Quality assets injection is another factor that has triggered the boom. Chen Qing

Defense sector stocks have managed to buck the falling trend and emerge market favorites, thanks to renewed investor interest ahead of the 60th anniversary parade.

According to figures from financial information provider Wind Info, defense sector stocks, comprising of 65 firms, edged up 1.1 percent on Monday, compared with the leading indicator's 6.7 percent decline on the same day.

Defense sector shares rose nearly 24 percent in July, but fell nearly 13.5 percent between Aug 1 and Aug 18.

Shares of Shenzhen-listed Xi'an Aircraft International Corp (XAIC), the country's leading military aircraft maker controlled by Aviation Industry Corporation of China (AVIC), had risen an aggregate 31.8 percent over five days before declining yesterday. The scrip plunged to its daily limit of 10 percent yesterday to 14.22 yuan ($2.08) after it said it would raise 71.25 million yuan through a private placement.

The Xi'an-based aircraft producer had on Aug 12 said it would set up two joint ventures with American aerospace manufacturing firm Goodrich Corp for specialized production of civil aircraft nacelle and landing gear. XAIC will hold 50 percent stake in each of the two joint ventures.

"Goodrich's established presence in US would help provide quality assets to the newly set up firms and also enhance XAIC's manufacturing, research and development capabilities," said Ren Chengde, senior analyst, China Galaxy Securities.

Apart from the buzz around the 60th anniversary parade, quality assets injection is another factor that has triggered the boom in defense stocks, said Ren.

Figures from financial investment consultancy Guangzhou Wanlong showed that between 2005 and 2007, the growth rate of defense sector stocks was eight times higher than that of the major index in September.

"The market, which is absent of any stimulus from the policy side, has to seek for a concept for advancement," said Zhu Lixin, analyst, TX Investment Consulting Co Ltd.

The turnover in the sector totaled 11.8 billion yuan to account for over 7 percent of the combined turnover in China's two bourses in yesterday's trading.

In addition to XAIC and Beijing-based hi-tech company Aisino Corporation, most stocks in the sector are small caps with 3 billion to 4 billion shares on average. In this sense, the proportion of its turnover in the market is quite significant, Zhu said.

The price/earnings (P/E) ratio in the sector reached over 42.5 times yesterday based on 2008 full-year earnings reports, compared with 21.8 times P/E ratio in the overall market on average.