A bumper year for the military industry: How to get on board

How to get on the "military industry" train? Different investors have different ways to "board".

In the article "A Big Year for Military Industry, Getting Ready to "Board the Train" ", the author has briefly reviewed the fundamental, external, and internal driving forces, as well as "catalysts", of the military industry's development from 2019 to 2049.

Later, some readers asked how to "board the train".

A reasonable "boarding" mentality: Value speculation.

Before discussing "boarding", it is necessary to discuss the "boarding mentality".

With the rise of China, the Chinese military industry may have a 30-year golden development period. Currently, the military industry is still a predominantly planned economy industry, and it is still a market where military and civilian products are separated. In the process of gradually transitioning from a planned economy to a market economy and integrating the military and civilian markets, a series of opportunities are expected to arise:

1. Reform of military product pricing may create a short-term "price arbitrage" space.

2. The integration of military and civilian product markets will bring "market expansion".

3. The transformation of scientific research institutes may bring patent monetization and potential activation.

…

Investment in the military industry is a long-term investment opportunity that requires patience and perseverance, and a long-term value investment mentality. This is the fundamental and basis. However, this does not mean that investors must hold stocks for decades. Of course, most ordinary investors cannot do this.

On April 24th, before and after the naval review, the military stocks in the A-share market did not experience the expected surge, but instead generally fell slightly. After seeing the article "A Big Year for Military Industry, Getting Ready to "Board the Train" ", a friend asked if there was any prospect for investment in the military industry. The author replied: "Does a marathon runner care about whether they are leading or lagging in the first few meters of the race?"

What does value investment make money from? First, it earns money from the growth of corporate value; second, it earns money from the restoration of corporate value.

In terms of investment in the military industry, the "golden age" of military industry investment for 30 years has arrived, ensuring good prospects for investment. The transformation of scientific research institutes, state-owned enterprise mixed-ownership reform, and reform of the military and civilian pricing mechanism have a "catalytic" effect, and a series of driving events such as the 70th anniversary of National Day and the 70th anniversary of the Air Force may also become factors driving the market upward.

In short, considering the long-term nature of the current military industry and its bright future prospects, a moderate "value speculation" mentality can be adopted.

Three Types of Markets and Two Types of Investors

First, the investment market can be divided into: primary market investment, secondary market investment, and primary and a half market investment.

Primary market investment refers to private equity investment in non-listed companies. According to the different investment stages, it can be divided into seed, angel, venture capital (VC), and private equity investment (PE).

Seed and angel investments require relatively small amounts of funds and have high risks. However, once the invested project is successfully listed, the returns are often hundreds of times or even higher.

As startups go through many hardships, develop, and gradually mature, investment uncertainty gradually decreases, the company's valuation increases, and investment risk decreases. However, the amount of investment required also increases, and returns are relatively smaller.

The main problems with primary market investment are: high uncertainty, high risk, limited exit channels, poor liquidity, and long investment periods (generally at least 5 years), but generally high returns.

Secondary market investment refers to securities investment in listed companies. The in-market market can be divided into: the main board market, the growth enterprise market, and the small and medium-sized board market.

Secondary market investment simply means buying and selling stocks. Information on listed companies is relatively transparent. Investors can buy and sell stocks at any time, and liquidity is strong. However, stock prices fluctuate up and down, which is a great test of investors' psychological qualities.

Primary and a half market investment mainly includes additional issuance, mergers and acquisitions, and asset restructuring. Its uncertainty, risk, and returns are between primary market investment and secondary market investment.

Secondly, from the perspective of investor types, they can be roughly divided into: professional investors (including institutional investors and individual investors) and ordinary individual investors.

Professional investors have information and resource advantages, a deep understanding of the industry, strong project screening capabilities, strong capital strength, and comprehensive risk control capabilities. Therefore, they pursue returns that exceed the market average. Professional investors are relatively objective and rational, and their investment mentality is relatively mature.

Ordinary individual investors have limited funds, energy, professional knowledge, and abilities, and it is generally unlikely for them to investigate companies and screen projects. In terms of investment returns, their core goals are mainly preservation and appreciation. Due to the above characteristics of ordinary individual investors, their expectations for investment returns are often too high, and they lack patience.

Military Industry Index Funds, Direct PE Investment, and PE FOF

There are no special thresholds for secondary market investment, and both professional investors and ordinary investors can participate. There are two ways to participate:

1. Directly purchase military stocks.

According to Buffett's value investment theory: "It is better to buy stocks of high-quality companies at a reasonable price than to buy stocks of mediocre companies at a low price."

Therefore, in stock selection, first, we must choose high-quality companies; second, we must use a reasonable price. As for what kind of company is Buffett's so-called "high-quality company" and what price is a "reasonable price", this requires investors to judge for themselves.

2. Purchase military industry theme funds.

According to incomplete statistics, there are currently about 31 military industry theme funds.

Military industry theme funds are divided into military industry index funds and military industry hybrid funds. Military industry index funds adopt a passive strategy and closely track the military industry index.

Among the indexes currently reflecting the overall performance of listed companies in the military industry in the Shanghai and Shenzhen markets, the more mainstream one is the CSI Military Industry Index (399967.SZ). The samples of this index are listed companies controlled by the twelve major military industrial groups whose main businesses are related to the military industry, as well as other listed companies whose main businesses are the military industry, using all A-shares (non-ST, *ST stocks) in the Shanghai and Shenzhen markets as the sample space.

Military industry theme hybrid funds adopt an active allocation strategy, and the fund manager flexibly adjusts the stock position ratio and the types of heavily held stocks according to market trends, etc.

In my opinion, if ordinary investors lack the time and energy to research stocks, they can adopt the "American cost averaging method" introduced by Graham in "The Intelligent Investor" to invest in military industry index funds for the long term, thus sharing the average returns of China's military industry development over the long run. Investing a fixed amount at regular intervals in index funds fundamentally solves the problems of stock selection (selecting a basket of stocks) and timing (investing on a fixed date each month or quarter).

In terms of primary market investment, investment in the military industry mainly includes direct project investment, military industry funds/military-civilian integration funds, and military industry master funds.

So-called "direct investment" refers to financial investment institutions using their unique resources and advantages to discover and acquire high-quality projects in the military-civilian integration field, directly investing their own funds into these projects.

China Zhongji Investment has invested in four high-quality enterprises: Hefei Jiang Hang, Suzhou Ship Power, and Blue Arrow Space, establishing a strong position in commercial aerospace, core aircraft components, and warship power systems. Of course, exceptionally high-quality military projects, such as Blue Arrow Space, Suzhou Ship Power, and Hefei Jiang Hang, will attract the attention of numerous institutional investors or individual LPs hoping to participate.

Financial investment institutions will also consider jointly establishing military-civilian integration industrial development funds with the government, policy banks, or private enterprises.

Currently, China Zhongji Investment is actively organizing and preparing for the establishment of a military-civilian integration industrial fund. China Zhongji Investment acts as the GP, and in addition to investing its own funds, it will also leverage its expertise in project discovery and screening, risk control, and post-investment management. It will handle fund registration, management, and other related work for LPs, charging a management fee and sharing in excess returns according to an agreed-upon ratio.

For ordinary investors, investing in a single project is very risky, but investing in a portfolio of projects through a fund of funds (FOF) can significantly reduce risk, as opportunities can be found in different areas.

According to statistics from the European Private Equity and Venture Capital Association, the probability of loss when investing in a single PE project is approximately 21%, but currently, investing through a PE FOF can significantly reduce the probability of loss.

PE FOFs can make VC investments, PE investments, and Pre-IPO investments, covering different stages. In terms of operating strategies, they can adopt various combination strategies, such as "primarily blue-chip stocks, supplemented by dark horses," effectively mitigating and diversifying risks.

In addition, secondary market investment mainly refers to private placements, where listed companies raise funds from non-specific institutions or a certain number of ultra-high-net-worth clients. Private placements differ from individual stock trading, where individuals buy and sell at market prices. Private placements are a benefit for institutional investors: they can purchase large amounts of listed company stock at a discount. These listed companies generally have favorable expectations of restructuring, etc., and the stock price usually increases easily after the completion of a private placement.

In summary, in my view, ordinary individual investors who want to "ride the military industry wave" can choose to invest regularly in military industry index funds, or select military industry-themed flexible allocation funds.

For high-net-worth clients, if they participate in primary market investment, they can invest in military industry-themed FOFs and invest in relatively certain military industry PE projects as individual LPs.

In addition, under the current market conditions, participating in private placement investments in military enterprises with the support of professional institutions is also a very good choice.

Zhou Jintao, the late chief economist of CITIC Securities, once said, "Life is a Kondratiev wave. Most people will encounter four major investment opportunities in their lifetime, and 2019 was a Kondratiev year."

Investment is an investment in national fortune!

When rise is the trend, when national fortune comes, will you rise with the tide and forge ahead, or will you row against the current or drift with the flow?

It depends on everyone's choice in this great era.