20211012-招银国际-China_AI_surveillance_Gov_t_projects_picking_up,_power_cuts_impact_limited_10页_1mb

CMB International Securities | Equity Research | Sector Update Summary

Core Content

This report provides an analysis of the Chinese AI surveillance sector, focusing on the performance of Hikvision and Dahua, two leading companies in the field. It evaluates the impact of public security project bidding, supply chain issues, and valuation trends on both firms, offering investment ratings and target prices.

Main Points

Demand Side: Public Security Projects

• Bidding Growth: In 3Q21, the number of public security projects in China increased by +20% YoY, compared to +10% YoY in 2Q21.
• YTD Growth: The total number of projects grew by +18% YoY year-to-date.
• Revenue Expectations:
  • Hikvision is expected to achieve +21% YoY revenue growth in 3Q21E.
  • Dahua is expected to grow by +18% YoY in 3Q21E.
• Project Delivery: More government projects were delivered in 3Q21, which could lead to a sequential decline in gross profit margin (GPM) for both companies.

Supply Side: Power Cuts Impact

• Impact Assessment: The energy shortage and power cuts have limited impact on Hikvision and Dahua due to high inventory levels.
• Production Locations:
  • Hikvision has plants in Hangzhou and Chongqing, with Chongqing being less affected by energy constraints.
  • Dahua’s core production is in Hangzhou, which faces higher risk due to energy intensity and consumption targets.
• Inventory to Sales Ratio:
  • Hikvision: 0.76 in FY2Q21.
  • Dahua: 0.87 in FY2Q21.
• Margin Pressure: Dahua faces higher margin pressure due to lower Hisilicon inventory, more to-gov't projects, and lower overseas revenue mix.

Company Performance

Hikvision (002415 CH)

• Rating: BUY
• Target Price: RMB79.62 (unchanged 36x FY22 P/E)
• Revenue Growth:
  • FY3Q21E: +21% YoY to RMB21.5bn.
  • FY21E: RMB80.448bn, FY22E: RMB95.131bn, FY23E: RMB108.819bn.
• GPM:
  • FY3Q21E: 45.8%, which is higher than the consensus of 44.8%.
  • FY21E: 46.0%, FY22E: 46.4%, FY23E: 46.8%.
• Net Profit:
  • FY3Q21E: RMB16.8bn.
  • FY21E: RMB16.8bn, FY22E: RMB20.647bn, FY23E: RMB24.048bn.
• R&D and Strategy:
  • Strong R&D capabilities support higher growth potential.
  • Announced plan to spin-off smart home business (Ezviz Network) to support IoT/AI R&D.
  • Valuation Gap: Expected to widen further due to stronger R&D and smoother supply chain transition.

Dahua (002236 CH)

• Rating: HOLD
• Target Price: RMB24.37 (unchanged 17x FY22 P/E)
• Revenue Growth:
  • FY3Q21E: +18% YoY to RMB7.5bn.
  • FY21E: RMB32.508bn, FY22E: RMB36.804bn, FY23E: RMB42.525bn.
• GPM:
  • FY3Q21E: 40.6%, lower than the consensus of 41.5%.
  • FY21E: 40.7%, FY22E: 41.4%, FY23E: 41.9%.
• Net Profit:
  • FY3Q21E: RMB3.689bn.
  • FY21E: RMB3.689bn, FY22E: RMB4.293bn, FY23E: RMB5.173bn.
• Margin Pressure: Higher than Hikvision due to limited Hisilicon inventory and increased to-gov't projects.

Valuation and Earnings Forecasts

Key Takeaways

• Hikvision is considered a safer investment due to its stronger R&D capabilities, diversified production locations, and higher growth potential.
• Dahua faces higher margin pressure and less inventory buffer than Hikvision, which affects its valuation and growth prospects.
• Power cuts have limited impact on both firms due to high inventory levels, but Dahua is at greater risk.
• Valuation Gap: The gap between Hikvision and Dahua is expected to widen further as Hikvision’s stronger growth drivers and better supply chain management improve its valuation.
• Spin-off Strategy: Hikvision's plan to spin off its smart home business could provide new financing channels and support R&D initiatives in AI and IoT.

Investment Recommendation

• Hikvision: BUY with a target price of RMB79.62.
• Dahua: HOLD with a target price of RMB24.37.

Financial Highlights

Hikvision (Income Statement)

• Revenue: RMB80.448bn (FY21E), RMB95.131bn (FY22E), RMB108.819bn (FY23E).
• Gross Profit: RMB37.033bn (FY21E), RMB44.107bn (FY22E), RMB50.899bn (FY23E).
• Net Profit: RMB16.8bn (FY21E), RMB20.647bn (FY22E), RMB24.048bn (FY23E).

Dahua (Income Statement)

• Revenue: RMB32.508bn (FY21E), RMB36.804bn (FY22E), RMB42.525bn (FY23E).
• Gross Profit: RMB13.216bn (FY21E), RMB15.253bn (FY22E), RMB17.814bn (FY23E).
• Net Profit: RMB3.689bn (FY21E), RMB4.293bn (FY22E), RMB5.173bn (FY23E).

Conclusion

The AI surveillance sector in China is showing signs of recovery, with public security projects increasing significantly in 3Q21. Hikvision is positioned as a more resilient and growth-oriented company, while Dahua faces greater margin pressure and valuation risks. The valuation gap between the two is expected to expand, favoring Hikvision.