US-Taiwan $11B Arms Sale and Global Defense Sector Impact

The U.S. Secretary of State officially approved a package of arms sales to Taiwan worth up to $11 billion, covering key systems such as artillery, anti-tank missiles, and naval and air defense components, setting a record for the largest single arms sale to Taiwan in recent years [1][2]. This move has dropped a “nuclear bomb” on the Taiwan Strait situation, catalyzing the escalation of tensions between the two sides of the Taiwan Strait and between China and the United States, while conversely enhancing the order visibility of major global defense groups. At the same time, the capital market has begun to reprice geopolitical risk premiums, and the valuation logic of related defense assets has shifted from “growth” back to “defense + orders”. Focus on how this event will translate into specific revenue and free cash flow in the next 6-12 months.

1. Sustained Demand Side:
   
   The expansion of U.S. military demand for arms supplies to Taiwan and allies has driven long-term contracts for missiles, radars, navigation, and continuous maintenance services, further deepening the backlog of arms dealers. Therefore, current valuations should consider a “demand certainty” premium. Although the stock prices of large U.S. defense companies had a slight correction after this round of news, institutions instead used the volatility to increase their positions.

2. Valuation Level and Relative Performance:
   
   Taking Lockheed Martin, General Dynamics, RTX, and Northrop as examples, their current stock prices are $474.79, $336.41, $177.20, and $564.19 respectively, with P/E ratios of approximately 26.4, 21.8, 36.5, and 20.3 times, indicating that the market has maintained a premium based on order visibility [0]. Among global stock markets (S&P/Nasdaq/Dow Jones), the three major indices have been volatile recently, while defense stocks have received relative support due to safe-haven demand—especially against the backdrop of pressure on technology and consumer sectors, funds are actively moving toward defensive leaders [0]. This is also reflected in industry rotation: currently, multiple sectors such as technology and consumer cycles are adjusting, while defense-related enterprises are receiving dual attention from policies and funds due to the “geopolitical security” theme [0].

3. Impact Path on Valuation:

• Order confirmation → Increase revenue forecasts for the next 2-3 years and improve the proportion of defensive revenue;
• Recovery of capacity utilization → Expected to boost gross profit margin and operating cash flow (especially the maintenance and service part);
• High-level arms sales to Taiwan (such as F-16 upgrades, anti-ship missiles, logistics components) may spread to naval and air combat systems through the rich product matrices of RTX, Lockheed Martin, etc., thereby enhancing the overall profit elasticity of enterprises.

The valuations of these enterprises internalize expectations for the regional security situation. As long as order conversion is smooth and delivery extension is transparent, profit magnification can be achieved in the medium and long term. In addition, as the revenue structure shifts toward “follow-up maintenance and upgrades”, cash flow stability improves, and investors can pay attention to the balance between “conservative cash flow discounting” and “growth” indicators.

1. Risk Factors:
   
   The tense situation in the Taiwan Strait may trigger relevant retaliation from China (such as military exercises, export restrictions), causing related supply chains (semiconductors, high-end components) to face short-term risks of rising costs and delivery delays. In addition, if the international community provides a buffer (diplomatic communication), the market may quickly strip off overly optimistic valuation premiums.

2. Strategy:

• Short-term
  : Focus on the order confirmation of leading defense enterprises and the progress of government contract approval, especially the subsequent appropriation and authorization at the end of the fiscal year (2025).
• Medium to long-term
  : Lock in enterprises with global layout, high maintenance service income, and high technical thresholds; at the same time, closely observe the trend of defense budgets and the support of multilateral security cooperation (such as NATO, QUAD) for export prospects.

3. Industry Selection Tendency:
   
   When geopolitical risks intensify, it is recommended to focus on the combination of “order visibility + cash flow protection” and avoid increasing positions in small and medium-sized defense stocks with high pure growth but high political sensitivity.

This $1.1 billion arms sale to Taiwan not only caused waves at the geopolitical level but also allowed the global defense sector to regain valuation support. Embracing leading enterprises with “order + cash flow” visibility and closely tracking policy progress and delivery rhythm will be a relatively stable investment path in the current cycle; at the same time, it is necessary to pay attention to the feedback of regional risks on supply chains and international cooperation to dynamically adjust the proportion of defense and allocation.

[0] Jinling API Data (Real-time Quotes and Industry Data)
[1] Bloomberg - “US Approves $11 Billion Arms Sale to Taiwan, Risking China Anger” (https://www.bloomberg.com/news/articles/2025-12-18/us-approves-11-billion-arms-sale-to-taiwan-risking-china-anger)
[2] CNBC - “U.S. approves largest ever arms sale to Taiwan as tensions simmer around the island” (https://www.cnbc.com/2025/12/18/us-taiwan-china-arms-sale-.html)