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3 ASX shares that could benefit from Australia and Japan deepening ties

Japan and Australia flags in speech bubbles on black background
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In a virtual meeting held on Thursday afternoon, prime minister Scott Morrison and his Japanese counterpart Shinzō Abe discussed further strengthening the defence and security relationship between Australia and Japan. Officials from both countries have also signed a new agreement between the two countries’ space agencies to work together on space science, research and education.

Both Australia and Japan have a well developed defence contracting sector. Therefore, I think it will be the more innovative companies in the sector that will benefit from this strengthened relationship. That is, companies with one-of-a-kind technology. Here’s a closer look at 3 ASX shares that fit the bill.

Space technology

Electro Optic Systems Hldg Ltd (ASX: EOS) is one of Australia’s leading defence companies formed in 1983 from the privatisation of Commonwealth of Australia space activity. Its products are based on proprietary sensor technology. 

The company is continually developing technology to help with over 500,000 pieces of space debris travelling at around 30,000 km per hour. This represents a serious threat to satellites, the international space station and more.

In this area, Electro Optic has an Australian-based space situational awareness (SSA) network. This monitors and tracks orbiting space-based objects. For instance, satellites and debris, using ground-based radar and optical stations.

The company also uses its sensors in the development of vehicle mounted, battle tested, remote weapons stations. Consequently, last Friday, Electro Optic Systems announced that it was in negotiations with the Commonwealth Government for 251 remote weapons stations (RWS) to be purchased over 12 months.

Artificial intelligence

Brainchip Holdings Ltd (ASX: BRN) is a company working in artificial intelligence (AI). It was started by a 40-year pioneer in information technology, a professional who is still with the company as its chief technology officer. The company already has successful AI products and is currently working on a first-of-its-kind technology, a neuromorphic system-on-a-chip.

Neuromorphic systems are large-scale systems of integrated circuits. Therefore, as the name implies, they mimic the human nervous system. Neuromorphic computing is considered the 5th generation of artificial intelligence by the Artificial Intelligence Board of America. 

The company has existing products used across defence and security already. It is a leading provider of security software to the casino industry for a range of security applications such as currency identification, player behaviour patterns, and game table operations.

Major airports use the product for facial recognition of terrorist suspects. In addition, unnamed European police departments have deployed the product in subways to search for known criminals. 

With the new product in advanced stages of development, the potential for further application of a system that learns for itself is very broad.

Advanced composite materials

Xtek Ltd (ASX: XTE) is a company with a patented technology called XTclave for curing and consolidating composite materials. The company has already installed an industrial sized machine in their Adelaide premises. This is large enough to support ~$40 million in revenues per year, and Xtek is also looking to install another one at its recently acquired US base.

Xtek’s technology manufactures high-quality void-free, precision ballistic and structural composite solutions. This includes, armour, lightweight tactical and human carriage equipment, robotic mechanical systems and unmanned craft.

For instance, the company is the primary provider to the Australian Department of Defence for portable X-ray equipment, demolition remote firing systems, and explosive ordinance robots. Furthermore, it sells the Xtek Tac2 Sniper Rifle as well as small unmanned aerial systems (SUAS). Agencies of the US Department of Defense and allied military services use the latter.

Finally, the company also manufactures a range of ballistic armour, which is up to 30% lighter than current benchmarks due to the company’s patented technology.

Foolish takeaway

The Australian defence sector is large and includes other great companies like Austal Limited (ASX: ASB), Quickstep Holdings Limited (ASX: QHL), and Bisalloy Steel Group Limited (ASX: BIS).

However, in the case of closer Australia and Japan ties, I think those companies offering a hard to replicate capability are more likely to see early success. 

Moreover, all of the companies mentioned also have either direct applications, or potential applications, in space exploration. 

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Daryl Mather owns shares of Austal Limited and Electro Optic Systems Holdings Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Austal Limited and Electro Optic Systems Holdings Limited. The Motley Fool Australia has recommended Electro Optic Systems Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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