A big year for the military industry, preparing to "get on board"

With the rise of China and the advancement of reforms, the future In the next 30 years, China will have at least four very clear and broad "main channels" (or "long and wet ski slopes") of times development: military industry, a new round of industrial revolution (themed on the Internet of Things and intelligent manufacturing), city clusters, and major health.

On April 23, 2019, the Chinese People's Liberation Army Navy held a grand naval review in Qingdao, with more than 10 countries sending warships to participate in the review, and naval delegations from more than 60 countries in Asia, Africa, Europe, America and Oceania participating. The unprecedentedly grand naval review was the first of its kind in the history of New China.

Mainstream media focuses on "China's Navy", but this is only the beginning of a grand event.

At least two major events will take place in 2019: October 1, the 70th anniversary of the founding of the People's Republic of China, will see an unprecedented National Day military parade; November 11, the 70th anniversary of the founding of the Air Force, the scale of the commemorative activities is expected to be no less than that of the Navy parade.

2019 can be called the "year of China's military".

From the perspective of financial investment, 2019 can be seen as the "year of the military industry". How to understand the "year of the military industry"? What are the fundamental driving force and catalyst for the development of the military industry?

The author attempts to outline and sort out in a rough way.

"Strengthening the army and rejuvenating the army" is the "rigid need" for China's rise

Although the future is full of variables, China's rise may be the most predictable event with a high probability.

For China to rise and become a truly top world power, it must have sufficient political, economic, military, industrial and technological strength.

Mao Zedong once said, "Political power grows out of the barrel of a gun." Among the five strengths, military strength is the "hardest". But at present, it is China's "shortest board". China lags behind the United States by almost two generations in national defense capabilities, such as aircraft carriers, fighter jets, and military informatization. Even compared with some European powers, there is a large gap. The "Taiwan Strait crisis" in 1996, the "collision incident" in April 2001, the increasingly intensified "island disputes" since 2010, and recent border conflicts have constantly alerted the Chinese people. For China to become a truly powerful country in the world, it must rely on the strongest and most reliable military strength as the "basic support".

       In this regard, in the new era, "Strengthening the army and rejuvenating the army" is the "rigid need" for China's rise. This is a national strategy, a national will. This is the fundamental driving force. This is the highest level. The ultimate fundamental foothold for investment in the military industry is clearly here.

From the perspective of actual needs, in the past 30 years, there has been one local war (the self-defense counterattack against Vietnam in February 1979), the Taiwan Strait crisis (1996), two military confrontations (bombing of the Chinese embassy in Yugoslavia in 1999, and the Hainan Island collision incident in April 2001), and dozens of disputes over the Diaoyu Islands and the South China Sea Islands, etc.

In the future 30 years, whether the Taiwan Strait crisis, border conflicts, island disputes, and great power confrontations can be effectively resolved, there are still great variables, and the solution to some of the most thorny problems may still rely on force.

In this regard, frequent external disputes may lead to escalating conflicts, which is an external driving force for the development of the military industry.

From the perspective of military equipment updates, China's navy, army and air force, and strategic missile forces are facing an unprecedented urgent need for equipment upgrading and replacement.

According to authoritative statistical data analysis:

1. At present, the Chinese Air Force is still mainly equipped with second-generation fighter jets (accounting for 51%), while the US military is equipped with third-generation and fourth-generation fighter jets. Assuming that in the next 10 years, the number of various types of fighter jets in China reaches 50% of that of the US military, the total value of Chinese military aircraft will be 1.3 trillion yuan.

2. At present, the Chinese Navy's warships suffer from backward power systems, small tonnage, and low total power. Although the number of warships far exceeds that of the United States, most of them are small-tonnage warships, and the overall quality is not high. Compared with the United States, China's surface warship strength will not be able to reach the level of the United States for a long time. Based on the 7% growth rate of defense budget, the total market size of Chinese warships in the next ten years will average about 1.5 trillion yuan.

3. At present, the technological level of China's army equipment is about 10 years behind that of the United States, and the number of equipment is significantly less than that of the United States and Russia, especially in terms of army helicopters. Most tanks and armored vehicles are still of the second and second-and-a-half generations. It is estimated that the overall market space for army equipment will reach about 500 billion yuan.

The strategic missile force will not be discussed here due to the lack of relevant data and information. From the army, navy and air force alone, the market space brought about by the military equipment replacement and upgrading in the next 10 years will be about 3.3 trillion yuan (an average of 330 billion yuan per year).

       In this regard, the urgent need for military equipment replacement is the endogenous driving force for the development of the military industry.

       From the long, medium, and short-term perspectives, the core driving force, external driving force, and endogenous driving force all actively promote the reform and development of the military industry. In the future 30 years, the development of China's national defense military industry will be full of momentum.

"Reform" catalyzes the "great growth of the military industry"

In the past few decades, China's military industry has been a closed market absolutely dominated by a planned economy, but in recent years, China's military industry has been undergoing earth-shaking changes, such as military reform, military-civilian integration, mixed-ownership reform of state-owned enterprises, and asset securitization.

The main idea of the military reform is that the Central Military Commission manages the overall situation, the theater commands the war, and the services build their own forces. The key points include the adjustment of the headquarters and theater commands, the transformation of the combat troops from divisions to brigades, and the transformation of the troops to adapt to the new era. The military reform has now been completed.

Against the backdrop of military reforms, the restructuring of military-industrial research institutes will be an inevitable trend. Research institutes are considered the most valuable military assets. Restructured research institutes will implement market-oriented operation methods, thus, it is expected to stimulate the vitality of the entire military industry and achieve the goal of balancing national defense construction and economic construction.

       Currently, the restructuring of military research institutes has entered a crucial implementation phase. According to the schedule: Military industrial groups must complete restructuring in 2020. 2019 will see a "small peak" in the restructuring of research institutes.

From the perspective of opportunities, most of the secondary units under Aerospace Science and Technology, Aerospace Science and Industry, and China Electronics Technology Group Corporation are research institutes, with the richest resources and the most valuable assets. The majority of the direct shareholders of the listed companies under the above three major groups correspond to research institutes, and the logic of asset injection is the clearest.

From the perspective of military-civilian integration, the state is vigorously promoting the military-civilian integration strategy, using military-to-civilian and civilian-to-military to bilaterally break through the institutional barriers between the military industry and non-military manufacturing, organically combining the strong army strategy and the strong manufacturing country strategy.

Reform of military-industrial state-owned enterprises is a current hot topic. The pace of reform of military-industrial state-owned enterprises is expected to accelerate in 2019. There are three main directions for the reform of military-industrial state-owned enterprises: strategic restructuring within the industry, such as China Shipbuilding (South Ship) and China Shipbuilding Industry Corporation (North Ship); in-depth reform from top to bottom to improve governance and operational efficiency; and vigorously promoting asset securitization.

Currently, among the twelve major military industrial groups, AVIC (with 27 listed companies) has the highest asset securitization ratio (59%). The average asset securitization ratio of China's military industrial groups is around 30%, which is far from the average 80% asset securitization ratio of major developed countries in the West.

Mixed-ownership reform is a breakthrough point for state-owned enterprise reform, and mixed-ownership reform in the military industry is a breakthrough point for mixed-ownership reform of state-owned enterprises. Judging from the current progress, the fourth batch of mixed-ownership reform list has been determined and will be announced soon. It is expected that the list will include more than 100 enterprises, including several central military enterprises.

In summary, the core of military reform is to "focus on warfare" and divest businesses that are not closely related to warfare. The core of military industrial reform is to use various means to release the constraints of the system and mechanism, introduce various means such as private capital and market-oriented operations, and encourage enterprises to improve quality and efficiency.

Overall, I believe that "Reform" will be the "fuse" for the rapid growth of the military industry, and the "market forces" driven by reform are the fundamental and transformative forces for the great development of China's military industry in the next few decades. The existing risks are: the progress of the reform is not as expected, and the effectiveness of the reform is uncertain.

However, I am full of confidence in the progress and effectiveness of the reform, because we implement the democratic centralism system, we can concentrate our efforts on major tasks, and in the field of national defense and military where power is highly concentrated, our army and military industry have first-class execution capabilities. If the reform is successful, the "market forces" it drives will be immeasurable.

In summary, I believe that: 2019 is a crucial time node for China's military industry, a breakthrough point and critical point for "reform and growth"; for investors, the fundamental driving force, external driving force, and internal driving force of the military industry will exist for a long time, and the "reform" catalyst is about to take effect. Whether it is secondary market investment or primary market investment, in the "military industry year", we should be prepared for long-term "value investment", ambush high-quality targets, and choose the right time to "get on board".

Sufficient preparation beforehand is crucial! Military industry investment, how to invest, how to get on board, are you ready?