Boom times ahead for defense contractors

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By Zhou Yan (China Daily)
Updated: 2009-08-06 08:05

Military companies have seen a sharp rise in their order books before China's 60th National Anniversary parade. [CFP]

China's increased spending on new weapons, some of which will be showcased during the 60th anniversary parade, has boosted stocks in the military industry.

The AVIC index that tracks 18 defense contractors controlled by Aviation Industry Corporation of China (AVIC), rose a total of 23.3 percent between July 8 and July 31, compared to a 10.5-percent gain in the benchmark indicator.

Shares of Shenzhen-listed Xi'an Aircraft International Corporation, the largest military aircraft maker under AVIC, surged an aggregate 34.85 percent within a month. Its shares rose 4.06 percent to close at 15.38 yuan yesterday, the highest in a year.

"Military companies have seen a sharp rise in their order books largely due to purchases of latest military equipment for display at the National Day Parade," said Shuai Zaixian, analyst, South China Securities.

Before the latest flood of orders, most stocks in the defense sector, which is non-cyclical, had underperformed the major index, Shuai said.

Between April 1 and July 7, the AVIC Index rose 12.6 percent, compared with the 28.3 percent increase of the main index.

Defense sector stocks often enjoy a bull run three months before the National Anniversary, said Huang Qingyang, analyst, Aijian Securities.

This year, the bullish trend has also been aided by the enlarged defense budget. China plans to increase its defense budget by 14.9 percent this year to 480.7 billion yuan, accounting for 6.3 percent of the total fiscal spending, parliament spokesman Li Zhaoxing said early this year, adding that part of the budget would be used for military equipment purchase and construction of facilities for military.

In addition, the central government's decision to reform the shareholding system in military enterprises last November also fuelled the sector's restructuring and securitization processes.

Shanghai-listed Jiangxi Hongdu Aviation Industry Co, an attack and fighter supplier to the Chinese military for instance, announced last Thursday that it planned to raise up to 2.5 billion yuan through a private placement to its parent company AVIC and several intuitional investors.

The money raised would be mainly utilized to buy the L15 trainer aircraft business and related assets from its affiliated enterprise Hongdu Aviation Industry Group Co, and other airplanes' research and development.

"It will take several steps to reform military firms, starting with the asset restructuring among military groups to acquisitions outside the industry. We will see more restructuring projects like this going forward," Shuai from South China Securities said, adding that the sector still has room for more growth.

There are nearly 55 publicly-traded companies under the 11 military groups, including 20 aviation-related enterprises.

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