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Defense Industry Weekly Report (2024 November Issue 3)

Investment Focus:

• Core Portfolio: AVIC Xifeng, AVIC Feifeng, Hongdu Aviation, Aeroengine Power, China Shipbuilding, China Sea Defense, Sinopharm Heavy Industry, PowerChina Dynamics, CSSC Defense, AVIC Electromagnetic, North China Navigation, Ordnance Arrow, Aeroengine Control.
• Key Stock Pool: AVIC Unmanned, Space Rainbow, Hongyun Electronics, AVIC Electromagnetic, Inner Mongolia No.1 Machine, AVIC Heavy Machinery, Purple Grappling, West Group Superconductor, Xingxing Chain, Baolite Technology, Huatian Technology.

Key Insights & Market Updates:

1. Zhuhai Airshow Performance: The 15th Zhuhai Airshow featured significant achievements:

   • The J-35A stealth fighter and advanced missile systems were publicly displayed, signaling enhanced domestic defense capabilities.
   • Military equipment showcases included drones, confirming rapid advancements in unmanned systems.
   • Equipment providers secured substantial orders: China Aviation signed over 370 aircraft deals, with China Southern Airlines committing to 360 C929s.

2. Industry Outlook: Defense stocks underperformed in the last week, falling over 8.7% as the index declined almost 3.1% compared to the broader market. Shares experienced upside in November, with resilience suggested despite broader market declines. Valuation metrics such as Price-to-Earnings remain elevated.

3. Company-Specific Highlights:

   • Defense stocks saw significant gains in the current month: Hongdu Aviation gained around 65%, Zhenghang Tech rose over 400%, and Advanced Information Tech (Hingxing) surpassed gains exceeding 800%.
   • Key defense contractors like China Shipbuilding and AeroEngine secured partnerships and signed pivotal contracts, with ongoing restructuring enhancing operational efficiency.

4. Fiscal Projection & Valuation: The defense sector is presented as undervalued given its growth prospects, with expected Year-on-Year profit increases noted across several key players.

Upcoming Recommendations & Opportunities:

• Focus areas for investment: Military modernization and unmanned systems technologies continue driving demand.
• Viewpoint on Near-Term Catalysts: The low growth rate in Q4 may correct, with military modernization projects providing sustained positive sentiment.

Risk Highlights:
Equities face risks from lower-than-projected national industrial incentive programs and project execution delays.