Fighter-Jet Makers a Rare Bright Spot in China's Bear Market
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Chinese fighter-jet and engine manufacturers are emerging as a bright spot in a stormy stock market that’s been besieged by a trade feud with the U.S. and a slowing economy.
Avic Shenyang Aircraft Co. and AECC Aviation Power Co. may stand out because their largest customer is the Chinese military, whose purchasing decisions have more to do with the nation’s plans for upgrading its air force and less to do with macro-economic fundamentals, analysts say.
The demand is creating a steady order flow for the two companies, the major manufacturers of fighter jets and military aero engines that are listed on China’s A-share market. The contracts provide stability for earnings as well as much-needed assurance for investors at a time when an economic slowdown in China and uncertainties arising from the U.S. trade spat are clouding companies’ prospects.
“These two stocks are becoming the blue chips of China’s defense sector,” said Liu Lang, an analyst with Kaiyuan Securities Co. in the northwestern city of Xi’an. “Both companies are producing in full swing to meet swelling demand as the Chinese army is upgrading its gear.”
Avic Shenyang rose as much as 4.86 percent Monday morning, while AECC Aviation gained as much as 2.97 percent, outperforming a less than 1 percent gain in the benchmark CSI 300 index. Avic Shenyang and AECC Aviation’s gains on Monday came on top of their respective rally of 5.49 and 2.39 percent last week.
China has a goal of creating a “world-class” military by the middle of this century, spurring greater production of more-advanced fighter jets. Boosted by this demand, Avic Shenyang and AECC Aviation are projected to be the world’s top two defense companies by revenue growth by the end of 2020, data compiled by Bloomberg show.
The nation’s fleet is in need of an upgrade to the latest generation of aircraft, according to Zheshang Securities Co. China has the world’s second-biggest combat fleet with 1,624 jets, about 40 percent less than that of the U.S., data compiled by FlightGlobal show.
The expansion and upgrade of the Chinese fleet will create a 30 billion-yuan market for fighter jets and a 45 billion-yuan market for military aero engines each year for the next decade, according to Zheshang Securities.
Avic Shenyang is projected to have revenue and profit gains of about 20 percent in 2019, after it listed in 2017 by injecting assets into a car manufacturer, according to data compiled by Bloomberg. AECC Aviation will probably see profit growth of nearly 20 percent.
Shares of Avic Shenyang and AECC Aviation are expected to jump more than 50 percent and 40 percent over the next 12 months, based on consensus estimates compiled by Bloomberg. That’s more bullish than expectations for the A-share market: The Shanghai Composite Index will probably end 2019 at around 2,950, 18 percent above its close on Dec. 28, according to the median estimate in a Bloomberg survey of 22 analysts and fund managers.
Both stocks haven’t been spared from the current downturn in the broader market. The shares fell about 20 percent in 2018, compared with a drop of about 25 percent in the A-share market.
Despite the declines, the two stocks remain pricey relative to global peers. Avic Shenyang and AECC Aviation are among the top three highest valued defense stocks, trading at 41 and 33 times their blended forward earnings estimates, compared with an average of 18 for the global peer group, data compiled by Bloomberg show.
“Their valuation is high but justifiable given that such stocks are rare in the market,” said Lu Zhou, an analyst at Dongxing Securities Co.
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