-year. However, Western Superconductor and Zhongjian, the main suppliers of upstream materials, both ended a five-quarter year-on-year decline in performance, and the growth rate returned to positive in 24Q2 and 24Q3 respectively, with a significant increase from the previous quarter. In addition, although the income statement is under pressure in the short term, the fixed assets of the whole industry chain still maintain a high level of positive growth, indicating that the long-term demand of the industry is highly certain.

Repair of the main chain: Actual combat training and low cost-effectiveness ratio have given rise to the elasticity of high demand for missiles and long-range fire, and a new round of growth of aviation equipment has been driven by upgrading and military trade going to sea. The precision guidance of modern warfare has led to a rapid increase in the demand for missiles and long-range fire, and the high-consumption characteristics of actual combat have also put forward higher requirements for the cost-effectiveness ratio. The U.S. missile and ammunition budget for fiscal year 2025 is $29.8 billion, an increase of 44% over fiscal year 2022, and the overall growth trend in the past three years has been obvious, of which the procurement budget for guided multiple launch rocket systems in fiscal year 2025 increased by 29.4% year-on-year. The new generation of aviation equipment represented by J35A and J20S was officially unveiled at the 15th Zhuhai Air Show, and is expected to lead a new round of growth in the future. Y20, Pterodactyl 2, Rainbow 3 and other models of products have frequently appeared in international air shows in recent years, and military trade is expected to become a new "business card" for high-end manufacturing to go overseas.

New quality and new domain: Cutting-edge technology is the commanding heights of the great power game. National defense equipment is the culmination of high-tech applications, and the optimal solution to the equipment race is to realize qualitative changes in army building through high-tech applications and thus gain intergenerational superiority over opponents. However, the implementation of high-tech depends on a large amount of resource investment, so the collaborative sharing of technology, market and industry through integration can effectively improve the efficiency of resource utilization and achieve a positive cycle. The new qualitative and new domains represented by commercial aviation, commercial aerospace, and low-altitude economy are gradually becoming a new growth curve for the sector.

In the long run, the demand of the military industry is highly certain, and a new round of business cycle can be expected. It is recommended to pay attention to the following subdivisions:

Core equipment and core support, it is recommended to pay attention to: OEMs, AVIC (300114, not rated), AVIC Shenfei (600760, not rated), AVIC Xifei (000768, not rated), Hangfa Power (600893, not rated), Zhongzhi (600038, increase), Hongdu Airlines (600316, not rated); Informatization and intelligence, AVIC Optoelectronics (002179, Buy), Aerospace Electric (002025, Buy), Zhenhua Scenery (688439, Buy), Zhenhua Technology (000733, Overweight), AVIC Airborne (600372, Overweight), Changyingtong (688143, not rated), Torch Electronics (603678, not rated); Core supporting, Western Superconductor (688122, Buy), AVIC Heavy Machinery (600765, Buy), Fushun Special Steel (600399, Buy), Tunan (300855, not rated), Steel Research Gaona (300034, Buy), Chujiang New Materials (002171, Buy), Parker New Materials (605123, not rated), Guangwei Composites (300699, Buy), AVIC Hi-Tech (600862, Buy), Hangfa Control (000738, not rated), Hangfa Technology (600391, not rated), Beimo Hi-Tech (002985, buy), etc.

New hot tracks, it is recommended to pay attention to: Satellite Internet and artificial intelligence, Hager Communications (002465, Buy), Aerospace Electronics (600879, not rated), Guobo Electronics (688375, Buy), Shenglu Communication (002446, not rated), Aerospace Electrical (002025, Buy), Shanghai Hanxun (300762, not rated), Zhenxin Technology (300101, not rated), Chengchang Technology (001270, not rated), Zhenlei Technology (688270, unrated), Fudan Microelectronics (688385, Buy), Ziguang Guowei (002049, overweight), Aerospace Intelligent Equipment (300455, unrated); Large aircraft supporting, AVIC Xifei (000768, not rated), AVIC Shenfei (600760, not rated), Zhongzhi shares (600038, increase), AVIC Heavy Machinery (600765, buy), AVIC Hi-Tech (600862, buy), etc.

Risk Warning:

Military orders and revenue recognition are lower than expected; R&D progress and industrialization are less than expected; competitive landscape and share fluctuation risk; the risk of falling product prices; Assumptions that change in conditions affect the calculation results