(For the report, please log in to the Future Think Tank www.vzkoo.com) Looking forward to 2020, the year of the final year of the 13th Five-Year Plan and military reform. Through the study of the industrial development framework, we judge that after the adjustment of the supply a

(For the report, please log in to the Future Think Tank www.vzkoo.com)

Outlook 2020 is the final year of the 13th Five-Year Plan and the military reform. Through the study of the industrial development framework, we judge that after the adjustment of the supply and demand relationship, the military industry may usher in an industrial explosion period, and the industry's prosperity is expected to further improve. As asset securitization of military-industrial central enterprises has entered a new stage, industrial development and capital operation will form a resonant effect; at the same time, the deepening of domestic substitution and the development of emerging markets may accelerate the incubation of military-industrial growth stocks. It is recommended to grasp the three main investment lines of new balance of supply and demand, reform and replacement.

1. Review and Outlook: The prosperity has been verified, and the industry is about to enter a new stage

.4.2 The five major questions facing the military industry sector and our research system

The military industry sector has experienced a downturn that has lasted for more than 4 years since 15 years, and has also accumulated many questions that need to be resolved urgently. These questions have gradually become the main contradiction that restricts the sector from getting rid of the decline. We summarized them into the following five major questions:

(1) Can the national defense budget still maintain stable and rapid growth;

(2) Will the high prosperity of the military industry continue?

(3) Where is the future breakthrough for the securitization of military assets;

(4) Can the military industry sector generate growth stocks;

(5) Changes in the capital attributes of the military industry sector and its impact?

We believe that as the military industry is about to enter a new stage, the traditional research framework in the past has been difficult to adapt to new needs. The CITIC Construction Investment Military Industry Team plans to build a new research system by analyzing the trend structure of the national defense budget, the industrial supply and demand pattern, reform and asset securitization path, spillover effects of the military industry and changes in the secondary market capital attributes.

Through research and judgment, we believe that: my country's national defense expenditure still has a big gap compared with its own construction demand, and will continue to maintain stable growth in the future to support the long-term good development of the military industry; the evolution of supply and demand relationship has made the industrial development show obvious stage-based characteristics in different periods, and the practical training after the military reform has caused essential changes to the demand side. On the supply side, it takes a certain amount of time to improve product quality and maturity, breakthroughs in capacity bottlenecks and improvements in supply chain management capabilities. After the supply and demand relationship is rebalanced, the industry may usher in an explosive period; military asset securitization is an important factor that runs through and promotes the development of the industry. Due to historical reasons, there are some constraints in the process of rapid increase in securitization rates. In the future, with the transformation of central enterprises from managing assets to managing capital assessment orientation, the new path of asset securitization will improve the core asset securitization rate and listed companies' operating efficiency, and achieve a win-win situation for shareholders; the military industry naturally has the soil to generate growth stocks, and in the environment where domestic substitution continues to deepen and emerging markets are developing rapidly, the military industry sector is expected to emerge more and more growth stocks; in recent years, with the long-term capital of industrial capital , foreign capital and other long-term funds in the secondary market increase, it is expected that military industry will be able to make military industry The sector is gradually gaining the attributes of value investment and entering a stage of continuous rise.

. The national defense budget continues to increase, and it is expected to maintain stable and rapid growth in 2020

my country's national defense expenditure is still a big gap compared with its own construction needs, and will continue to maintain long-term and stable growth in the future. "Ensure that mechanization is basically achieved by 2020, information construction has made significant progress, and strategic capabilities have been greatly improved; strive to basically achieve national defense and military modernization by 2035; and build the People's Army into a world-class army by the middle of this century" is the clear plan for our military development proposed in the report of the 19th National Congress of the Communist Party of China. "Handle 7 China National Defense in the New Era" points out that China is the only major country in the world that has not yet achieved complete reunification, and is one of the most complex countries around the world. It faces severe challenges in safeguarding national sovereignty, territorial integrity, maritime rights and interests. The Chinese military is in the stage of transformation to informatization, and the task of adapting to the development trend of the new world military revolution and promoting military transformation with Chinese characteristics is arduous and arduous.Compared with the protection needs of China's national defense expenditure to safeguard national sovereignty, security and development interests, there is still a big gap compared with the protection needs of fulfilling the international responsibilities and obligations of major countries.

It is expected that my country's national defense budget will maintain stable and rapid growth in 2020. With the continuous deepening of practical training, the military's demand for weapons and equipment procurement and maintenance and protection will continue to expand, and objectively put forward rigid requirements for the growth of the national defense budget. Defense expenditure, as one of government fiscal expenditure, is closely related to the national economic growth rate. After more than 30 years of rapid growth, my country's economy will gradually slow down, and the GDP growth rate has begun to decrease year by year, but the growth trend is relatively certain. my country's defense budget accounts for relatively fixed GDP, and the stable growth of GDP will surely drive the absolute amount of the national defense budget to maintain a steady upward trend. In addition, the continued strong investment of the United States in the defense budget will directly lead to a rapid growth in global defense spending. Therefore, we believe that under the influence of both internal factors of increasing military demand and external factors of rapid growth in world defense expenditure, my country's defense budget expenditure may continue to maintain stable and rapid growth in the next few years, and the growth rate in 2020 is expected to remain within the range of 7.5%-8.0%.

. New balance of supply and demand: both the supply and demand sides of the industry have shown a turning point. During the 14th Five-Year Plan period, it may usher in an industrial outbreak period

The new round of military reform launched at the end of 2015 is an important watershed in the supply and demand relationship of my country's military industry. We divide the supply and demand relationship of the military industry into three stages: before the military reform, during the military reform, and after the military reform. Before the military reform, it was before 2015; a new round of military reform was launched at the end of 2015, and breakthrough progress is expected in 2020, and the military reform will be in the period from 2016 to 2020; after the military reform, it will be after 2020.

During the 13th Five-Year Plan period, both the supply and demand sides of the industry showed a turning point, and the industrial explosion period may usher in the "14th Five-Year Plan" period. From the demand side, according to the plan of the 2015 Central Military Commission Reform Work Conference, 2020 is an important node in the new round of national defense and military reforms, and major breakthroughs and important progress must be achieved. At the same time, factors such as practical training, stable growth of national defense budget, and increased proportion of equipment construction costs are also conducive to the further increase of the military's demand for equipment; from the supply side, in recent years, new main combat equipment of various military branches has been put into service in a fixed manner, and the maturity is becoming increasingly stable. The production capacity to meet the needs of the military is already in place. The degree of refinement of supply chain management is expected to continue to improve.

At the same time, the following new characteristics may appear in the industrial development: 1. Large-scale and low-cost equipment systems may become the mainstream; 2. The foreign trade market may become a new addition to the development of my country's military industry.

. Reform starts again: Asset securitization has entered a new era, and the win-win pattern is expected to be realized.

Through in-depth analysis of asset injection cases from 2005 to 2018, we believe that due to historical reasons, the traditional asset securitization path of military-industrial central enterprises in the past had the following constraints: . The main goal is to improve the asset securitization rate, including some non-core assets. It does not pay enough attention to the improvement of the operating quality of listed companies, resulting in the lack of focus on the business of listed companies and the limited profitability; 2. The securitization problem of core assets of core institutes has never been solved; 3. The lack of supporting effective incentive policies and systems, and the business integration problem after asset injection still exists. We believe that the above three constraints lead to the fact that even if the overall securitization rate increases rapidly, the operating efficiency of listed companies is limited, the profitability improvement is not obvious, and the overall valuation level of the sector is still high.

is represented by Guorui Technology and AVIC Aircraft Capital Operation Cases, and the asset securitization of military-industrial central enterprises has entered a new era. In the second half of 2018, Guorui Technology's "gradual" plan officially opened a new path for core asset securitization of core institutes. In 2019, AVIC Aircraft Asset Replacement Plan is a typical example of asset optimization and integration by military-industrial central enterprise groups represented by the aviation industry. We believe that, represented by Guorui Technology and AVIC Aircraft, the capital operation of military-industrial central enterprises will enter a new era, no longer taking the single goal of increasing asset securitization rate as a single goal, and may pay more attention to improving the operating efficiency of listed companies.

A new era of asset securitization will pay more attention to the improvement of listed companies' income statements, and may achieve a win-win situation. The core assets of core institutes are generally strong, and after injection, it will directly improve the company's performance; follow the principle of "managing assets" to "managing capital", and improve capital allocation efficiency. It should be carried out through resource integration and reflected through capital appreciation, and capital operation will also pay more attention to improving the operating efficiency of listed companies through resource integration, and thus improving the profit statement. We believe that from the perspective of the secondary market, the investment opportunities brought by asset securitization must be accompanied by the improvement of the operating efficiency and profitability of listed companies, which directly depends on the profit statement of listed companies. The above path is expected to achieve a win-win situation for military-industry groups, listed companies and investors.

. The right time to replace: deepening of domestic substitution and the development of emerging markets accelerate the incubation of military growth stocks

The military sector naturally has the soil to generate growth stocks. First, from the perspective of industry attributes, military industry such as aerospace, shipbuilding, informatization, etc. belong to the fields of high-end manufacturing, new generation information technology and new materials. It is a strategic emerging industry in my country, and it has the conditions to generate growth stocks in terms of industry attributes. Second, from the perspective of the industry development stage, my country's military industry is still in a period of development, and the level of military equipment is still quite different from that of foreign countries. It will be a stage of accelerating the realization of mechanization and informatization for a long time in the future. From the perspective of the industry development stage, it is a period of rapid development. Third, from the perspective of technical level, due to its strict requirements on the environment and technical level in the military industry, long-term independent research and development and large resource investment, the technical level of a considerable number of fields is higher than that of civilian fields and has a strong technical spillover effect.

is currently in the best historical period of civilianization of military technology. The deepening of domestic substitution and the development of emerging markets will give birth to more and more military growth stocks. is currently in the context of the Sino-US trade war, and the demand for domestic substitution is strong, which is the time. The state encourages the civilian transformation of military technology. In addition, the military industry has accumulated over the years of technology and has the ability to replace "bottleneck" products for civilian imports, which is a good place. Emerging civilian markets are rapidly erupting, with new industries such as 5G, autonomous driving, and new energy vehicles emerging one after another, providing a broad market space, which is harmonious.

. The voice of medium and long-term funds has gradually increased, and the military industry sector is expected to start a journey of continuous rise

In recent years, the market participants in the military industry sector have shown two marginal changes. One is that major shareholders and industrial capital increase their holdings in the military industry leader, and the other is that the proportion of foreign capital has increased significantly. This trend is still expected to continue in the future. At present, most military-industrial stocks are in the bottom range, and their attractiveness to major shareholders and industrial capital has increased. In the future, major shareholders and industrial capital are expected to continue to increase their holdings through capital operations. The proportion of foreign capital in the military industry sector is increasing, becoming an important force influencing the military industry sector and will also have a certain impact on the domestic institutional investment style.

Military industrial core assets have successively entered the capital market, and the asset quality of listed companies has been greatly improved. In recent years, the capital operation of military-industrial enterprises has continued to recover, and the core assets of military-industrial central enterprises and high-quality civilian-entered enterprises have successively entered the capital market, and the asset quality of military-industrial listed companies has improved significantly; the market's analysis methods for military-industrial listed companies have gradually switched from the preparation method of in vitro asset injection to the study of listed companies' business itself.

The long-term funds such as major shareholders, industrial capital, foreign capital, etc. have increased their voice in the secondary market, which is expected to gradually enable the military industry sector to gradually have the attributes of value investment and enter the stage of continuous rise . As major shareholders, industrial capital, foreign capital and other medium- and long-term funds flow into the military industry sector and become the dominant force, the secondary market of the military industry sector will pay more attention to the performance and growth of listed companies in the future, and prefer leading companies with core competitiveness.The expectation of medium- and long-term stable growth in the military industry is consistent with the medium- and long-term capital risk preferences. The continuous inflow of the above funds is expected to enable the military industry sector to embark on a journey of continuous rise.

2. The national defense budget continues to increase, and it is expected to maintain stable and rapid growth in 2020

After experiencing nearly 10 years of rapid growth, my country's national defense budget began to show a downward trend year by year in 2014, with a year-on-year growth rate of 7% in 2017 hitting a new low in the past decade. 2018 The growth rate of national defense budget rebounded for the first time in recent years, with a year-on-year growth rate rising to 8.1%. In 2019, the central general public budget expenditure at the central level was 3539.5 billion yuan, an increase of 6.5%, and the national defense expenditure budget was 1189.9 billion yuan (approximately US$177.61 billion), an increase of about 7.5% year-on-year. The total defense budget has maintained an upward trend year by year, and although the growth rate has declined compared with 2018, the overall annual growth rate has remained stable upward trend.

The continuous increase in the defense budget is an objective need for the development of the defense industry. National defense construction should develop in a coordinated manner with economic construction and be in line with national security and development interests. It is a common practice for all countries to adjust the scale of the defense budget according to national defense needs and the level of national economic development. Whether from the perspective of the proportion of the defense budget to GDP, national fiscal expenditure, or from the per capita amount, China's defense investment level is lower than that of major countries in the world. In recent years, China has moderately increased its national defense investment, a considerable part of which is to make up for the shortcomings of past investment, and is mainly used to update armed equipment, improve the living treatment of soldiers and the training and living conditions of grassroots troops. At present, the proportion of equipment costs is increasing, and training and maintenance costs are expected to continue to increase. Under the conditions that the army has become more powerful, the proportion of equipment costs and training and maintenance costs related to weapon and equipment procurement still has room for improvement.

my country's defense expenditure is still far from its own construction needs, and it will continue to maintain long-term and stable growth in the future. "Ensure that mechanization is basically achieved by 2020, information construction has made significant progress, and strategic capabilities have been greatly improved; strive to basically achieve national defense and military modernization by 2035; and build the People's Army into a world-class army by the middle of this century" is the clear plan for our military development proposed in the report of the 19th National Congress of the Communist Party of China. "China's National Defense in the New Era" points out that China is the only major country in the world that has not yet achieved complete reunification, and is one of the most complex countries around the world. It faces severe challenges in safeguarding national sovereignty, territorial integrity, maritime rights and interests. The Chinese military is in the stage of transformation to informatization, and the task of adapting to the development trend of the new world military revolution and promoting military transformation with Chinese characteristics is arduous and arduous. Compared with the protection needs of China's national defense expenditure to safeguard national sovereignty, security and development interests, there is still a big gap compared with the protection needs of fulfilling the international responsibilities and obligations of major countries.

Judging from the military expenditure structure in recent years, the proportion of equipment expenses has increased day by day, and training and maintenance fees are expected to continue to increase. We expect that under the conditions where the overall size of military personnel has decreased by 300,000 to 2 million and the army has become more powerful, the proportion of equipment fees and training and maintenance fees related to weapon and equipment procurement still has room for improvement.

The US defense budget hit a new high in fiscal year 2020, and continued to invest in weapons, military expansion and training. 2 On December 9, the U.S. Senate and the House of Representatives reached an agreement on the U.S. fiscal year 2020 defense budget, and the new fiscal year defense budget bill with a total of $738 billion is expected to be passed by the end of the year. In fiscal year 2020, the total defense budget of the US $738 billion hit a new high since the wars of Afghanistan and Iraq, an increase of 2.93% from the previous fiscal year. It will allocate $658.4 billion to the National Security Program of the US Department of Defense and the Department of Energy; allocate $71.5 billion to overseas emergency operations to support overseas operations; and also plan to provide $5.3 billion as reconstruction funds after extreme weather and disasters. The allocation of this defense budget will continue to increase investment in three aspects: weapons and equipment procurement, military expansion and personnel salary adjustment, training and equipment maintenance. Through this budget bill, it can be seen that during the term of Trump’s term of office, the US policy of strengthening the military will continue to advance, and military expenditure may continue to expand in the future.

It is expected that my country's national defense budget will achieve stable and rapid growth in 2020. With the continuous deepening of practical training, the military's demand for weapons and equipment procurement and maintenance will continue to expand, and objectively put forward rigid requirements for the growth of the national defense budget. Defense expenditure, as one of government fiscal expenditure, is closely related to the national economic growth rate. After more than 30 years of rapid growth, my country's economy will gradually slow down, and the GDP growth rate has begun to decrease year by year, but the growth trend is relatively certain. my country's defense budget accounts for relatively fixed GDP, and the stable growth of GDP will surely drive the absolute amount of national defense budget to maintain a steady upward trend. In addition, the continued strong investment of the United States in the defense budget will directly lead to a rapid growth trend in global defense spending. Therefore, we believe that under the influence of both internal factors of increasing military demand and external factors of rapid growth in world defense spending, my country's defense budget expenditure may continue to maintain stable and rapid growth in the next few years, and the growth rate in 2020 is expected to remain within the range of 7.5%-8.0%.

3. New balance of supply and demand: After the military reform, the supply and demand relationship is adjusted in place, and the industry may usher in an outbreak period

.1 The supply and demand relationship of the military industry is the main contradiction in research

For the military industry, the supply and demand relationship is the main contradiction in research. Life cycle, industrial policies, supply and demand relationship, competitive landscape, etc. are the main elements of industry research, but due to the particularity of the military industry, its life cycle, industrial policies, and competitive landscape are relatively stable, and supply and demand relationship has become the most important variable to determine the prosperity of military enterprises.

my country's military industry has been in a long-term growth period. The report of the 19th National Congress clearly states: Ensure that mechanization is basically achieved by 2020, significant progress is made in informatization construction, and strategic capabilities are greatly improved; strive to basically achieve national defense and military modernization by 2035; and build the People's Army into a world-class army by the middle of this century. The long-term military construction goal has laid the foundation for the long-term growth of the military industry.

The competitive landscape of the military industry is relatively stable. The military industry market is a relatively closed industry. Although the military has been strengthening the procurement of competitive equipment and trying to avoid single source procurement as much as possible, the number of mid- and downstream enterprises in the military industry, especially the whole machine type, is relatively small, and most of them are oligopoly industry competition patterns. The market share of different military-industrial enterprises is relatively stable.

Supply and demand relationship has become the most important contradiction in determining the prosperity of the military industry. Before the military reform, the military industry was very planned, and military demand and military enterprise supply maintained a relatively stable growth rate as planned; and the supply and demand relationship of the new round of military reforms to the military industry brought about major changes, which will become the main driving factor for the future development of the military industry.

The new round of military reform launched at the end of 2015 is an important watershed in the supply and demand relationship of my country's military industry. We divide the supply and demand relationship of the military industry into three stages: before the military reform, during the military reform, and after the military reform. Before the military reform, it was before 2015; a new round of military reform was launched at the end of 2015, and breakthrough progress is expected in 2020, and the military reform will be in the period from 2016 to 2020; after the military reform, it will be after 2020.

.2 The traditional system is difficult to adapt to the new situation, and military reform has profoundly affected the needs of the troops

.2.1 Military reform background: Establishing "can fight and win battles" as the key to strengthening the army, the traditional military system does not adapt to the new situation

.2.2 Military improvement progress: The reform of the leadership and command system has been completed, and the reform of scale structure and force composition is coming to an end

The reform of the leadership and command system has been launched first. The reform has been completed in 2016, realizing the historic changes in the organizational structure of our army, and the system, structure and appearance of our army have been completely renewed. After the Central Military Commission's reform work meeting in November 2015, the reform of our army's leadership and command system was launched first, breaking the headquarters system, the military region system, and the mainland military system, forming a new military commission organ, establishing the army leadership body, the Rocket Force and the strategic support force, and setting up five major war zones. The Joint Operations Command Center of the Military Commission made its first public appearance, establishing a joint logistics support force and building a base and five center layout, forming a new pattern of the Military Commission's management of the General Administration, the war zone is in charge of war, and the military branch is in charge of construction.

After the founding of New China, our army has made unremitting efforts in reforming scale structure and force composition.After several major streamlining and reorganizations since the reform and opening up, our army's scale structure and strength composition have been continuously optimized, effectively liberating and developing combat effectiveness. However, in the face of the new trend of accelerating evolution of modern war forms, the new situation of our country's development from large to strong, and the new requirements for expanding our mission and tasks, the problem of inadaptation in this regard is even more prominent.

This reform of military scale structure and force composition is a reshaping and reconstruction of our military's force system. This reform is not simply a merger, a reduction, but a problem-oriented approach, focusing on building a joint combat force system under the new system, and focusing on optimizing structural functions to drive scale adjustments, including reducing scale, adjusting structure, and fine composition. After reform, our army will become more effective, more combat-effective and more powerful.

According to the plan of the 2015 Central Military Commission Reform Work Conference, 2020 is an important node in the new round of national defense and military reforms, and major breakthroughs and important progress must be achieved. Overall, this round of military reform is coming to an end. This military reform will have a profound impact on future military equipment procurement.

.2.3 Impact of military reform: Military expenditure will continue to grow steadily for a long time, and pay more attention to re-quality combat capabilities and practical capabilities.

. Building a world-class army is our long-term goal, and military expenditure will continue to grow steadily for a long time

The report of the 19th National Congress clearly states: Ensure that by 2020, the construction of information technology will make significant progress, and the strategic capabilities will be greatly improved; strive to basically achieve national defense and military modernization by 2035; by the middle of this century, the people's army will be fully built into a world-class army. Compared with the protection needs of China's defense expenditure to safeguard national sovereignty, security and development interests, and compared with the protection needs of fulfilling the international responsibilities and obligations of major countries, there is still a big gap compared with the protection needs of its own construction and development. will continue to maintain long-term and stable growth in the future.

. The new equipment is equipped with accelerating, and gradually forming a weapon and equipment system with high-tech equipment as the backbone

. "China's National Defense in the New Era" points out that it is necessary to build a modern weapon and equipment system, improve and optimize the weapon and equipment system structure, coordinate the development of weapons and equipment of various military branches, coordinate the development of main combat equipment, information systems, and guarantee equipment, and comprehensively improve the level of standardization, serialization and generalization; increase efforts to eliminate old equipment, and gradually form a weapon and equipment system with high-tech equipment as the backbone.

From the proportion of new equipment being paraded in military parades in recent years, it can be seen that the speed of equipment research and development of our military has significantly improved. In the past five years, my country has held three major military reviews, namely September 3, 2015, July 30, 2017 and October 1, 2019. The average reading is once every two years, but the proportion of new equipment debuts is very high, indicating that the speed and quantity of equipment research and development of our army has increased significantly.

On July 30, 2017, a military parade commemorating the 90th anniversary of the founding of the People's Liberation Army of China was held at Zhurihe Training Base. Just two years later from the 2015 War of Resistance Against Japanese Aggression Parade, 40% of the equipment was unveiled for the first time.

019 National Day military parade is the first National Day military parade for socialism with Chinese characteristics entering a new era, and it is also the first overall appearance of the Republic's armed forces after the reform and reshaping. The proportion of new weapons and equipment that debuted in this military parade accounts for nearly 40% of . Among them, the Type 15 main battle tank, the H-6N new strategic bomber, the Z-20 helicopter, the Dongfeng-17 conventional missile, the Changjian-100 cruise missile, the Dongfeng-41 nuclear missile and other weapons and equipment have all made their debuts, fully reflecting our country's independent innovation capabilities in national defense scientific research.

. Practical training has become an important direction

.3 Supply and demand pattern before the military reform: Equipment compensation construction, there are five-year cycles and seasonal laws

Before the military reform, my country's national defense and military industry supply and demand pattern showed the following three characteristics: 1. The growth rate of national defense budget has been maintained at double digits for a long time, and compensatory equipment construction is carried out; 2. Equipment procurement is based on a five-year plan cycle, showing the law of low at the beginning and high at the end; 3. The annual production and delivery of military enterprises is obviously seasonal, and no balanced delivery has been achieved.

.4 Supply and demand pattern in military reform: Military reform releases strong demand, and new main combat equipment has been gradually finalized

.4.1 Demand side: After the military reform, the demand for new equipment by various branches is very strong

In this military reform, the military management system, command system, scale structure and force composition have undergone major changes. The military's demand for equipment is more practical, bringing about essential changes on the demand side. is mainly reflected in the following three aspects:

1) Increase efforts to eliminate old equipment and gradually form a weapon and equipment system with high-tech equipment as the backbone. New equipment that can meet future combat needs will be accelerated, and old equipment that cannot meet future combat needs will gradually stop production and withdraw from the historical stage;

2) Comprehensively improve the level of standardization, serialization and generalization, and reduce the cost of weapons and equipment. If the price of weapons and equipment is high, military expenditure will be difficult to support large-scale procurement, and it will be difficult to form strong combat effectiveness. The military's demand for reducing costs of weapons and equipment is becoming increasingly urgent;

3) The requirements for the quality of weapons and equipment are increasing. Practical combat has improved the quality requirements for weapons and equipment reliability, environmental adaptability, average failure-free time, etc.

In the long run, the military reform has established a new demand orientation for the military industry, but due to the adjustments to leadership institutions, personnel, etc., it has brought about a decline in the medium and short-term industrial prosperity. Take Zhongzhi Shares and High Communications as examples. From its revenue growth rate, it can be seen that the early military reform did affect the prosperity of the military industry. In 2016-2017, the revenue growth rate of the above-mentioned companies was relatively low, even negative. However, this impact began to be gradually eliminated at the end of 2017 and showed a certain order compensation effect, which was reflected in the rapid growth of the company's revenue.

After the military reform, my country's military power has transformed from the original four types of military services to six major military services, including land, sea, air, rocket, strategic support, and joint logistics support. The Navy and Air Force is the key direction of my country's weapons and equipment development in recent years. The two strategic goals of building a "ocean Navy" and "strategic air force" have enabled our warships and fighter jets to continuously introduce innovations in order to continuously shorten the gap between my country's equipment in quantity and generation systems and world-class levels. After the military reform, the overall command organization and the military organization have undergone major changes. In the context of mechanized reform, the mechanized equipment of key brigades has required to be equipped to squad-level units; although the army's aviation troops have basically taken shape, the military helicopters for each aviation brigade have not yet reached the full number of units. As a new military, the Strategic Support and Joint Logistics Support Force will go through a process from scratch, and the demand for information equipment is also extremely strong.

…

.4.2 Supply side: In recent years, new equipment has been put into service one after another, and the industrial supply and demand relationship is still in the adjustment stage

New main combat equipment of various military branches has been put into service one after another in recent years, filling the gap in our army in advanced equipment. There has always been a big gap between our army and the US army in terms of main combat equipment, and the demand for equipment construction is very strong. In the past, due to the lack of main combat equipment models, equipment demand was not effectively released. Around 2015, the main combat equipment of the three armies was successively put into service, becoming a turning point in the supply side of the national defense and military industry chain.

In terms of air force equipment, the J-16 has started service in 2016. As a third-generation and a half-generation fighter, it will become the main force to fill the gap in my country's fighter jets; the H-6K and the H-6N will be the main force of my country's strategic and tactical bombing in the future; the Y-20 will gradually take on most of the strategic and tactical transport tasks of the troops, and will also be used as a basic modification platform to derive a variety of modifications such as tankers, early warning aircraft, electronic warfare aircraft, etc.; the Z-20 general-purpose helicopter completed its first flight at the end of 2013 and is expected to be put into service in recent years, which will fill the gap in the current three-army general-purpose helicopter models of our army; the J-20, as the latest fourth-generation fighter, has been put into service in 2017 and will become the core force of the Air Force fighter jets.

In terms of army equipment, the 99A heavy tank and the new 8*8 wheeled tank were put into service around 2010 and will become the main force to improve the mechanization of army equipment; the current light tanks in my country's army are too outdated, and the 99A heavy tanks cannot effectively perform special regional combat tasks such as plateaus, mountains, hills, etc. The Type 15 light tank was put into service in 2018, which will make up for the lack of combat equipment in the army in special environments.

In terms of naval equipment, the 052D destroyer has started service in 2014 and achieved mass construction, becoming an important force for my country's navy to move towards the distant seas; the 055 large destroyer was put into service in 2019, filling the gap in the navy's lack of 10,000 tons of destroyers, and assumed the main role of anti-submarine air defense in the aircraft carrier formation. It will be the main combat force of the ocean navy in the future; the 075 amphibious assault ship is expected to start service in 2020 and can cooperate with the aircraft carrier formation to play an important role in distant sea operations.

Rocket Force is the core force for China to implement strategic deterrence. is mainly responsible for curbing the use of nuclear weapons against China, performing nuclear counterattacks and conventional missile precision strikes. Its main equipment is the Dongfeng series of missiles and the Longjian series of missiles. In the past two years, the Dongfeng series and the Longjian series of weapons have frequently appeared in the military parade, marking that the Rocket Force's main combat equipment and weapons series have developed and matured.

On the supply side, military enterprises need to adapt to new demands to achieve supply and demand rebalancing. Although the military reform will bring about compensatory growth in military demand after the phased end of the military reform, the supply and demand relationship still needs to be adjusted, including product quality, capacity bottlenecks, supply chain management, etc., the overall situation is still in a state of supply shortage, and the prosperity of the military industry is still in the process of climbing. Take Inner Mongolia Yimai as an example. Judging from the company's prepayment, since the end of 2017, the military has had a strong demand for the company's products, but the company's revenue has not increased significantly, and the inventory has continued to be lower than the prepayment, which shows that the company cannot meet the military's urgent demand for weapons and equipment due to its own capacity problems or supply chain management problems, and a large number of military orders have not yet been put into production.

.5 New balance of supply and demand after military reform: capacity construction and supply chain management make up for shortcomings, and the industry may usher in an outbreak period

.5.1 Upstream enterprises begin to make up for production capacity, and the supply and demand relationship will be gradually adjusted

After the weapons and equipment are finalized, they will be delivered to the troops and start small-scale production work. The whole machine-type companies will first respond to military needs, while the mid- and upstream reactions to demand are relatively lagging. When the military generates the demand for mass purchase of weapons and equipment, it will first formulate a weapon and equipment procurement plan, determine key elements such as procurement quantity and delivery time, and then issue the procurement requirements in the form of an order to specific host manufacturers participating in the preliminary research and development, test flight and other links, and sign a procurement contract. The whole machine factory is at the bottom of the entire military industry chain, and orders for large components and system-class companies are coordinated and issued by the whole machine factory.

The army has a strong demand for new main combat equipment. It takes time for the construction and production of the whole machine factory to build new capacity and put into production. There will be a production climbing process in terms of production. Therefore, there is a certain time lag from the final delivery of weapons and equipment to the mass production stage. However, since the whole machine factory tracks the equipment development stage and the military purchase demand plan closely, it will be ahead of the upstream enterprises in the industrial chain in capacity construction.

classifies and counts related enterprises according to the three links of the industrial chain, and is divided into three categories: whole machine factory, subsystem, components and raw materials. The original value of fixed assets is the original acquisition cost of fixed assets. Since fixed assets need to be depreciated every year, the existing value of fixed assets does not represent the real production capacity of the enterprise, and the original value of fixed assets reflects the enterprise's investment in fixed assets and the enterprise's production scale, equipment level, etc. We select the original value of fixed assets as an indicator to measure the production capacity of enterprises. The under-construction project is an indicator for the current capacity construction of enterprises, and conduct statistics on the situation of the three types of enterprises.

The original value of fixed assets of three types of enterprises has increased in the past five years, and the overall production capacity has steadily improved. From the perspective of the original value of fixed assets of the three types of enterprises, the growth trend has been maintained in the past five years, indicating that all types of enterprises are carrying out production capacity construction in an orderly manner and the production capacity has steadily improved; from the perspective of the under-construction projects, the under-construction projects of the whole machine factory and the sub-system enterprises have always maintained a certain level, and the under-construction volume of components and raw materials companies has gradually increased in the past five years.

The ratio of the under-construction project to the original value of fixed assets reflects the speed of enterprise production capacity expansion. Judging from the situation in the past five years, the production capacity construction speed of whole machine factories and sub-system companies is faster than that of component and raw material companies, but it has shown a downward trend in the past two years, while the production capacity construction speed of component and raw material companies has shown an upward trend in the past two years and has surpassed the production capacity of whole machine factories. We believe that since the whole machine factory and branch system companies have a close track of equipment supply and military demand, they are also faster than upstream companies in the industrial chain in terms of capacity construction. In the past two years, the capacity construction of components and raw materials companies has accelerated, and the overall capacity will be supplemented in the future.

In recent years, the inventory level of the whole machine factory has increased, and the proportion of products has increased significantly. From the inventory level of the five major whole-machine factories, except AVIC Aircraft, the inventory and operating income ratios of AVIC Shenyang Aircraft, Zhongzhi Co., Ltd., Inner Mongolia First Aircraft and AVIC Power have all shown an upward trend, among which Zhongzhi Co., Ltd.'s inventory and revenue ratio in 2018 was 102.27%; from 2014 to the present, the proportion of products in total inventory in the five major whole-machine factories has been on an upward trend. Except for AVIC Aircraft, this indicator of the four whole-machine factories has exceeded 70%. We believe that the increase in the relative level of inventory indicates that the production progress is accelerated after capacity construction, while the proportion of products in inventory increases, indicating that there may be a certain degree of delay in the production link. Combined with the analysis of the upstream and downstream production capacity construction progress of the industrial chain, it is expected that upstream enterprises will have certain delays in product supply, resulting in downstream enterprises failing to complete production delivery in a timely manner.

The cash flow situation of upstream enterprises has deteriorated in recent years. With the release of military demand, the operating income of companies in all links of the industrial chain has increased, but the proportion of accounts receivable to operating income of upstream enterprises has increased year by year, from 36.3% in 2014 to 43.76% in 2018. At the same time, the net operating cash flow has deteriorated since 2015. In 2015, the total operating cash flow of 10 core components and raw materials companies was 2.402 billion yuan, and in 2018 it was only 646 million yuan, which has deteriorated to a large extent, indicating that the downstream enterprises’ payment pressure on upstream enterprises and the delayed delivery phenomenon are relatively serious, which is also corresponding to the increase in the proportion of inventory of downstream enterprises.

.5.2 During the 14th Five-Year Plan period, the industry may usher in an explosive period, and the precision of supply chain management is expected to improve

During the 13th Five-Year Plan period, both the supply and demand sides of the industry showed a turning point, and during the 14th Five-Year Plan period, the industrial explosion period may usher in an explosive period. From the demand side, according to the plan of the 2015 Central Military Commission Reform Work Conference, 2020 is an important node in the new round of national defense and military reforms, and major breakthroughs and important progress must be achieved. At the same time, factors such as practical training, stable growth of national defense budget, and increased proportion of equipment construction costs are also conducive to the further increase of the military's demand for equipment; from the supply side, in recent years, new main combat equipment of various military branches have been put into service one after another, and the capacity construction work in all links of the industrial chain has been carried out in an orderly manner, and the production capacity to meet the needs of the military has been already in place.

The downstream and upstream enterprises in the industrial chain have a time-delay effect of capacity construction and release, and the supply chain management work within the industry needs to be further refined. According to data analysis of the capacity construction cycle and production delivery situation in each link of the industrial chain, upstream and downstream enterprises in the industrial chain have time lags in capacity construction, and upstream enterprises may fail to meet the production needs of downstream enterprises in a timely manner. At the same time, downstream enterprises are also seriously suppressing funds for upstream enterprises, and the cash flow situation of upstream enterprises has deteriorated. We believe that the current supply chain management work for the military industry may be difficult to cope with the future industrial outbreak period, and the supply chain management work is expected to be further refined to improve industrial efficiency.

Refer to the US defense supply chain management experience. When the industrial supply and demand relationship is in the adjustment stage, the demand for products is relatively small. After the industry enters the explosive period, the demand for products will increase rapidly in a short period of time. If upstream companies fail to provide the required products, it will cause a backlog of products from downstream companies and reduce production and operation efficiency. Referring to the US defense industry supply chain management system, while relying on market mechanisms to self-regulate, it also relies on the government to conduct macro-control and intervention. In order to make up for the shortcomings of the market mechanism in meeting the defense needs in some key and weak areas, the US Department of Defense conducts macro-monitoring, evaluation and management of the defense supply chain through annual defense industrial capacity assessment, industry-by-industry-by-level (S2T2) review, and the Department of Defense Manufacturing Technology Program.

.5.3 New features of the industry: Large-scale and low-cost equipment system becomes the mainstream

In the future, under the supply and demand relationship of weapon and equipment procurement, it will be an inevitable trend for large-scale and low-cost equipment system to become the mainstream: 1. In the case of practical training and upgrading new equipment installation, the military's demand for weapons and equipment is still very strong. Large-scale procurement will reduce the procurement cost of weapons and equipment; 2. The ultimate goal of the reform of the military pricing mechanism is to reduce the procurement cost of military equipment; 3. At present, my country's weapons and equipment, especially missile-type weapons, have achieved serial development and will effectively reduce the cost of early research and development.

The procurement quantity of weapons and equipment has a significant impact on the procurement cost, and increasing the procurement batch is conducive to reducing unit price costs. takes the US military's procurement of "Trident-1" submarine-submarine ballistic missiles as an example. The unit price of the first batch of 48 missiles was about US$20 million, while the average unit price of each subsequent batch was US$10.65 million; the unit price of the first batch of 21 "Trident-2" missiles was US$64.14 million, and the average unit price of the subsequent 132 was US$33.93 million.

Reform of military product pricing mechanism will move towards multiple pricing methods in parallel to reduce equipment procurement costs . On April 15, 2011, with the approval of the State Council and the Central Military Commission, the National Development and Reform Commission, the Ministry of Finance, and the General Equipment Department recently jointly issued the "Guiding Opinions on Further Promoting the Reform of Military Product Prices", to accelerate the transformation of military product prices from "post-pricing" to "pre-control", from "single pricing model" to "multiple pricing models", from "individual cost pricing" to "social average cost pricing", to ensure that military product price reform is to establish a scientific and reasonable military product price formation mechanism, establish a pricing model that adapts to multiple procurement methods of weapons and equipment, improve a standardized price management system, a sound and complete equipment price management system, and build an interconnected and shared price informatization Breakthroughs have been made in management platforms and other aspects, and strive to find a path of weapon and equipment construction and development of national defense science and technology industry with little investment and high efficiency. Since 2014, the newly established model development projects have simultaneously demonstrated the target price of equipment purchase. In the future, those purchased at the target price of equipment purchase will gradually occupy the mainstream position.

In recent years, a variety of series of equipment have been unveiled at the military parade, and the serialization development will effectively reduce R&D costs. takes missile-type weapons as an example. The expenses in the four stages of project demonstration, development, production and maintenance are 3%, 12%, 35% and 50% respectively. Serial development can reduce repeated development, save early development funds, help reduce production costs in the mass production stage, and at the same time reduce the frictional consumption of later maintenance and support.

.5.3 New features of the industry: The foreign trade market will become a new increase in the development of the military industry

The scale of the global military trade market has steadily increased. According to SIPRI statistics, the global military export scale increased by 10% from 2013 to 2017 compared with 2008 to 2012. The top five military export countries are the United States, Russia, France, Germany and China, accounting for 74% of the global military trade market share. Compared with 2008-2012, China's military exports increased by 38%, and the main exporters were Pakistan , Algeria and Bangladesh.

Missile export volume has grown rapidly after my country entered the 21st century. According to the "Analysis of the Current Situation and Trend Outlook of the Global Missile Trading Market", my country's missile export volume grew rapidly after entering the 21st century, and its export ranking jumped from 8th place between 2007 and 2011 to 4th place between 2012 and 2016. The export volume increased significantly, from 1,954 missile export volume to 3,975, reflecting that my country's missile industry chain is becoming increasingly perfect and its missile performance has gradually been recognized.

Asia and the Middle East are the largest sources of demand, and demand in the Middle East is growing rapidly. According to SIPRI statistics, from 2013 to 2017, most of the top ten military importers were located in the Middle East and India and Pakistan. According to regional division, the proportion of Asia exceeded 40%, and the proportion of the Middle East increased from 18% in 2008 to 2012 to 32%. From 2013 to 2017, more than 70% of the total global military trade volume flowed into Asia and the Middle East.

We believe that my country's current competitiveness in the international military trade market has been significantly improved, and the weapon and equipment system for the military trade market is relatively complete. With the steady increase in the scale of the global military trade market and the further enhancement of international customers' recognition of the performance of my country's military trade weapons and equipment, the military trade market is expected to become a new increase in the development of my country's military industry.

4. Reform starts again: asset securitization has entered a new stage, and the win-win pattern may be realized.

.1 Historical review of military asset securitization: The securitization rate has increased rapidly, and there are still restrictions.

.2 Core asset injection and improving the quality of listed companies are new paths, and equity incentives are lubricants

.2.1 New path of asset securitization 1: The core asset injection process of core institutes will be accelerated

There are a large number of military core assets in the military research institute. The prerequisite for capital operation for such assets is to realize corporate operations. ’s past idea was to first reorganize research institutes, and then convert them into enterprise assets as a whole to carry out capital operations. The current progress of reorganization of military research institutes and institutes is relatively slow. The main reason is that the reorganization faces many complex problems, so the reform progress is not as expected, and subsequent asset injections have been shelved.

The restructuring of the institute has encountered difficulties in the temporary restructuring, and the cost sharing of the restructuring still requires consultation from multiple parties, and there is no model that can be copied. The main difficulties faced by the restructuring of the institute include four aspects: First, the land problem. The military research institute used state-allocated land as a public institution, and used it free of charge. After being converted into an enterprise, it needs to purchase land or pay rent, which greatly increased the cost of the institute; Second, the social security of personnel, employees with public positions did not pay social security before 2014, and there was a large gap in their social security accounts. If all the hospitals bear the cost, the cost would be very high; Third, the restructuring of business expenses will be suspended, which will affect the efficiency of the institute; Fourth, the tax policy is unclear, and the military products produced by the institute are directly exempt from value-added tax. It is not clear whether they will be collected first and then returned in the future like private enterprises. The restructuring of institutes still requires the central government, local governments and enterprises to jointly determine the sharing of the cost of the restructuring. There is currently no replicable model, and it may still be carried out by discussing the matter one by one.

The innovation of Guorui Technology's solution lies in bypassing the complex procedures of the reform of scientific research institutes. It does not adopt the traditional path of "transform first and then inject", but integrates the core military assets in the institute into a new company through transfer, and then injects them directly into the listed company. In the asset restructuring of Guorui Technology, one of the target assets, Guorui Defense, was established at the end of 2018 to undertake the assets and liabilities corresponding to the radar business oriented towards international operations through asset transfer.

In August 2019, the National Defense Science and Technology Bureau agreed in principle to Guorui Technology for this major asset restructuring; in September, the State-owned Assets Supervision and Administration Commission of the State Council agreed in principle to the overall plan for this asset restructuring and supporting financing; in October, the application for this major asset restructuring was accepted by the China Securities Regulatory Commission. The principles of the National Defense Science and Technology Bureau and the State-owned Assets Supervision and Administration Commission agreed with the acceptance of the China Securities Regulatory Commission. shows that this major asset restructuring is feasible in the plan. This move provides a new path for the injection of core assets of scientific research institutes into listed companies, and may become a new gradual plan for the restructuring of the institute. The first choice for the converted target of

is the Department of Electrical Science and Technology of the Institute, and the Department of Aerospace and the Department of Aviation. We recommend that the institute reorganization investment targets are preferred from the two dimensions of asset injection elasticity and operability: From the perspective of asset injection elasticity: the EPS thickening of the listed companies under Aerospace Science and Technology, Aerospace Science and Technology and China Electronics Technology have the most obvious thickness after injection, the PE is the smallest after injection, and the elasticity is the largest. On the one hand, the assets of the institute are relatively high, and on the other hand, the market value of the listed companies is not large, and there is still a lot of room for the secondary market after injection. From the perspective of operability, the assets of the core institutes under China Electronics Technology are relatively low, have a high marketization, and have a large financing demand. The listing progress may be faster than that of the core institutes of the Aerospace Department. The injection progress after the restructuring is worth looking forward to; in addition, the assets of the Aerospace Department and supporting research institutes related to the aerospace industry are relatively high, and the progress of the restructuring and asset injection is also worth looking forward to. It is recommended to focus on SiChuang Electronics, Jiesai Technology , AVIC Electronics and AVIC Electromechanical.

.2.2 New path to asset securitization: Change the state-owned assets management method, focus on the main business to improve the quality of listed companies

htmlOn June 3, the State Council issued the "List of Authorization and Delegation of Powers of the State-owned Assets Supervision and Administration Commission of the State Council (2019 Edition)", accelerating the transformation from managing enterprises to managing capital, better perform the responsibilities of investors, further increasing the power of authorization and delegating power, and effectively enhancing the vitality of micro-subjects. 's "List" combines the enterprise's functional positioning, governance capabilities, management level and other enterprise reform and development reality, and clarifies authorization and delegating matters for central enterprises, comprehensive reform pilot enterprises, state-owned capital investment, operation company pilot enterprises and specific enterprises; at the same time, the group company should simultaneously carry out authorization and delegating power to its affiliated enterprises, so as to "loosen" at all levels and fully stimulate the vitality of enterprises at all levels.

In December 2018, Aviation Industry Group received the "Notice on the Pilot of State-owned Capital Investment Company" from the State-owned Assets Supervision and Administration Commission on the 18th. Aviation Industry Group became one of the pilot enterprises of state-owned capital investment companies. The Group will steadily promote the implementation of various reform measures in accordance with the relevant requirements of the pilot work.

State-owned Capital Investment Company is a wholly state-owned company authorized by the state to operate state-owned capital. Its main function is to optimize the layout of state-owned capital and enhance industrial competitiveness through strategic core business holdings. According to the goals, tasks and layout areas determined by the state, state-owned capital investment companies can be established through reorganization and new establishment. According to the specific positioning and development needs of state-owned capital investment companies, the relevant state-owned capital will be reorganized and integrated through free transfer or market-oriented methods. State-owned investment companies will conduct enterprise management through capital management, and will not engage in specific production and operation activities, nor will they interfere with the daily production and operation of shareholders, which is conducive to the establishment of the enterprise's market-oriented dominant position and the improvement of enterprise efficiency and efficiency. State-owned investment companies mainly focus on industrial capital investment, and their investment direction is mainly for industry, focusing on investment financing and project construction. The investment company holds equity in the investment industrial company and operates and manages the assets they hold. State-owned capital investment can effectively improve the liquidity of state-owned assets and obtain the preservation and appreciation of state-owned capital through investment.

Aviation Industry Group is the first state-owned capital investment company pilot enterprise in the military industry. The establishment of the state-owned investment company has a demonstration effect on the remaining 9 major military-owned enterprises. At present, the Aviation Industry Group has many subsidiaries and the quality of assets is uneven. The establishment of a state-owned capital investment company will effectively integrate the group's non-performing assets, as well as assets that have weak profitability, idle or excess capacity, etc., which contribute less to the future development of the group. After the above-mentioned assets are transferred into the investment company through free transfer or market-oriented methods, the investment company will divest the state-owned social functions and other legacy issues of the relevant assets, and then deal with them in a market-oriented manner.

On November 6, 2019, AVIC Aircraft issued an announcement that it plans to invest 100% of the equity of Xi'an Aircraft Industry (Group) Co., Ltd., 100% of the equity of Shaanxi Aircraft Industry (Group) Co., Ltd. and 100% of the equity of AVIC Space Water Aircraft Industry Co., Ltd., and other assets, including Changsha Landing Gear Branch of AVIC Aircraft Co., Ltd., Xi'an Braking Branch of AVIC Aircraft Co., Ltd., and 100% of the equity of Guizhou Xin'an Aviation Machinery Co., Ltd.

Xi'an Aircraft Industry (Group) Co., Ltd. owns 7.07% of the shares of AVIC Aircraft, and is the research and production base for large and medium-sized military and civil aircraft in my country; Shaanxi Aircraft Industry (Group) Co., Ltd. mainly produces large and medium-sized military and civil transport aircraft; AVIC Space Water Aircraft Industry's main business includes aircraft repair, unmanned target aircraft manufacturing, aircraft part accessories manufacturing, etc.

The purpose of this transaction is to focus on the main business of aviation aircraft, further integrate R&D resources, improve operational efficiency, improve profitability of listed companies, enhance the independence of listed companies and reduce related transactions, and promote the pilot work of the State-owned Capital Investment Company of China Aviation Industry Group Co., Ltd. In the first three quarters of 2019, the total assets of Aviation Industry West Flight were RMB 27.22 billion, net assets were RMB 8.82 billion, operating income was RMB 10.28 billion, and net profit was RMB 240 million. Aviation Industry Shaanxi Flying’s total assets are 10.413 billion yuan, net assets are 1.549 billion yuan, operating income is 8.415 billion yuan, and net profit is 56 million yuan. The overall profitability of the injected assets is good, and it is expected that the profits of listed companies will be increased after injection. We believe that this move is an important plan for the aviation industry to focus on the overall machine asset strategy, and it is of great reference significance for the capital operation direction of other military-industrial groups.

.2.3 Asset securitization lubricant: The SASAC delegating power list and refinancing rules are optimized, and the restrictions on equity incentives are relaxed.

The State Council issued the "SASAC authorized delegating power list (2019 edition)" and clearly stated that "support central enterprises to carry out various forms of equity incentives in their affiliated enterprises that meet the conditions. The actual income level of equity incentives is not linked to the total personal salary level of employees, and is not included in the total salary base of the unit." Previously, the equity incentives of central enterprises were restricted by the total salary level of senior executives, which led to insufficient equity incentives or difficulty in advance. The lifting of this restriction will promote more listed companies of military-industrial central enterprises to implement equity incentives, bind the interests of management and shareholders, and release the vitality of the company.

11 On November 8, the China Securities Regulatory Commission publicly solicited opinions on the refinancing rules such as the amendment of the "Regulations on the Management of Securities Issuance of Listed Companies" and the "Interim Measures on the Management of Securities Issuance of Listed Companies on the GEM". The proposed revision mainly includes streamlining issuance conditions, optimizing non-public institutional arrangements, supporting listed companies to introduce strategic investors, and appropriately extending the validity period of the approval documents. We believe that the optimization of refinancing rules will help combine the company's management with industrial capital and achieve a joint role in improving the company's operating and management efficiency.

In recent years, the aviation industry has carried out a series of medium- and long-term incentive pilot work. Its listed companies include AVIC, Tianhong Shopping Mall, AVIC Optoelectronics, AVIC Electronics Testing, and Guihang Co., Ltd. have granted restricted stocks or stock options to directors, executives and core employees. In July 2017, the Aviation Industry launched a medium- and long-term incentive plan, proposing that listed companies should vigorously promote equity incentives such as restricted stocks and stock options. Among the major military-industrial groups, the incentive plan for the aviation industry is at the forefront. With the deepening of military-industrial reform, other military-industrial groups are also expected to follow up.

equity incentives will fully mobilize the enthusiasm, initiative and creativity of the cadres and employees of listed companies of military-industrial central enterprises, and are expected to stimulate vitality and improve corporate efficiency. recommends that the leaders of central enterprises that are expected to introduce equity incentive plans in the future, including Aerospace Electronics, Aerospace Electrical Appliances, AVIC Electrical and China Direct Shares.

.3 Reform starts again: Optimizing the profit statement of listed companies may achieve a win-win situation

Represented by Guorui Technology and AVIC Aircraft capital operation cases, the asset securitization of military-industrial central enterprises has entered a new era. From 2005 to 2018, through asset injection, the asset securitization rate of major military-industrial groups has increased significantly. At this stage, it did not focus on improving the operating efficiency of listed companies by focusing on the main business and asset integration, and a large number of core assets have not been securitized. In the second half of 2018, Guorui Technology's "gradual" plan officially opened a new path for the securitization of core assets of core institutes. In 2019, AVIC Aircraft Asset Replacement Plan is a typical example of resource integration by military-industrial central enterprise groups represented by the aviation industry. We believe that, represented by Guorui Technology and AVIC Aircraft, the capital operation of military-industrial central enterprises will enter a new era, and will no longer use the single goal of increasing the asset securitization rate, and will pay more attention to improving asset management efficiency.

A new era of asset securitization will pay more attention to the improvement of listed companies' income statements, and may achieve a win-win situation. The core assets of core institutes are generally strong, and after injection, it will directly improve the company's performance; follow the principle of "managing assets" to "managing capital", and improve capital allocation efficiency. It should be carried out through resource integration and reflected through capital appreciation, and capital operation will also pay more attention to improving the operating efficiency of listed companies through resource integration, and thus improving the profit statement. We believe that from the perspective of the secondary market, the investment opportunities brought by asset securitization must be accompanied by the improvement of the operating efficiency and profitability of listed companies, which directly depends on the profit statement of listed companies. The above path is expected to achieve a win-win situation for military-industry groups, listed companies and investors.

5. The right time to replace: deepening of domestic substitution and the development of emerging markets accelerates the incubation of military growth stocks

.1 Military technology transformation has a solid foundation, and the military industry sector has the soil to nurture growth stocks

The military industry sector naturally has the soil to generate growth stocks. First, from the perspective of industry attributes, military industry such as aerospace, shipbuilding, informatization, etc. belong to the fields of high-end manufacturing, new generation information technology and new materials. It is a strategic emerging industry in my country. It has the conditions for generating growth stocks in terms of industry attributes. Second, from the perspective of the industry development stage, my country's military industry is still in a period of development, and the level of military equipment is still quite different from that of foreign countries. It will be a stage of accelerating the realization of mechanization and informatization for a long time in the future. From the perspective of the industry development stage, it is a period of rapid development. Third, from the perspective of technical level, due to its strict requirements on the environment and technical level in the military industry, long-term independent research and development and large resource investment, the technical level of a considerable number of fields is higher than that of civilian fields and has a strong technical spillover effect.

From the perspective of the development trend of the US military industry sector, American military industry enterprises experienced the rapid development of military industry during the Cold War, and the continuous development of civilianization of military technology after the Cold War, and gave birth to high-quality companies such as Lockheed Martin and Boeing with performance growth. For example, Boeing attaches great importance to the innovation of military-civilian dual-use technology, attaches great importance to the dual-use of technology from the source of research and development, and pays attention to the application analysis of cross-military-civilian dual-use technology, and has established a special department to analyze the dual-use of technology. This allows Boeing to maintain its leading position in new fields, such as the VSOC enterprise information manager in the information field, NarusInsight network protection, TAC data monitoring and analysis software, human geographic analysis framework, DataMaster video image processing framework, and its active energy engineering. Its security mobile company specializes in providing upgradeable, customizable software and full spectrum mobile security services, all thanks to the military technical support of Boeing's Engineering, Operations and Technology Department. These products and technologies have been widely used in Boeing's civil industry chain, bringing great benefits to the company.

Reviewing the development of the military industry sector, the military industry sector has produced growth stocks such as AVIC Optoelectronics and Hikvision with outstanding performance and high shareholding returns. From 2008 to 2018, AVIC Optoelectronics' operating income increased by 7.8 times, with an annual compound growth rate of 21.92%, and net profit attributable to shareholders increased by 8.5 times, with an annual compound growth rate of 23.90%; Hikvision's operating income increased by 28 times, with an annual compound growth rate of 39.84%, and net profit attributable to shareholders increased by 20 times, with an annual compound growth rate of 35.38%. AVIC Optoelectronics and Hikvision are both leading companies in the industry, with outstanding technological R&D capabilities and long-term rapid growth in performance. In the past three years, AVIC Optoelectronics' shareholding returns have reached a compound annual growth of 22%, while Hikvision believes it is 30%.

.2 The upstream of the industry has dual-use military and civilian capabilities. Technology transformation solves the problem of domestic substitution

The technologies and products of upstream military enterprises are dual-use military and civilian capabilities. Many technologies and products can solve the problem of domestic substitution through the transformation to civilian usage, and there is broad room for future development. In the context of the Sino-US trade war and the United States' technology blockade against Chinese technology enterprises, the independent and controllable demand for core components and raw materials is imminent. Military technology has formed rich results after years of high investment. Driven by national policies and the demand for civilian market, upstream military enterprises with core technologies have fully benefited. focuses on related industries with three standards: "large industry space, low domestic production rate, and strong domestic production demand", including carbon fiber, connectors, microwave components, capacitors, infrared detectors and other fields.

.2.1 Carbon fiber: the first choice for lightweight materials for aerospace. The domestic substitution process is expected to accelerate.

Carbon fiber is an important strategic material for the development of national defense and military industry and national economy. It is a technology-intensive key material. The carbon fiber industry is also a strategic emerging industry that the country focuses on developing, representing the direction of a new round of scientific and technological revolution and industrial transformation, and is a key area for cultivating new development momentum and obtaining new competitive advantages in the future. Accelerating the cultivation and development of the new materials industry is of great strategic significance for leading the upgrading of the materials industry, supporting the development of strategic emerging industries, ensuring the construction of major national projects, promoting the transformation and upgrading of traditional industries, and building new advantages in international competition.

Since 2004, the global carbon fiber market has begun to face a shortage of supply, and prices have risen sharply. Since then, with the significant increase in demand for carbon fiber in aerospace, sports and leisure and industrial applications, the global carbon fiber market size has grown rapidly. In 2008, global demand for carbon fiber reached 36,400 tons, an increase of more than 100% from 2001. From 2009 to 2017, global carbon fiber demand has been rising, with an average annual growth rate of 10%. In 2015, global carbon fiber demand growth rate reached the highest level in recent years, of 27.85%. After 15 years of rapid growth, global carbon fiber demand recovered to an average growth rate of around 10% in 2016 and 2017, and the total global demand in 2017 reached 84,200 tons.

From the perspective of downstream industries, the top three industries in the world's carbon fiber demand in 2017 were still aerospace, wind power blades and sports and leisure, with demand accounting for 19.8%, 19.2%, and 13.2%, respectively. The total demand of the three exceeded half of the global total. In 2017, low-wind speed wind farms and offshore wind power jointly promoted the large-scale development of wind power blades. The demand for carbon fiber products continued to grow rapidly in the wind power field. Wind power giants such as VESTAS signed large contracts and announced expansion of production. The demand in the wind power field increased by more than 10% year-on-year. In the aerospace field, carbon fiber demand is mainly driven by commercial aircraft. In 2017, 136 Boeing composite aircraft B787 were delivered, the delivery volume was the same as in 2016. The Airbus composite aircraft A350WB delivered a total of 78 aircraft, an increase of 60% over the same period last year, directly leading to a 10% year-on-year increase in carbon fiber demand in the aerospace field in 2017. Globally, half of the total carbon fiber composite materials are used in the industrial field, especially in wind power blades and automobile fields. The proportion of carbon fiber composite materials consumed by sports and leisure products is less than 20%, and is showing a downward trend year by year.

Since 2014, my country's carbon fiber demand has shown an upward trend year by year, and the total volume has always remained at the level of 10,000 tons. As of 2017, my country's demand reached 23,500 tons, with an average annual growth of 12.25% in four years. With the increasing demand for carbon fiber in my country year by year, the proportion of domestic demand is also increasing.With the improvement of domestic carbon fiber self-sufficiency in the next few years, my country's demand for carbon fiber will also be released better. Based on the average annual growth rate of my country's carbon fiber demand in recent years, it is predicted that my country's carbon fiber demand will maintain an average annual compound growth rate of more than 14% during the 13th Five-Year Plan period, and by 2022, my country's carbon fiber demand will exceed 48,000 tons.

From the perspective of production capacity, my country's carbon fiber production capacity grew rapidly from 2006 to 2009. After the growth rate bottomed out in 2010, China's carbon fiber production capacity has maintained stable growth since 2011. Affected by the completion and commissioning of 1,000-ton production lines of carbon fiber production enterprises such as Zhongfu Shenying and Jilin Jinggong, and the increase in the raw silk production capacity of enterprises such as Jilin Chemical Fiber, my country's theoretical carbon fiber production capacity increased by 44% year-on-year in 2017, reaching 26,000 tons. In the next 2-3 years, carbon fiber manufacturers led by Guangwei Composite will still have multiple thousand-ton production lines to be completed one after another, and my country's theoretical carbon fiber production capacity is expected to maintain a rapid growth trend.

Domestic substitution process is expected to accelerate. At present, my country's domestic carbon fiber products are still mainly tracking foreign varieties such as Japan Toray, and lack the research and development of products led by independent application. The market-competitive carbon fiber industrialization process and equipment are not fully mastered, the product prices remain high, and the technical maturity is still insufficient. Therefore, in recent years, the carbon fiber industry has had serious phenomenon of "production capacity but no production". In 2016, my country's carbon fiber production capacity reached about 18,000 tons, but the actual output was only about 4,600 tons; in 2017, my country's theoretical production capacity reached a historical high of 26,000 tons, and the actual output was only 7,000 tons, accounting for about 30% of the total production capacity. In the future, my country's carbon fiber still needs to deepen its product technology and core technology of production equipment. Under the premise that my country's carbon fiber industry has made breakthroughs in independent research and development, my country's carbon fiber capacity utilization rate may increase, and output may maintain rapid growth.

.2.2 Connector: Industry mergers and acquisitions will continue, and industrial upgrading is opening up

Connector usually refers to an electromechanical component that connects the conductor (wire) with appropriate mating components to enable the switch-on and disconnect current or signal, and plays an electrical connection and signal transmission role between devices and components, components and mechanisms, systems and subsystems. The main downstream application areas of connectors are automotive, communications, consumer electronics, industry and other fields, accounting for 71%. According to BishopAssociates' 2016 statistics, the top four major applications of connectors are automobiles (23%), communications (21%), consumer electronics (15%), and industry (12%), accounting for a total of 71% of the market share, followed by transportation (7%) and military aviation (6%). Other fields such as medical, commercial and office equipment account for a total of 16%.

At present, connectors produced by foreign manufacturers account for about 60% of the Chinese connector market. As of 2016, there were about 300 foreign-invested connector companies in China and about 700 domestic local connector manufacturers. However, due to the late start of the domestic manufacturers, most of the manufacturers have a small scale, and the overall technical level and financial strength are far from that of leading international manufacturers. Therefore, the domestic high-end connector market except the military industry is mainly occupied by foreign manufacturers. For example, in the automotive industry that has high requirements for the stability and reliability of connectors, three-invested connector companies (Sino-foreign joint ventures, Sino-foreign cooperative enterprises, and wholly foreign-owned enterprises) account for 80% of the market share, while domestic enterprises only account for 20%.

Overall, the profit margin of my country's connector industry is at a relatively low level. The connectors produced in my country are mainly mid- and low-end, and the share of high-end connectors is relatively low, but the demand growth rate is relatively fast. Most Chinese connector companies are also mainly mid- and low-end products and imported substitute products, with low added value, especially consumer electronic products. As market competition intensifies, profit levels are showing a downward trend.

high-end connectors are a key area for my country's top connector manufacturers to achieve a transformation from quantity to quality in the future. At present, the development of connectors in my country is in a transitional period from production to creation. There is a huge demand for high-end connectors, especially automobiles, telecommunications and data communications, computers and peripheral equipment, industry, military aviation and other fields, which has led to a rapid growth in the high-end connector market.The domestic replacement of high-end connectors is beginning. As internationally renowned connector companies represented by TEK, Mox , etc. have moved their production bases to my country, my country's connector manufacturing level has rapidly improved. In addition, my country's demand and investment in high-end connectors in military industries such as aerospace, aviation, electronics, and ships have been increasing. The connector technology in various downstream application fields of domestic enterprises has approached or even reached the top international level. High-end connector companies represented by Luxshare Precision, AVIC Optoelectronics, etc. are growing rapidly, accelerating the process of domestic replacement of high-end connectors.

.2.3 Microwave component: Radar communication proportion increases, technology integration trend

Microwave component is used to realize various transformations of microwave signals such as frequency, power, phase, etc., and is widely used in radar, communication, electronic countermeasures and other fields. radar includes various types of military radars, meteorological radars, air traffic radars, automotive millimeter wave radars, etc.; communication equipment includes military communication equipment and civil communication equipment, among which civil communication mainly includes base stations and mobile communication terminals such as mobile phones and tablets; electronic confrontation mainly includes military radio reconnaissance, electronic interference and other equipment.

microwave component has dual-purpose properties for military and civilians, and the working frequency and power of military and civilians are different. military radar has a wide operating frequency distribution, ranging from several hundred megahertz to dozens of gigahertz, while civilian communications are generally in a lower working frequency band; military radar, communications and electronic confrontation generally require high transmission power, while civilian communications are relatively low; due to different working frequency and transmission power, the material selection and technical route of military and civilian microwave components are different. As 5G communication expands to high-frequency bands and military microwave components have also begun to develop towards low-cost miniaturization, there is a broad space for military microwave component technology to transform into civilians.

In military radar, electronic countermeasures and other fields, microwave components account for more than 60%, and their proportion is increasing. In the military field, microwave components are mainly military-industrial central enterprises, and private enterprises rely on special technologies to occupy part of the market. The application of microwave components in the civil market is mainly communication and ADAS. With the advancement of communication technology, the value of microwave components in base stations and mobile terminals continues to increase. It is estimated that the market space for base station radio frequency devices in the 5G era will exceed 50 billion, and the value of microwave components in 5G mobile phones will reach US$50 per unit. Civilian microwave components are highly dependent on imports. Except for some filters, most of the microwave components in civil communications are imported; the microwave components of automotive millimeter-wave radar are basically monopolized by Infineon, STMicroelectronics, NXP, etc., and domestic related companies mainly focus on system integration and signal processing.

microwave component military and civilian technology is connected, and the transformation of military technology to civilians has become a general trend. , such as Yaguang Technology, has developed a millimeter-wave power amplifier for 5G communication, Shenglu Communications subsidiary Nanjing Hengdian has developed a 5G millimeter-wave phased array antenna, and Rayco Defense Automobile Millimeter-wave radar has entered Baidu Apollo hardware development platform. The demand for military products of microwave components will benefit from the maintenance of a high growth rate of national defense information construction, and civilian demand will mainly benefit from the rapid growth of communications, automotive millimeter-wave radars and domestic substitution. In the selection of investment targets, it is recommended to focus on leading enterprises with outstanding technological advantages and great potential for transformation of private goods, including Yaguang Technology, Shenglu Communications, Aerospace Development, etc.

.2.4 Capacitor: The industrial structure is stable and changing. Seize opportunities to increase scale.

The downstream application fields of capacitors include military and civilian, among which the civilian market is divided into civilian industrial market and civilian consumer market. The application scope of capacitors is also very wide, mainly divided into two major fields: military and civilian. In the military field, capacitors are used in weapons and equipment such as ships, aviation, aerospace, weapons, and electronic confrontation. The civil market is divided into civil industrial markets and civil consumer markets. Civil industrial categories include system communication equipment, industrial control equipment, medical electronic equipment, rail transit, precision instruments, automotive electronics and other fields; civil consumer categories include mobile phones, computers, digital cameras, recording equipment and other fields.High-end capacitors are a field of concern for my country's leading capacitor manufacturers and have broad prospects. At present, my country's scientific and technological innovation capabilities are rapidly improving, especially in the fields of automobiles, communications, aerospace, etc., the demand and investment in high-end capacitors are increasing, which has led to a rapid growth in the high-end capacitor market. Domestic manufacturers are accelerating the process of domestic replacement of high-end capacitors.

Global capacitor market maintains stable growth. According to the "Forecast Report on Competitive Trends and Investment Development Trends of China Capacitor Market in 2017-2023", the global capacitor market size in 2017 was US$20.9 billion, and the domestic market size was approximately RMB98.7 billion; it is estimated that the global capacitor scale will reach US$22.2 billion in 2019, and the domestic market size will be approximately RMB110.1 billion. We judge that the stable development of the information technology industry and military weapons and equipment around the world determines that the capacitor market size will show a steady upward trend.

The growth rate of the domestic capacitor industry is significantly higher than that of the international market. China's capacitor market size expanded from 72.6 billion yuan to 98.7 billion yuan from 2012 to 2017, with a compound annual growth rate of about 6.33%, significantly higher than the world average.

Domestic substitution of civil capacitors is still an important issue facing my country's capacitor industry. In 2018, my country's export of capacitor products was US$5.062 billion and its import amount was US$12.489 billion. Overall, foreign manufacturers have cost advantages in ordinary capacitor products and technical advantages in high-end capacitor products, resulting in my country still relying on imported products in civil industrial capacitors. Military capacitors have basically achieved domestic substitution.

The overall market of my country's capacitor industry will maintain steady growth in the future. At present, the main problems facing my country's capacitor manufacturers are to reduce the cost of mid- and low-end capacitor products, break through the technical barriers of high-end capacitor products, and promote the domestic substitution process of capacitor products.

Looking ahead, my country's capacitor industry will show two major development trends: First, civilian capacitor manufacturers are launching mid- and low-end product fields in the stage of Japanese and Korean companies launching mid- and low-end product fields, actively seize the downstream market, improve product consistency and quality control capabilities through scale effect, thereby reducing product costs, and at the same time increase investment in the research and development and manufacturing of high-end capacitor products to achieve domestic substitution; second, military capacitor manufacturers are making arrangements to the upstream raw materials field, realize domestic substitution in the entire industrial chain, expand a variety of capacitor product fields, enrich product lines, and actively deploy markets in civilian fields such as new energy vehicles, 5G communications, and industrial control.

.2.5 Infrared detector: The detection technology has made a breakthrough, paying attention to the investment opportunities of domestic production

Infrared is not seen by human eyes, but it is everywhere . Infrared was discovered by British astronomer William Herschel in 1800, also known as infrared thermal radiation. The wavelength of infrared radiation is between visible light and microwave. According to the generation mechanism of infrared radiation, the application and development of infrared radiation, and the transmission characteristics of infrared radiation in the earth's atmosphere, infrared radiation of 0.75~1000μm is further divided into four bands: short-wave infrared, medium-wave infrared, long-wave infrared and extreme far-wave infrared. Although infrared radiation cannot be directly perceived by the human eye, it is one of the most widely present radiation in nature. Any object with a temperature above absolute zero (-273.15℃) will continuously radiate outwards the full spectrum radiation signal including infrared radiation.

Infrared thermal imager is an infrared system for two-dimensional plane imaging, used to detect infrared radiation from target objects. converts the temperature distribution of the target object into a grayscale distribution through photoelectric conversion and electrical signal processing, and outputs it in the form of video or image. The components and technologies of infrared thermal image include infrared optical systems, infrared focal plane detectors, subsequent circuits and image processing software. The application of

Infrared thermal imager is divided into two major markets: military and civilian. in the military field, infrared detection is widely used in various weapon platforms. After years of technological iteration and product replacement, infrared products are currently popular among the armies of developed countries such as the United States and France. Infrared imaging, infrared reconnaissance, infrared tracking, infrared guidance, infrared warning, infrared confrontation, etc. are very important tactical and strategic means in modern warfare.

From a global perspective, the military infrared product market is showing a steady growth trend. According to the US Maxtech International Infrared Thermal Imager Market Survey Report, military Infrared Thermal Imager will maintain a relatively stable growth rate, with the market size expected to reach US$9.251 billion in 2019, with an annual compound growth rate of 3.4%. Infrared detectors account for about 13% of the total market size of military infrared detectors, and are expected to reach US$1.19 billion in 2019. Because military infrared products have a high degree of military sensitivity, the international military infrared market has shown a monopoly competition pattern with the state as the main body.

The global civilian growth rate is higher than that of military use, and non-refrigeration detection is the main force. Since the 1970s, some developed countries in Europe and the United States have successively used infrared thermal cameras to explore various fields. With the development and maturity of non-cooled focal plane array detectors, the equipment has been miniaturized, low cost and high reliability, and the application fields in the power, industry, security, fire protection, vehicle-mounted and medical industries have been continuously expanded.

Infrared thermal imager has fully realized market-oriented competition in the civil field. From the demand side, with the continuous expansion of applicable scenarios and application scope, the consumption of infrared thermal cameras in the civil market has maintained a rapid growth rate. According to the Infrared Thermal Imager Market Survey Report of Maxtech International in the United States, the market size of civilian infrared Thermal Imager reached US$3.107 billion in 2014, and the market size is expected to reach US$5.601 billion in 2020. The total consumption of civilian infrared thermal cameras has a compound annual growth rate of about 10.3%, which is much higher than that of military fields.

Infrared thermal imager has outstanding advantages in the civil field, but the high cost has become the main obstacle to infrared consumption. packaging is an important process in the production process of infrared detectors and is the most important part of the production cost of non-refrigeration infrared detectors. As a new generation of packaging technology, wafer-level packaging has higher integration and simplified process steps. As the technology matures, it is expected to significantly reduce the cost of detectors, and the consumer market provides detectors with sufficient cost performance.

Domestic infrared enterprises are small and scattered, and the military business accounts for a high proportion. The units engaged in infrared research and production in my country can be divided into three parts: military industry group, sub-unit units of the Chinese Academy of Sciences and private enterprises. The military industry group occupies the main market in the military infrared field. In recent years, with the gradual deepening of the reform of the national defense science and technology industry, the field of weapon and equipment scientific research and production, and the equipment procurement system, domestic strong civilian infrared enterprises including Gaode Infrared, Dali Technology and Ruichuang Micronano have begun to gradually directly participate in the supply of infrared products and equipment of the military and armed police, occupying part of the market.

In terms of investment target selection, it is recommended to focus on leading companies with outstanding technological advantages. On the one hand, the entry threshold for infrared imaging industry is high, and the leading enterprises are large in scale, and can continue to maintain R&D investment and ensure the advanced technology; on the other hand, leading enterprises are expected to break the traditional closed military industry structure and gain a higher market share. In addition, leading enterprises are also expected to make breakthroughs in the civilian field and enter a broader market.

.3 Replacement is right now: It is a good time for the military industry to incubate a large number of growth stocks

is currently in the best historical period of civilianization of military technology. The deepening of domestic substitution and the development of emerging markets will give birth to more and more military growth stocks. is currently in the context of the Sino-US trade war, and the demand for domestic substitution is strong, which is the time. The state encourages the civilian transformation of military technology. In addition, the military industry has accumulated over the years of technology and has the ability to replace "bottleneck" products for civilian imports, which is a good place.Emerging civilian markets are rapidly erupting, with new industries such as 5G, autonomous driving, and new energy vehicles emerging one after another, providing a broad market space, which is harmonious.

The United States has long relied on implementing a military blockade on China, and weapons are the focus of its embargo on China. In order to achieve the purpose of embargo on China, the United States adopted the following blockade measures: First, it was to pass domestic legislation to prohibit the export of weapons to China. Since the founding of New China, the US Congress has issued the "U.S. Export Control Act of 1949", which was the beginning of the United States' arms embargo policy against China; second, it was to establish an embargo organization with other countries, November 1949. The United States colluded with Britain, France and other countries to discuss how to curb the issue of socialist countries such as China. It established a "Export Control Coordination Committee" in Paris to restrict the export of strategic materials and technologies to China and other countries. Although the organization was dissolved in 1994, the embargo on China has not stopped; third, it is to oppress the EU. In 2004, China has become an important trading partner of the EU second only to the United States, and plans to lift arms sales to China. As soon as the news came out, the United States increased its pressure on the EU and maintained an embargo on China; fourth, it is to oppress its allies' embargo on China. Israel is a country with advanced military technology. In the process of cooperation with Israel, the United States has blocked it.

Since 2018, the United States has launched a trade war, and civilian high-tech technologies have also become the key target of the US blockade, and domestic substitution is in full swing. At the beginning of 2018, Trump of the United States announced that he would impose heavy taxes of 25% and 10% on steel and aluminum imports for a long time, and then gradually escalated and impose high tariffs on a large number of exported goods. On August 1, the U.S. Federal Government Gazette website released a document saying that the U.S. Department of Commerce included 44 Chinese companies (8 units and 36 affiliated agencies) on the export control list on the grounds of national security and diplomatic interests and implemented a technical blockade. Most of the units involved were my country's military scientific research units, reflecting the strict US blockade of my country's military technology. In May 2019, the United States included Huawei and other companies on the entity list.

my country's advanced military technology has the ability to transform to civilian . Against the backdrop of the Sino-US trade war, there is a strong demand for domestic substitution. In the first 11 months of 2019, the total trade value of China-US is 3.4 trillion yuan, a year-on-year decrease of 11.1%, and there is a lot of room for domestic substitution. Through years of research and development, my country's military technology has achieved breakthroughs, and has basically achieved localization. In some industries, it has the ability to transform military technology into civilian products. Some mid-to-upstream fields have the conditions for transformation to civilian use, especially in the fields of raw materials such as carbon fiber and quartz fiber, as well as components such as connectors and infrared detectors. Civilian demand is very broad. The transformation to civilian use through military technology will help break the risks brought by foreign embargo.

policy encourages the transformation of military technology to civilians. In 2018, the Ministry of Industry and Information Technology released the "Catalogue of Military Technology to Civil Promotion (2018 Annual)", which focuses on six technical fields including advanced materials, intelligent manufacturing, high-end equipment, new generation information technology, new energy and environmental protection, emergency rescue and public safety. The Ministry of Industry and Information Technology and the National Defense Science and Technology Bureau collected and selected 150 "military to civilian" technical achievements. The rapid development of emerging industries such as

G, autonomous driving, robots, and the Internet of Things has brought broad market space to dual-use technology in military and civilians. Emerging industries such as 5G, autonomous driving, robots, Internet of Things, and new energy vehicles are in full swing. Military and civilian dual-use technology will have a lot of room for implementation, especially the common upstream sensor field. It is expected that with the rapid development of new generation information technology and high-end manufacturing industries, the military industry will lead to the birth of high-quality enterprises with strong competitiveness in the civilian field.

6. The voice of medium and long-term funds is gradually increasing, and the sector is expected to embark on a journey of continuous rise

.1 Market participants in the military sector

The market participants in the military sector can be divided into five categories: major shareholders, industrial capital, public/insurance/private equity institutions, hot money retail investors, and foreign capital. For military central enterprises, the major shareholders are generally military-industrial groups, and their holdings are the most stable; industrial capital generally enters listed companies through private placement, and its investment cycle is generally longer; the trading activity of public/insurance/private equity institutions is between industrial capital and hot money retail investors; hot money retail investors trade more frequently, and it is easy to chase ups and sell downs; foreign capital is the fresh blood entering the military sector, and value investment is its main tag; some also include Central Huijin and China Securities Gold and other China Securities Gold. Shares are held by special institutions such as Rong Co., Ltd.

From the perspective of shareholding ratio, for ordinary military-industrial central enterprises, major shareholders are generally in a dominant position, followed by shareholding ratios of industrial capital, public/insurance/private equity institutions. In recent years, foreign-funded shareholding has increasingly occupied an important position, and it is expected to exceed the shareholding ratios of domestic public/insurance/private equity institutions in the future. The rest are hot-funded retail investors.

.2 Industrial capital is highly forward-looking, changes in investor structure reduce sector market volatility

Major shareholders and industrial capital have a deeper understanding of the development prospects of the military industry. Their increase and decrease of holdings are generally strongly forward-looking, and are mainly based on increasing holdings. The time for increasing holdings is generally at the bottom. The increase in holdings of major shareholders and industrial capital plays a role in enhancing confidence in the market. The medium- and long-term stock price reaction is positive, and has little impact on short-term stock price fluctuations.

Changes in institutional holdings such as public offering, insurance, and private equity are important forces that affect the company's stock price. The participation of institutional investors helps the company's stock price stabilize and reduces volatility, which is reflected in the reduction of beta value. Take AVIC Aircraft as an example. In the bull market from 2005 to 2007, institutional investors increased their holdings significantly, and the shareholding ratio of public funds soared from nearly 0% at the beginning of 2015 to 24% at the end of 2016, becoming the main driving force for the rise in the company's stock price and also driving the company's beta value to increase from 1 to 2. However, after the public funds were established, the company's beta value quickly returned to around 1. After 2010, the state-owned shares of military listed companies were fully circulated, and the proportion of fund companies' shares in free-circulating shares became lower. However, as the proportion of holdings of major shareholders of the company remained stable, institutional investors were still an important force affecting the company's stock price.

hot money retail investors play a role in fueling the stock price, and when hot money retail investors dominate the market, it is reflected in high beta. Take AVIC Aircraft as an example. In the bull market in 2015, hot money and retail investors were the main driving force for the company's stock price. The number of shareholders of AVIC Aircraft increased from 150,000 at the end of 2014 to 200,000 in mid-2015. From 2015 to 2017, the company's beta value remained at a high of around 1.5.

Foreign-invested shareholding is increasingly becoming an important force influencing the military industry sector. northbound funds have significantly increased their holdings in military stocks since August 2018. At the beginning of 2018, the total market value of military-industry shares held by Lukoutong was 4 billion yuan, accounting for 0.24% of the total market value of military-industry. Since the first half of 2018, the shareholding ratio has remained basically stable. Since August 2018, the Mainland Stock Connect has begun to increase its holdings in military industry, especially since May this year, the increase in military industry has accelerated significantly. As of December 16, the total market value of military-industry stocks held by the Mainland Stock Connect reached 13.638 billion yuan, accounting for 0.92% of the total market value of military-industry, which has become an important force affecting the military-industry sector.

Take AVIC Optoelectronics, which has the highest shareholding ratio in Land-Hong Kong Stock Connect, as an example. Since 2017, northbound funds have continued to increase their holdings, and AVIC Optoelectronics' beta value has dropped significantly. Before 2017, the beta value of AVIC Optoelectronics has remained at around 1, with a maximum of 1.4. Since the mainland Stock Connect continued to increase its positions in 2017, its beta value has dropped below 1, and as low as 0.5, with a significant decline in volatility.

.3 Industrial capital increases its holdings in leading enterprises, and the proportion of foreign capital has increased significantly

In recent years, the market participants in the military industry sector have shown two marginal changes. One is that major shareholders and industrial capital increase their holdings in leading military industry, and the other is that the proportion of foreign capital has increased significantly. This trend is expected to continue in the future.

As the capital operation of military-industrial central enterprises gradually recovers, major shareholders and industrial capital of listed companies of military-industrial central enterprises have continuously increased their holdings of listed companies through asset restructuring and participation in private placement. The asset restructuring and private placement of military-industrial central enterprises are generally carried out within the bottom range of the stock price. The asset quality is further improved by issuing shares to major shareholders or other shareholders to purchase assets. Major shareholders and industrial capital increase their holdings of listed companies by participating in private placement. Currently, most military-industrial stocks are in the bottom range, which is more attractive to major shareholders and industrial capital. In the future, major shareholders and industrial capital are expected to continue to increase their holdings through capital operations.

Foreign investment in the military industry sector is increasing, becoming an important force influencing the military industry sector and will also have a certain impact on the domestic institutional investment style. The foreign investment cycle is relatively long, and the leading military industry target is the first choice, and the investment style is relatively stable. MSCI China A-share index components include 17 military-industry stocks, including 6 targets: AVIC Power, AVIC Aircraft, AVIC Shenyang Aircraft, China Heavy Industry, China Power, and China Satellite. The Chinese-cap stocks include AVIC Control, Aerospace Electronics, AVIC Electrical, China Direct Co., Ltd., AVIC Optoelectronics, Haig Communications, Inner Mongolia First Aircraft, Unigroup Guowei, Guangwei Composite Materials, Guests, and Gaode Infrared. As of December 16, 2019, the total market value of foreign capital holding the 17 military targets through the Mainland Stock Connect was 8.4 billion yuan, and the proportion of each individual stock held by them accounted for more than 1% of the free-flowing shares, with an average of 3.71%.

.4 The investor structure has undergone essential changes, and the sector is expected to enter a stage of continuous rise

Military industrial core assets have successively entered the capital market, and the asset quality of listed companies has been greatly improved. In recent years, the capital operation of military-industrial enterprises has continued to recover, and the core assets of military-industrial central enterprises and high-quality civilian-entered enterprises have successively entered the capital market, and the asset quality of military-industrial listed companies has improved significantly; the market's analysis methods for military-industrial listed companies have gradually switched from the preparation method of in vitro asset injection to the study of listed companies' business itself.

Long-term funds such as major shareholders, industrial capital, foreign capital, etc. have increased their voice in the secondary market, which is expected to enable the military industry sector to gradually have the attributes of value investment and enter a stage of continuous rise. As medium- and long-term funds such as major shareholders, industrial capital, foreign capital flow into the military industry sector and become the dominant force, the secondary market of the military industry sector will pay more attention to the performance and growth of listed companies in the future, and prefer leading companies with core competitiveness. The expectation of medium- and long-term stable growth in the military industry is consistent with the medium- and long-term capital risk preferences. The continuous inflow of the above funds is expected to enable the military industry sector to embark on a journey of continuous rise.

7. Investment strategy and key recommendation companies

.1 Investment strategy: Grasp the new balance of supply and demand, reform starts again, and replace the three main lines of the time

Outlook 2020 is the final year of the "13th Five-Year Plan" and military reform. Through the study of the industrial development framework, we judge that after the supply and demand relationship is adjusted, the military industry may usher in an industrial explosion period, and the industry's prosperity is expected to further improve. As the asset securitization of military-industrial central enterprises has entered a new stage, industrial development and capital operation will form a resonant effect; at the same time, the deepening of domestic substitution and the development of emerging markets may accelerate the incubation of military-industrial growth stocks. It is recommended to grasp the three main investment lines of new balance of supply and demand, reform and replacement.

. The supply and demand relationship has become the most important contradiction that determines the prosperity of the military industry. During the 13th Five-Year Plan period, both the supply and demand sides of the industry showed a turning point, and the industrial explosion period may usher in the "14th Five-Year Plan" period.

From the demand side: . This round of military reform is coming to an end. The military's management system, command system, scale structure and force composition have undergone major changes. The military's demand for equipment is more practical, bringing essential changes on the demand side; 2. National defense expenditure will continue to maintain long-term and stable growth in the future, the proportion of equipment expenses will increase day by day, and training and maintenance costs are expected to continue to increase; 3. Practical training will bring long-term performance support to military enterprises in three aspects. First, accelerate the renewal of equipment, second, accelerate the consumption of consumables such as weapons and targets, and third, increase the needs of weapons and equipment maintenance and guarantee.

From the supply side, . The new main combat equipment of each military branch has been established and started to serve in recent years, filling the gap in our army in advanced equipment; 2. The capacity construction work in all links of the industrial chain is progressing in an orderly manner. Downstream enterprises have carried out production capacity construction in advance, upstream enterprises have begun to make up for production capacity, and the degree of refinement of supply chain management is expected to continue to improve; 3. Large-scale and low-cost equipment systems have become the mainstream, and the foreign trade market will also become a new increase in the development of the military industry.

. There are constraints on the traditional securitization path. The asset securitization of military-industrial central enterprises is about to enter a new era, and may achieve a win-win pattern

In the past, the traditional asset securitization path of military-industrial central enterprises had the following constraints: (1) The main goal is to improve the asset securitization rate, the quality of the injected assets is uneven, and the improvement of the operating quality of listed companies is relatively slow, resulting in the lack of focus on the business of listed companies; (2) The problem of securitization of core assets of core institutes has never been solved; (3) The lack of supporting incentive policies and systems, and the business integration problem after asset injection still exists.

New path to securitization of assets 1: Focus on the new path to securitization of core assets of core institutes . There are a large number of military core assets in the military research institute. The prerequisite for capital operation for such assets is to realize corporate operations. However, the reform of the institute has encountered difficulties. Guorui Technology Plan bypasses the complex procedures of the reform of the research institute and does not adopt the traditional path of "transform first and then injects", but integrates the core military assets in the institute into a new company through transfer, and then directly injects them into the listed company, providing a new path for the injection of core assets of the research institute into listed companies, and may become a new gradual plan for the reform of the institute.

New path to asset securitization: Transform the state-owned assets management method and focus on the main business to improve the quality of listed companies. In the context of state-owned enterprises accelerating the transformation from management of enterprises to management of capital, Aviation Industry Group, as the first state-owned capital investment company pilot enterprise in the military industry, AVIC Aircraft adopts asset replacement method, focuses on the main business of aviation aircraft, further integrates R&D resources, improves operational efficiency, and improves the profitability of listed companies, which is of great reference significance for the capital operation directions of other military-industry groups.

Asset securitization lubricant: equity incentive . The State Council issued the "List of Authorized Delegation of Powers by the State-owned Assets Supervision and Administration Commission of the State Council (2019 Edition)" and clearly proposed to support central enterprises in carrying out equity incentives and liberalize the restrictions on the total salary level. Equity incentives will fully mobilize the enthusiasm, initiative and creativity of the cadres and employees of listed companies of military-industrial central enterprises, and are expected to stimulate vitality and improve corporate efficiency.

A new era of asset securitization will pay more attention to the improvement of listed companies' income statements, and may achieve a win-win situation . The core asset profitability of core institutes is generally strong, and after injection, it will directly improve the company's performance; follow the principle of "managing assets" to "managing capital", and improve capital allocation efficiency. It should be carried out through resource integration and reflected through capital appreciation, and capital operation will also pay more attention to improving the operating efficiency of listed companies through resource integration, thereby improving the profit statement. We believe that from the perspective of the secondary market, the investment opportunities brought by asset securitization must be accompanied by the improvement of the operating efficiency and profitability of listed companies, which directly depends on the profit statement of listed companies. The above path is expected to achieve a win-win situation for military-industry groups, listed companies and investors.

. Deepening of domestic substitution and the development of emerging markets accelerated the incubation of military growth stocks

The military industry sector naturally has the soil to generate growth stocks. First, from the perspective of industry attributes, military industry such as aerospace, shipbuilding, informatization, etc. belong to the fields of high-end manufacturing, new generation information technology and new materials. It is a strategic emerging industry in my country. It has the conditions for generating growth stocks in terms of industry attributes. Second, from the perspective of the industry development stage, my country's military industry is still in a period of development, and the level of military equipment is still quite different from that of foreign countries. It will be a stage of accelerating the realization of mechanization and informatization for a long time in the future. From the perspective of the industry development stage, it is a period of rapid development.Third, from the perspective of technical level, due to its strict requirements on the environment and technical level in the military industry, long-term independent research and development and large resource investment, the technical level of a considerable number of fields is higher than that of civilian fields and has a strong technical spillover effect.

is currently in the best historical period of civilianization of military technology. The deepening of domestic substitution and the development of emerging markets will give birth to more and more military growth stocks. is currently in the context of the Sino-US trade war, and the demand for domestic substitution is strong, which is the time. The state encourages the civilian transformation of military technology. In addition, the military industry has accumulated over the years of technology and has the ability to replace "bottleneck" products for civilian imports, which is a good place. Emerging civilian markets are rapidly erupting, with new industries such as 5G, autonomous driving, and new energy vehicles emerging one after another, providing a broad market space, which is harmonious.

We believe that the three major logics that promote industry development will be gradually verified in 2020. It is recommended to focus on the three main investment lines of new balance of supply and demand, reform and replacement.

. In terms of the new balance of supply and demand: it is recommended to choose a complete machine company that meets the three standards of "strong practical demand, new modeling, and mass production expected to be approaching", as well as related companies that are concentrated in demand under the background of practical training.

. In terms of reform re-starting: With the increasing support of national policies and personnel adjustments in place, the demonstration effect of new paths of asset injection will gradually emerge. The core military assets may be accelerated to securitize, and optimizing and improving the operating efficiency of listed companies may become an important task for major military-industrial groups. It is recommended to focus on listed companies of military-industrial central enterprises with "supported main business, large room for injection, and improved operations."

. In terms of the right time to replace: the technologies and products of upstream military enterprises are both military-civilian and civilian. The problem of domestic substitution can be solved through the transformation to civilians. Focus on related industries with the three major standards of "large industry space, low domestic production rate, and strong domestic demand", including carbon fiber, connectors, microwave components, capacitors, infrared detectors, etc.

Key recommendation companies

New balance of supply and demand: Zhongzhi Co., Ltd., AVIC Power, AVIC Aircraft, Inner Mongolia First Aircraft, AVIC Aerospace Development;

Reform starts again: SiChuang Electronics, Jiesai Technology, AVIC Electromechanical, AVIC Electronics;

Replacement is right: Guangwei Composite Materials, July 12, Hongda Electronics, AVIC Optoelectronics, Aerospace Electrical Appliances, Gaode Infrared.

…

(Report source: CITIC Construction Securities)

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