20221020-招银国际-Public_security_demand_remained_weak_in_3Q22,_limited_near_term_impact_from_new_US_export_rules_11页_1mb

CMB International Global Markets | Equity Research | Sector Update Summary

Core Content

This report provides an analysis of the impact of the U.S. new export rules on China's AI and public security sectors, with a focus on key companies: Hikvision, Dahua, and SenseTime. It also includes financial forecasts and valuation updates for these firms.

Main Points

Public Security Demand

• Public security projects bidding in China declined further in 3Q22, reaching -7% YoY, worse than the -4% YoY in 2Q22.
• The decline was particularly sharp in September at -9% YoY, following a brief improvement in July and August.
• In FY1H22, To-Gov't revenue accounted for 27% (Hikvision), 28% (Dahua), and 31% (SenseTime) of their respective total revenues.
• The weakening macroeconomic environment and slower enterprise digitalization are expected to affect FY2H22 results.

U.S. Export Restrictions

• The U.S. has expanded export controls from targeting specific companies (Entity List) to specific products, particularly advanced chips and supercomputers.
• The new rules will primarily impact AI training, not AI inference, which is used in commercial applications like surveillance cameras.
• Companies with their own AI training clusters, such as SenseTime, will be more affected due to the need to redesign and optimize AI training using less advanced chips.
• China can still design AI chips below the computing threshold, but manufacturing and testing must occur outside of China, typically in Taiwan.

Impact on Companies

• Hikvision: Expected to deliver +9% to +4% YoY revenue and net profit growth in FY3Q22E. The company's ongoing share repurchase (RMB2-2.5bn) should support its share price amid macro uncertainty.
• Dahua: Expected to grow at a slower pace, with +7% to +9% YoY revenue and net profit growth. The company's technology, supply chain, and cash flow are weaker than Hikvision, leading to a lower target price.
• SenseTime: Expected to see slower revenue growth due to the export rules. The company's target price was cut from HK$3.07 to HK$2.10, based on a 9x EV/sales multiple.

Key Information

Valuation Table

Company	Ticker	Rating	Mkt Cap (US$ mn)	Price (LC)	TP (LC)	P/E FY23E	EV/Sales FY23E	ROE FY22E	Sales CAGR FY21-24E
Hikvision	002415 CH	BUY	40,002	30.58	41.46	14.6	3.0	23.7	25.0
Dahua	002236 CH	HOLD	5,186	12.30	13.97	8.8	1.1	14.7	15.0
SenseTime	20 HK	BUY	5,676	1.33	2.10	n.a.	5.3	n.a.	n.a.
AlInnovation	2121 HK	NR	1,294	118.16	n.a.	n.a.	5.1	n.a.	n.a.
Arcsoft	688088 CH	NR	1,409	25.02	n.a.	43.7	14.4	5.4	7.9

Earnings Revisions and Financial Outlook

Hikvision

• 3Q22E sales: RMB23,705M (vs. Street: RMB24,339M)
• Net profit: RMB16,116M (vs. Street: RMB17,256M)
• EPS: RMB1.71 (vs. Street: RMB1.83)
• Target price: RMB41.46 (down from RMB45.08)
• P/E: 14.6
• EV/Sales: 3.0
• ROE: 23.7%
• Sales CAGR: 25.0%

Dahua

• 3Q22E sales: RMB8,535M (vs. Street: RMB8,692M)
• Net profit: RMB3,695M (vs. Street: RMB3,929M)
• EPS: RMB1.22 (vs. Street: RMB1.31)
• Target price: RMB13.97 (down from RMB17.06)
• P/E: 8.8
• EV/Sales: 1.1
• ROE: 14.7%
• Sales CAGR: 15.0%

SenseTime

• 3Q22E sales: RMB4,907M (vs. Street: RMB5,161M)
• Net profit: RMB-4,563M (vs. Street: RMB-4,055M)
• EPS: RMB-0.14 (vs. Street: RMB-0.12)
• Target price: HK$2.10 (down from HK$3.07)
• EV/Sales: 5.3
• Sales CAGR: n.a.

Key Changes in U.S. Export Rules

• Semiconductor equipment: Restrictions on equipment for advanced logic or memory chip production.
• Logic chips: 16nm or 14nm with non-planar transistor architectures (FinFET or GAAFET).
• DRAM memory chips: 18nm half-pitch or less.
• NAND flash memory chips: 128 layers or more.
• Supercomputers: Defined as systems with a compute capacity of 100 or more double-precision petaflops.
• Unverified List: Companies not cooperating with BIS verification may be moved to the Entity List.

Conclusion

• The U.S. export rules have a limited impact on existing commercial AI applications but significantly affect AI training.
• Hikvision is preferred due to its strong To-B and overseas growth, as well as its share repurchase and market leadership.
• Dahua is held due to weaker performance and a lower target price.
• SenseTime is maintained as a BUY but with a revised target price due to the impact of AI training restrictions and early-stage AI deployment.

Related Reports

1. "China Technology - Implications of U.S.'s new chip export restrictions to China" - 10 Oct 2022
2. "China AI - U.S. may broaden AI chips export restrictions" - 14 Sep 2022
3. "China AI - U.S. is restricting advanced GPU sales to China" - 1 Sep 2022