The Zhitong Finance App learned that CITIC Construction Investment released a research report saying that the pattern of “building a foundation for domestic demand, expanding foreign trade, and civilian backfeeding” is profoundly reshaping the face and borders of China's military industry. The industry is shifting from “cyclical growth” to “comprehensive growth.” 1) Domestic military demand revolves around the goal of building an army for 100 years: focusing on “preparing for war” and modernizing equipment. Strong deterrence, high precision, systematization, unmanned, and low cost are the main directions. 2) Military trade overseas: With cost-effective advantages, systematic combat capability, and geo-strategic cooperation, China's military trade share continues to increase, and its strategic influence and economic benefits are win-win. 3) Civilization of military technology: spawning trillion-level new industries such as commercial aerospace, low-altitude economy, future energy, deep-sea technology, and large aircraft, driving the development of new processes, new materials, and new devices, forming a virtuous cycle of “military technology and civilian use, feeding back the military industry”. The 2026 three-quarter report shows that the inflection point of performance has been structurally verified: OEMs and system manufacturers benefiting from equipment release, military trade overseas, and AI-related companies leading the growth rate, while the pace of delivery has moved backwards is under phased pressure. Looking ahead to the “15th Five-Year Plan”, the bank is optimistic about the steady recovery of the first growth curve and the accelerated growth of the second and third growth curves, especially the direction related to commercial aerospace, large aircraft, and AI, driven by the dual drive of the end of the centennial goal of building an army and connecting the new round of equipment cycles.
CITIC Construction Investment's main views are as follows:
Industry situation: Sectors' performance inflection point confirmed, waiting for the “15th Five-Year Plan” large-scale order to be placed
The military sector rose first in the first three quarters and then declined, and the characteristics of the bottom were evident after deep adjustments in the third quarter. In the first three quarters of 2026, the trend in the military sector showed an inverted N pattern of “rising in the first quarter, fluctuating in the second quarter, and retreating in the third quarter.” In the first half of the year, the sector continued the recovery trend since the fourth quarter of 2025, showing an overall upward trend with a volatile upward trend. As the industry breaks out of the 2023-2024 adjustment trough, the reshaping of the personnel and pricing system has basically been completed in 2025. The recovery of orders continued to be reflected on the reporting side from the third quarter of 2025. By the 2026 quarterly report, sector prosperity continued, and the revenue and profit side of each sector ushered in a large year-on-year recovery. Entering the third quarter, the sector showed a marked retracement and outperformed major broad-based indices due to a decline in the overall risk appetite of the market, a reversal in trading congestion in the early stages of the technology growth sector, and disturbances in macro-level oil prices and interest rate expectations. As of November 3, the Shanghai Composite Index fell 9.09% to close at 3608.10 points this year. The China Securities Military Industry Index fell 27.58% during the same period to close at 10146.37 points, outperforming the market by 18.49 percentage points and ranking 24th among the 29 CITIC Tier 1 industries.
Although the performance of the index fell short of the market, the internal structure was significantly divided, and the booming racetrack and leading targets emerged from the independent market. Commercial space continues to explode, milestones on the industrial side have been implemented intensively, and pricing logic is shifting to order fulfillment. Since Q4 2025, commercial space has risen strongly under the triple catalyst of policy, technology, and orders, and achieved a landmark leap forward in the third quarter: on July 10, the Long March 10B made its first flight and achieved the world's first maritime network recycling, and on August 19, Suzake-3 Yao2 achieved China's first sub-stage land recycling of an orbital launch vehicle. As a result, China became the only country outside the United States to gather two recycling technology routes at sea and land.
The heating up of geographical risks and the implementation of the “15th Five-Year Plan” are double catalyzed, and the military trade is moving from single product exports to systematic exports. On February 28, the US and Israel launched a joint military attack against Iran. Iran immediately launched a “True Promise-4” counterattack. The conflict escalated comprehensively and the will to push for global arms procurement suddenly increased. Since then, the US and Iran have “fought while talking” and signed the “Islamabad Memorandum of Understanding to End the Imposed War” on June 18, but the core differences have not been resolved. As of October 27, the Strait of Hormuz is still in a “closed” state, and energy and shipping risk premiums remain high. On the domestic side, the “Outline of the 15th Five-Year Plan” clearly “achieve the goal of building the army for 100 years as scheduled”; 2026 is a key year in the battle for the centennial goal of building the army. After the 9-3 military parade, various advanced equipment was unveiled, and large-scale orders are gradually getting closer. The military trade is being upgraded from single product exports to systematic equipment exports integrating early warning, attack, prevention, control, and maintenance.
The performance of the defense and military sector has continued to pick up since it bottomed out in 25 years. The recovery in demand has been reflected on the reporting side for several consecutive quarters. The profit growth rate in the 26Q1-Q3 sector has risen markedly, and the recovery is moving from structural to comprehensive. In the context of the 100th anniversary of the founding of the military in 2027, there is strong certainty about the positive trend of the industry from 2025 to 2027. Currently, it is at a critical window where the “14th Five-Year Plan” ends and the “15th Five-Year Plan” alternates, and there are many opportunities on the demand side of the industry. The impact of military customer personnel adjustments in the first three quarters was further digested. The “14th Five-Year Plan” delayed order delivery; after the 9-3 military parade, various advanced equipment was unveiled, military trade export expectations continued to heat up, and military trade orders continued to land; downstream OEMs had full production schedules, and the boom was transmitted upstream along the industrial chain. Orders from upstream component and material companies picked up since the second half of '25, and the 26Q1-Q3 reporting terminal has been fully fulfilled. As the “15th Five-Year Plan” equipment catalogue is gradually clarified and large-scale orders are gradually being placed, the sector has entered a new cycle of comprehensive fundamental recovery. Judging from the 162 key companies in the military sector tracked by the bank, the 26Q1-Q3 sector achieved a total operating income of 621,192 billion yuan, an increase of 3.46% over the previous year; realized net profit of 34.916 billion yuan, a sharp increase of 17.02% over the previous year. The growth rate was further increased from 25Q1-Q3 (+14.10%), and reached a new high growth rate in the same period in recent years. It is worth noting that the accelerated recovery of profits in the 26Q1-Q3 sector showed significant structural characteristics: growth was mainly contributed by ground armaments, ships, and military trade-related directions, while profits on traditional core tracks such as aerospace continued to decline year on year.
As of the second quarter of 2026, according to the shareholding data of the top ten major public fund holdings, the total market value of shares held was 4460.991 billion yuan, up 45.64% from 2025Q2 and 19.73% from 2026Q1; of these, the total market value of military holdings was 168.249 billion yuan, and military stock holdings accounted for 3.77%, up 0.52 percentage points from the 2025Q4 low (3.25%), a slight decrease of 0.2 percentage points compared to 2026Q1. Judging from the overall trend from 2025Q1 to 2026Q2, military sector holdings showed the characteristics of “exploring the bottom first, then fluctuating and recovering”, reflecting the significant expansion of overall market capital and reallocation in the direction of high prosperity.
Macroeconomic environment: The international situation is turbulent, and the defense budget is growing steadily
Prolonged geographical conflicts: Hot events such as the US-Iran conflict, the Russian-Ukrainian conflict, the India-Pakistan conflict, and the Israeli-Palestinian conflict highlight the turbulent global security landscape and drive up military spending in various countries. In 2025, global military spending reached 2.887 trillion US dollars, an actual increase of 2.9%, which is the 11th consecutive year of growth; the share of global military spending in GDP rose from 2.4% in 2024 to 2.5%, the highest level since 2009. The US Department of Defense proposed a defense budget of 1.01 trillion US dollars for the 2026 fiscal year, an increase of nearly 13% compared to the 2025 fiscal year of 895 billion US dollars.
China's defense budget has been growing steadily: China's defense spending in 2026 was 1909.561 billion yuan, up 7% year on year, slightly down from 7.2% in 2025. China's military spending as a share of GDP (about 1.7%) is far lower than that of the US (about 3.1%), and there is significant room for future growth. The 15th Five-Year Plan clearly “accelerate the construction of new combat capabilities,” and unmanned intelligence, hypersonic weapons, etc. became the focus of investment.
Relations between China and the US have eased in the short term, but the essence of competition remains the same: China and the US met twice in the first year to establish a “constructive strategic and stable relationship between China and the US,” and the short-term trend picked up further. In May 2026, US President Trump was invited to pay a state visit to China. The heads of state of the two countries held talks in Beijing and reached a consensus to establish a “constructive strategic stable relationship between China and the US” as the new position of Sino-US relations; from September 23 to 25, 2026, President Xi Jinping paid another state visit to the US after a lapse of 11 years, and the heads of state of the two countries met and had a tea reception at the White House to further enrich the content of the new position of Sino-US relations and clearly establish a “constructive strategic and stable relationship between China and the US based on respect, fairness, and equality.”
First growth curve: domestic equipment demand recovery+system expansion
The goal of building an army for 100 years is about to be achieved, and the “15th Five-Year Plan” has ushered in an important inspection point. As can be seen from the 15th Five-Year Plan and the 93 military parade, our military's systematic construction focuses on two aspects: on the one hand, strong deterence/high-precision equipment, such as hypersonic weapon systems, triad nuclear strike forces, air defense and anti-missile equipment, laser weapons, etc.; on the other hand, systematic equipment enabled by AI, such as AI combat bases, unmanned systems that are easy to manufacture in large quantities at low cost, and low cost accurate guided munitions.
Empowered by military AI, leading a shift in the strategic focus of modern warfare. In modern warfare, in addition to nuclear deterrence, new conventional deterrents will become an important part of future wars. The field and dimensions of combat space will be greatly expanded, and the application of cutting-edge strategic technology will profoundly change the pattern of warfare. Intelligent warfare is based on energy and information networks, with data calculation and model algorithms as the core to reshape the cognitive space, information space, and physical space of the battlefield through artificial intelligence, big data, cloud computing, unmanned equipment, IoT sensing, etc., to form a new form of combat integrating multi-domain integration, cross-domain attack and defense, unmanned operation, cluster confrontation, and reality.
Military AI construction path: Enabling the comprehensive evolution of the basic layer, transmission layer, and sensing application layer of intelligent battlefields. Under the trend of intelligent warfare evolving in depth, artificial intelligence (AI) is gradually penetrating, empowering and reconstructing military combat systems. From an architectural perspective, the AI construction of an intelligent battlefield can be divided into three technical dimensions: basic layer, transmission layer, and sensing application layer. Each layer complements each other to form a closed loop system of “data-driven - intelligent collaboration - precise attack”.
In the 2026 conflict between Israel and Iran, AI has penetrated the entire battle process. In terms of reconnaissance intelligence, the US and Israeli coalition forces introduced the Claude AI model, which is nearly 800 times more efficient than manual labor. The system can transcribe Farsi calls in real time with ultra-high accuracy, and quickly distill core targets such as Iran's special forces headquarters and missile positions, supporting multiple rounds of precise air strikes. Although Iran is at a disadvantage, it also used AI image recognition technology to analyze drone reconnaissance images in real time, successfully locking down the position of the US aircraft carrier USS “Lincoln” and leading the attack. In terms of command and decision making, AI compresses the “Observe - Judge - Decision - Act” (OODA) cycle from the hour level to the second level.
Low-cost, expendable weapons and equipment are the focus. Since the Russian-Ukrainian conflict, both sides have experienced a certain problem of insufficient production capacity, and it is also critical to build a resilient industrial chain, so that industrial production capacity can be quickly transformed into military weapons capability. The war of arms and equipment attrition in the Russian-Ukrainian conflict has put tremendous economic and military pressure on both sides. Traditional weapons are still the main consumers, but drones and precision-guided munitions have reshaped the rules of the battlefield, and logistics and industrial mobilization capabilities have become the key to protracted warfare. The Russian military industry faced a chip embargo and a shortage of accurate ammunition, and was forced to restart Cold War weapons stocks, while NATO countries had insufficient shell production capacity due to “de-industrialization.”
The “distributed kill chain” under intelligent warfare has greatly increased the application of unmanned systems. A distributed kill chain refers to a combat mode where multiple combat units (such as ships, aircraft, drones, etc.) are distributed and advanced communication and network technology is used to achieve information sharing and cooperative combat between units, so as to carry out efficient attacks on enemy targets. The distributed killing chain emphasizes cross-domain collaboration, and allows distributed deployment of forces while concentrating firepower and improving dynamic adaptability. However, unmanned systems can effectively enhance the ability to sense situations, reduce combat costs and risks, achieve rapid attack and firepower coverage, improve combat flexibility and adaptability, and build collaborative combat systems, and play a very important role in distributed death chains.
Unmanned systems: The level of intelligence of unmanned equipment is rapidly improving, and application scenarios are comprehensive and cost-effective. Low-cost precision missile medicine: Low-cost ammunition actually consumes a lot of combat, and is being developed into technology integration, modularity, and multi-purpose use.
Second growth curve: the transition of military trade from single product exports to system exports
Currently, global military spending is the biggest increase since the Cold War, and geopolitical conflicts are catalyzing a new pattern in the military trade market. In this context, as China's comprehensive national strength becomes stronger and its global influence continues to increase, the 93 military parade demonstrated China's equipment strength, showing that China has developed comprehensive military product development capabilities and system export capabilities.
In the international landscape, exports of the Russian-style weapons system are shrinking, and there is a gap in customer demand. The 100 years of change require major powers to take responsibility. The Belt and Road Initiative has radiated China's military exports, providing a historic window for China's military trade. In actual combat, our country's equipment has been tested, and the military trade has already ushered in the DeepSeek moment. At the same time, military industry groups are actively expanding, and their international competitiveness is constantly improving, driving the Chinese military industry to move from a single export of equipment to a “systematic export” trend covering advanced equipment, combat concepts, and systematic solutions to meet the security needs of the new global landscape.
Third growth curve: The market for the commercialization of military technology is broad, boosting the 15th Five Emerging Pillar Industries and Future Industries
The market for the commercialization of military technology is vast, and efforts are being made in the “15th Five-Year Plan” emerging pillar industries and future industries. Its core is to transform mature cutting-edge technology in the military field into the civilian market, forming a virtuous cycle of “military technology for civilian use, and feeding back the military industry.” The specific layout covers six major directions: “commercial aerospace” focuses on integrated navigation and remote applications such as satellite internet; “low-altitude economy” is represented by unmanned systems such as eVTOL; “future energy” represented by “controlled nuclear fusion” is a layout focus; “deep-sea technology” revolves around the development of underwater and deep-sea equipment systems; the “big aircraft” industry promotes high-end manufacturing through models such as C919; and supports the development of “new processes, new materials, and new devices”, including basic fields such as additive manufacturing, superhard materials, and ceramic-based composites, etc. Inject new momentum into economic growth . From a corporate perspective, demand related to AI data centers has become one of the fastest directions for the civilian application of military technology. Optical module chip bases and shells, quartz electronic cloth, and functional diamond cooling materials have entered the stage of batch supply or verification and batch production.
Investment Strategy: Building a System, Going Global, Transferring the Armed Forces to Civilians
China's military industry has evolved from a model that relied on a single domestic demand in the past to a new three-wheel drive development pattern, with more diversified and sustainable growth momentum. The pattern of “building a foundation for domestic demand, expanding foreign trade, and civilian backfeeding” is profoundly reshaping the face and borders of China's military industry. The industry is shifting from “cyclical growth” to “comprehensive growth.”
First curve: Domestic military demand revolves around the goal of building an army for 100 years (basic plan): focusing on “preparing for war” and equipment modernization. Demand comes from steady growth in defense budgets and equipment upgrades (such as mass production of key models during the “14th Five-Year Plan” period). Strong deterrence, high precision, systematization, unmanned, and low cost are the main growth directions.
Second curve: military trade overseas (new engine): With its cost performance advantages, systematic combat capability, and geo-strategic cooperation (“Belt and Road”), China's military trade share continues to increase, becoming an important global supplier, achieving a win-win situation between strategic influence and economic benefits.
Third curve: Civilization of military technology (new frontier): Advanced military technology spills over into the civilian field, spawning trillion-level new industries such as commercial aerospace, low-altitude economy, future energy, deep-sea technology, and large aircraft, driving the development of new processes, new materials, and new devices, forming a virtuous cycle of “military technology and civilian use to feed back the military”. Some military technology (military companies) have gradually made significant progress in AI data centers.
It is expected that the first growth curve will recover moderately in 2027, and the second and third growth curves will accelerate growth; looking forward to 2027, with the execution of large-scale “15th Five-Year Plan” orders, the advancement of structured military trade exports, and the increase in civilian demand such as AI computing power, commercial aerospace, and large aircraft, the military industry is expected to enter the 3.0 era and achieve full growth with three-wheel drive.
Risk Alerts
1. Defense budget growth falls short of expectations: The defense budget has maintained a relatively steady growth in recent years. The military industry policy is improving, but there is a possibility that changes in national policies and national strategies will reduce defense budget spending.
2. Fluctuating market demand: Military products involve the special nature of national defense and security. The country has strict control over military procurement, and military procurement is highly planned. If model equipment procurement plans fall short of expectations, the performance of relevant enterprises in the industrial chain will be affected.
3. The progress of relevant reforms falls short of expectations: The country's judgment and guiding ideology on the future situation determine the development prospects of the industry. The country's macroeconomic policy and industrial development policy have a significant impact on the strategic direction of military enterprises, industrial choices, and the direction of investment, mergers and acquisitions.
4. Raw material cost pressure: Raw materials for structural parts and components of weapons and equipment are easily affected by various factors such as the international situation and macroeconomy. If the price of raw materials rises sharply, it will squeeze corporate profits.
5. Competition has increased risk: In recent years, the country has encouraged private enterprises to participate in the military supply chain. New entrants will crowd out the market share of the original enterprises in the industry, which will adversely affect their performance.
6. Risk of falling product prices: Under the guidance of the military's low-cost procurement, product prices may drop, causing corporate performance to fall short of expectations.