Asia's Hottest Stock Is a Bet on China's Military Expansion

(Bloomberg) -- China’s push to bolster its military firepower has turned a state-run aviation stock into one of Asia’s best performers this year.

AviChina Industry & Technology Co., a maker of training jets, transport helicopters and airplane electronics systems, jumped 40 percent in Hong Kong since the start of February through Monday as Beijing pledged to boost defense spending. That put it on top of the MSCI Asia Pacific Index, which fell more than 6 percent in that time.

Growing tensions between China and the U.S. have renewed investors’ interest in Chinese defense stocks such as AviChina, according to Kelvin Lau, an analyst at Daiwa Capital Markets. Like the other 11 analysts tracked by Bloomberg who cover the company, Lau has a buy rating on the stock.

AviChina’s military revenue now outpaces profits from general-purpose lightweight aircraft used for cargo transport and crop seeding. Beijing expects defense spending to rise at the quickest pace in three years to 1.11 trillion yuan ($176 billion) as President Xi Jinping seeks to mold the People’s Liberation Army into a “world-class” force.

The rally is a turnaround for the stock, which was trading at the cheapest valuation in more than a decade in February.

Trainer Aircraft

“Previously the focus for AviChina was the general aircraft industry which was restricted by policies in China,” said Sean Xiang, an analyst at Guotai Junan Securities Co. “Now the growth driver has changed to the military business.”

In 2017, revenue from the trainer aircraft business rose 45 percent on year to 1.44 billion yuan while revenue from general-purpose aircraft decreased by 89 percent to 209 million yuan, according to its latest preliminary annual filing.

The company’s K8 plane, used in basic flight training, is the “most successful export trainer so far manufactured by China” and has been sold to more than 13 countries, according to Xiang. The L15, a new generation twin-engine supersonic jet trainer, “has been exhibited by the Chinese military in some aviation exhibitions,” he said.

The company manufactures helicopters, airplane parts and electronics systems through its mainland-listed subsidiaries including AVIC Helicopter Co. and China Avionics Systems Co. AviChina’s shares fell 5.7 percent in Hong Kong while the broader market rose on Tuesday.

AviChina, founded in Beijing and listed in Hong Kong since 2003, is a unit of China’s biggest defense contractor, Aviation Industry Corporation of China or AVIC. AviChina also counts Airbus SE as a partner and stakeholder, with an 11.7 percent share, according to the latest data compiled by Bloomberg.

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