China Securities Co., Ltd. has released a research report analyzing recent H1 semi-annual performance forecasts from multiple companies in the defense and military sector. A decline in new orders within the traditional defense segment has led to varying degrees of profit decreases among military information technology firms. Overall, the sector's growth drivers in the first half were primarily shipbuilding and arms exports, a trend expected to continue into the second half of the year.
The report outlines three key observations. First, the defense sector's performance is now being shaped by a shift from a single domestic demand model to a "three-curve" growth framework. The first curve focuses on domestic military needs, driven by stable defense budget growth and equipment modernization, such as mass production of key models during the 14th Five-Year Plan period. The second curve centers on overseas arms sales, leveraging cost advantages, integrated combat capabilities, and strategic partnerships like the Belt and Road Initiative. The third curve involves the civilian application of military technologies, spawning trillion-yuan industries like commercial aerospace, low-altitude economy, future energy, deep-sea technology, and large aircraft.
Valuation recovery and a new cycle are expected to lift the defense sector. The industry is at a turning point from earnings expectations to actual realization. Since September 24, 2024, the sector index has risen by up to 50%, reflecting expectations for a new growth cycle. The year 2025 is seen as a period of earnings realization, with structural and divergent characteristics becoming more pronounced. The current valuation of the CSI Defense Index stands at 59.50 times earnings, driven by event catalysts and fundamental improvements.
Recent catalysts include the May 10 incident where a Pakistani JF-17 Thunder fighter jet allegedly destroyed an Indian S-400 air defense system, boosting the sector on geopolitical tensions. On May 11, a People's Daily article titled "Accelerating the Liberation and Development of New Combat Capabilities" heightened market attention. On June 24, the State Council Information Office confirmed that a military parade for the 80th anniversary of the end of World War II will be held in Tiananmen Square on September 3, spotlighting new equipment like unmanned swarms and hypersonic missiles. These events, combined with renewed Middle East tensions and multiple commercial space rocket launches, have triggered a short-term rally. The sector is now at a bottom in both earnings growth and fund allocation, with domestic and international catalysts likely to sustain momentum, particularly in new domains and new quality areas.
The investment strategy focuses on three pillars: building a system, expanding overseas, and promoting military-to-civilian conversion. The report emphasizes that the Chinese defense industry has evolved into a three-wheel-driven development model, making growth more diversified and sustainable. The pattern of "domestic demand as foundation, foreign trade expansion, and civilian feedback" is reshaping the sector's boundaries. Key directions include high-end, precise, and unmanned systems for domestic needs, cost-effective arms exports for global influence, and the spillover of military technologies into civilian sectors like commercial aerospace and low-altitude economy.
The report also highlights several risks. There is a possibility that defense budget growth may fall short of expectations if national policies or strategies change. Equipment delivery delays could occur due to post-pandemic supply chain disruptions and regional tensions, particularly in shipbuilding and similar industries. Lastly, progress in related reforms may be slower than anticipated, as national economic and industrial policies significantly impact defense companies' strategic direction, industrial selection, and investment decisions.