20220417-招银国际-海康威视-002415.SZ-Short_term_margin_pain_amid_business_transformation_10页_1mb

Hikvision (002415 CH) Summary

Core Content

Hikvision, a leading Chinese company in the global markets, has reported strong revenue growth in FY21 and FY1Q22, but experienced margin compression due to various factors. The company is undergoing a business transformation that includes expanding into innovative sectors and reducing reliance on public security projects. Despite short-term margin pain, the company's long-term growth potential and strategic moves have led to maintaining a BUY rating.

Main Points

Revenue and Profit Performance

• FY21 Revenue: RMB81.42bn (+28% YoY), in-line with estimates.
• FY21 Net Profit: RMB16.80bn (+26% YoY), in-line with estimates.
• FY1Q22 Revenue: RMB16.52bn (+18% YoY), beat estimates by 3%.
• FY1Q22 Net Profit: RMB2.28bn (+5% YoY), below estimates by 20%.

Margin Compression

• FY21 Gross Margin: 44.3% (-2.2 ppts YoY), below both estimates and consensus.
• FY1Q22 Gross Margin: 43.7% (-3.1 ppts YoY), below estimates and consensus.
• Reasons for Margin Erosion:
  1. Increased implementation work for large-scale smart city projects with low gross margin.
  2. Expansion into innovative businesses with lower gross margin compared to core products.
  3. Additional costs due to supply chain disruptions.

Innovative Business Growth

• Innovative business revenue doubled YoY in FY21 to RMB12.27bn, accounting for 15% of total revenue.
• The company has invested heavily in R&D, with R&D expenses increasing by 29% YoY to RMB8.25bn.
• These innovative businesses include Smart Home, Robotics, Thermal, HikAuto, and Storage.

Business Transformation

• The company is reducing its reliance on public security projects, with PBG China revenue contribution declining from 35% in FY20 to 32% in FY21.
• The shift is part of a broader strategy to expand into more diversified and high-margin areas.

Key Information

Financial Highlights

• Revenue Growth: Expected to remain stable at 15% in FY22E, 17% in FY23E, and 16% in FY24E.
• Net Profit Growth: Expected to be 11% in FY22E, 18% in FY23E, and 10% in FY24E.
• EPS Growth: Expected to be 9% in FY22E, 18% in FY23E, and 10% in FY24E.
• Target Price: RMB57.10 (down from RMB62.06), based on a 29x FY22 P/E.
• Valuation: The company's P/E and EV/sales ratios are lower than its peers, indicating potential for re-rating.

Operating Model

• The company has maintained a high-inventory strategy to stabilize gross margin despite mix changes.
• The revenue breakdown shows a consistent shift towards innovative businesses and a reduction in reliance on public security projects.

Risk Factors

• Key downside risks include city lockdowns and macroeconomic softening.
• The company's performance in FY1Q22 was affected by a significant decline in revenue compared to the previous quarter.

Shareholding and Performance

• Shareholding Structure: CETC owns 36.5%, and the Chairman owns 10.3%.
• Stock Performance: The stock has shown negative returns over the past 12 months, with a current price of RMB39.93.

Valuation and Ratios

Valuation

• P/E Ratio: 20.3x for FY22E, with a target price of RMB57.10.
• EV/Sales Ratio: 3.7x for FY22E.
• ROE: 28.7% in FY21E, with a slight decline expected in FY22E.

Key Ratios

• Gross Margin: Expected to stabilize at 44.4% in FY22E and increase slightly to 44.7% in FY23E.
• Operating Margin: Expected to be 20.6% in FY22E and 21.3% in FY23E.
• Net Margin: Expected to be 19.8% in FY22E and 20.0% in FY23E.

Summary

Hikvision continues to demonstrate strong revenue growth, with a focus on expanding its innovative business segments and reducing reliance on public security projects. Despite margin compression in FY21 and FY1Q22, the company maintains a BUY rating due to its strategic direction and potential for long-term growth. The company's financial performance is expected to stabilize in FY22E with a target price of RMB57.10, reflecting its potential for re-rating as supply chain risks are mitigated and new growth drivers emerge.