Defense industry adopts market role

China's defense sector is taking bold steps to be more competitive and innovative, as it prepares to mark the 90th anniversary of the founding of the Chinese People's Liberation Army on Aug 1.

A key aspect of this reform is the drive to put the nation's defense research institutes on a more commercial footing, a move which was announced at a recent conference held by the State Administration of Science, Technology and Industry for National Defense.

Work is proceeding well on such efforts at 41 institutes, which will become independent legal entities as companies, it was revealed at the conference on July 7.

The move shows that the reform of the institutes has entered the period of its practical implementation, said Wang Zongchao, chief analyst of Huatai Securities.

In fact, the capital market has been eagerly awaiting this step for a number of years, said Wang.

"Until now, the asset securitization rate of the 10 largest defense industrial groups was only about 30 percent, which leaves much room for improvement."

These research organizations have the leading technologies in their sectors, and strong research and development capabilities.

"Putting these institutes on a commercial footing can stimulate their vitality, and raise their overall productivity," said Wang, who focuses on research of listed companies in the defense sector.

Sinolink Securities said in a research note that investors should not expect too many results from the reform this year.

Gao Song, an analyst at CITIC Securities, pointed out that the reform was unlikely to be completed until the end of 2018, noting that it is "very complicated and the pace will be steady".

Covering a large amount of employees and involving many different sectors, reform of defense research institutes is an important task for the central government in its wider reform of State institutions.

"With advanced technologies, the research institutes will increase the profitability and competitiveness of the already listed defense companies through capital infusion," said Wang.

He added that these new defense companies will either be listed, or see investment in units under them which are already listed.

Although defense industry shares have remained stable recently, Wang said he has a bullish outlook for the sector in the medium and long-term, especially in aeronautics and astronautics, as well as high-end equipment.