[Observation] State-owned enterprise reform is accelerating, related sector welcomes investment opportunities.

2022 is the closing year of the three-year action plan for state-owned enterprise reform. The State-owned Assets Supervision and Administration Commission recently held a special promotion meeting to deepen the reform of state-owned holding listed companies and strive to become a model for the three-year action plan for state-owned enterprise reform.

On the market, the military sector has recently rebounded strongly. After the sector surged on May 24th, it rose again on May 25th, with Left Jiang Technology up more than 11%, Baota Industry, Yichang Technology, Hanma Technology, Yuandong Transmission, and Emerging Eastern Aviation Equipment all hitting the limit up. Envicool, Xiangtan Electric Manufacturing, and Nancal Technology rose more than 10%.

Many institutions generally believe that as the three-year action of state-owned enterprise reform comes to an end, the securitization of military assets is expected to accelerate. In the second half of the year, "state-owned enterprise reform" is expected to become one of the important investment themes in the military sector.

Component stocks of state-owned enterprise reform have high growth potential.

The year of the conclusion of the three-year action plan for state-owned enterprise reform is a year of high market attention to state-owned enterprise reform.

According to the official website of the State-owned Assets Supervision and Administration Commission, on May 18, the Commission held a thematic promotion meeting on the deepening of reform in state-owned controlling listed companies and striving to be a model for the three-year action plan for state-owned enterprise reform, reporting the progress of key reform tasks of state-owned enterprises by the end of March 2022.

The meeting emphasized that the deepening of reform in state-owned controlling listed companies should focus on key areas and overcome difficulties, strengthen the main responsibilities and core businesses, achieve clear sector attribution.Adjust and optimize the equity structure, play the role of active shareholders; improve corporate governance mechanisms, select and use independent directors; strengthen and enrich positive incentives, stimulate internal dynamic and vitality; strengthen internal strength and consolidate the foundation, enhance value guidance and expectations.The meeting emphasized the need to regard the deepening of reform in state-owned controlling listed companies as an important area of the three-year action plan, strengthen guidance and supervision, and increase overall coordination and coordination.

The meeting requires,The meeting required to focus on deepening the reform of state-owned controlling listed companies as an important area of the three-year action plan,strengthen guidance and supervision, and increase overall coordination and coordination.To promote listed companies to become benchmarks for deep implementation of state-owned enterprise reform for three years,to be benchmarks for operating in accordance with laws and regulations, and to promote the healthy and stable development of the capital market.

According to WiND data, in the first quarter of 2022, most of the 100 constituent stocks of the CSI State-owned Enterprises Reform Index achieved good growth.

In the first quarter of this year, the companies with the highest year-on-year revenue growth were Shandong Gold, Zhonghuan Shares, Western Superconducting Technologies, Shandong Hualu-Hengsheng Chemical, Huagong Tech, Huizhou Desay SV Automotive, Three Gorges Energy, and Naura Technology Group. The revenue growth rate of these companies exceeded 50%.

China Northern Rare Earth, China National Software & Service, Inspur Electronic Information Industry, AECC Aviation Power, China Zhenhua, Shanxi Xinghuacun Fen Wine Factory, Jiangsu Yangnong Chemical, China National Chemical Engineering, PetroChina, Unigroup Guoxin Microelectronics, and iFlytek also achieved revenue growth rates of over 40%.

Among these companies, except for iFlytek, the net income in the first quarter of this year also achieved high-speed growth. Among them, Shandong Gold and Naura Technology Group saw nearly a doubling of net income attributable to shareholders; Zhonghuan Shares saw a net income growth of nearly 1.45 times; Jiangsu Yangnong Chemical saw a net income growth of over 1 times; AECC Aviation Power, China Northern Rare Earth, and Huagong Tech saw a net income growth of nearly 1 times.

In addition, among the constituent stocks of state-owned enterprise reform, the companies with the highest growth in net income attributable to shareholders are Chongqing Changan Automobile (over 4 times), Yankuang Energy (nearly 2 times), Avic Heavy Machinery (over 1.7 times), China Zhenhua, Zijin Mining Group (about 144%), Navinfo Co., Ltd. (about 126%), and JCET Group Co., Ltd. (about 123%).

In contrast, there are also some companies in the sector whose performance growth has slowed down, such as Avicopter PLC, GF Securities, Weichai Power, Beijing Shunxin Agriculture, Conch Cement, GTJA, Mango Excellent Media, and XCMG Construction Machinery, involving multiple industries such as brokerage, construction materials, consumer, and media. There are many reasons for the slowdown in growth in multiple fields, which are closely related to the macro environment, such as the COVID-19 pandemic, as well as the high base effect of the same period in 2021.

The military industry sector is bullish according to institutions.

In 2022, which is the final year of the three-year action plan for state-owned enterprise reforms, deepening the reform of state-owned listed companies and striving to become a model for the three-year action plan for state-owned enterprise reforms, has been seen as bullish for the military industry sector by multiple institutions.

CICC believes that from the perspective of asset securitization rate, the current asset securitization rates of aerospace science and technology, aerospace science and industry, China Electronics Technology Group Corporation, and Weapons Industry Group are still at a relatively low level, and there is great potential for increase in asset securitization rates. Various state-owned enterprise reform measures, including asset restructuring and stock-based incentives, are expected to accelerate, which will help enhance the asset quality, management efficiency, and profitability of the sector.

China Galaxy Securities believes that 2022, as the final year of the three-year action plan for state-owned enterprise reforms,In the second half of the year, "state-owned enterprise reform" is expected to become one of the important main themes for investment in the military industry sector, and there is the potential for a resurgence of asset securitization, which may lead to a reshaping of the valuation system.In the short term, the asset securitization of military groups may still focus on high-quality assets outside the field. With the introduction of supporting policies for the transformation of institutions, it is expected that the transition to higher-quality assets of institutions will be possible in the future.

Dongguan Securities believes that 2022 is the "final year" of state-owned enterprise reforms. From the recent intensive announcements of share repurchases, stock-based incentive plans, and shareholdings, it can be observed that the reform of military enterprises is gaining momentum and is expected to activate the vitality of military enterprises.Long-term bullish on the industry during the "14th Five-Year Plan" period, under the demand for equipment upgrading and replacement.From the perspective of usage, the increase in the number of practical training sessions has led to an increase in the loss of trainer aircraft and the replenishment of missile inventory.Bullish on the aviation industry chain and the high-consumable missile industry chain.On the other hand, bullish on the transfer and transformation of space technology achievements to the economic and social sectors.Bullish on the development of the aerospace industry service and the Beidou industry chain under the Internet of Things, as well as the development of special chips under the new wave of digital currency reforms.

First Securities believes that the three-year action plan for state-owned enterprise reform is entering its final year. With the advancement of reform efforts, the securitization of defense industry assets is expected to accelerate. The securitization rate of defense conglomerates is still relatively low.If there are high-quality assets such as research institutes injected in the future, there is huge potential for securitization.Aerospace Science and Technology Corporation, Aerospace Science and Industry Corporation, China Ordnance Industry Group, China Electronics Technology Group, etc. currently have relatively low securitization rates and have great room for improvement.

The performance of the defense industry sector in the first quarter of this year has been good.

Wind data shows that most of the 40 constituents of the CSI AVIC Aerospace & Defense Index have achieved good growth. Among them, Guanglian Aviation, Sinofibers Technology, Changsha Jingjia Microelectronics, Western Superconducting Technologies, Beijing Relpow Technology, and Chengdu Ald Aviation Manufacturing all have revenue growth rates exceeding 60%;

While North Navigation's net income attributable to the parent company has increased by over 26 times, Guanglian Aviation by over 10 times, Xi'an Chenxi Aviation Technology, Sinofibers Technology, AVIC Heavy Machinery, China Zhenhua, and other companies have seen their net income attributable to the parent company more than double year-on-year.

Since 2022, influenced by factors such as market sentiment, the military industry sector and new energy sector have both experienced significant corrections, with the CSI AVIC Aerospace & Defense Index falling by over 29% year-to-date. This year, the stock prices of all 40 constituents of the CSI AVIC Aerospace & Defense Index have fallen across the board. Among them, Avicopter Plc, Raytron Technology, Fujian Torch Electron Technology, Changsha Jingjia Microelectronics, Zhuzhou Hongda Electronics, and AVIC Heavy Machinery are leading the decline.

Now that the new energy sector has made a winning comeback, with new bullish factors, can the military industry sector also see a turning point?

Looking at the recent unusual movements in defense stocks, the sector has been surging for several days. On May 25th, Baota Industry, Guangzhou Echom Sci.&Tech. Co.,Ltd., Hanma Science and Technology, Yuandong Drive Shaft, and many others hit the daily limit up, coupled with positive stimuli such as state-owned enterprise reforms, indicating potential for further highs in the future.

First Capital Securities believes that the industry's expansion logic remains unchanged. Verification of large deposits from downstream companies implies the landing of significant orders, which will orderly transmit upstream and midstream along the industry chain. With the demand surge from supporting companies during the "14th Five-Year Plan" period confirmed, the CSI AVIC Aerospace & Defense Index has a valuation of 53 times, at the 8th percentile of historical PE, continuing to be bullish on the sector's allocation value at the current position.

Author: Qing Wei Liao

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