20210726-招银国际-海康威视-002415.SZ-Innovative_business_gaining_momentum_9页_1mb

Hikvision (002415 CH) Company Update Summary

Core Content Overview

Hikvision, a leading Chinese security technology company, reported strong performance in FY2Q21, with revenue growing by +34% YoY to RMB19.9bn and net profit rising by +38% YoY to RMB4.3bn. The company beat estimates and was in line with consensus, showing resilience amid global challenges. The report highlights Hikvision's innovative business as a key growth driver, which saw +122% YoY revenue growth to RMB5.6bn in FY1H21, contributing 16% to total revenue. The gross margin for the innovative business improved to 41.6%, narrowing the gap with the core surveillance segment's margin of 47.2%.

Key Highlights

• Innovative Business Growth:

  • Revenue grew by +122% YoY to RMB5.6bn in FY1H21.
  • Gross margin increased by +3.1 pct pts YoY to 41.6%, showing improvement in profitability.
  • The company is expanding beyond surveillance into areas such as smart home products, robotics, thermal, and x-ray solutions, driven by AI and sensor technology integration.

• Inventory Strategy:

  • Hikvision has adopted a high inventory level strategy, which helped secure customers during global raw material shortages.
  • Inventory increased to RMB15.1bn in FY2Q21, with RMB6.9bn in raw materials, reflecting a +35% YoY increase.
  • The AR days decreased to 114 in FY2Q21 from 139 in FY2Q20, indicating improved cash flow and customer relations.

• Operating Performance:

  • Operating profit reached RMB3.9bn, up +26% YoY.
  • Opex ratio was 26.4%, better than the estimated 28.1%.
  • R&D expenses increased by 19% YoY, while G&A expenses declined by 8% YoY, highlighting the company's focus on innovation.

Earnings and Financial Performance

• Earnings Summary (YE 31 Dec):

  • Revenue is projected to grow from RMB57.6bn in FY19 to RMB109.0bn in FY23E, with YoY growth ranging from 16% to 14%.
  • Net profit is expected to increase from RMB12.4bn in FY19 to RMB24.2bn in FY23E, with YoY growth from 8% to 17%.
  • EPS is forecasted to rise from RMB1.33 in FY19 to RMB2.59 in FY23E, with YoY growth from 8% to 17%.

• Earnings Revision:

  • CMB International Securities raised its target price to RMB80.00 from RMB75.65, based on an unchanged 36x FY22 P/E.
  • The P/E ratio is expected to decrease from 37.1x in FY21E to 30.3x in FY22E and 26.0x in FY23E, reflecting strong growth expectations.

Valuation and Market Position

• Valuation Analysis:
  • The 12-month forward P/E is shown in the report, with Hikvision's P/E ratio at 37.1x in FY21E and 30.3x in FY22E.
  • Hikvision is compared to peers like Dahua, China Transinfo, Thunisoft, and iFlytek, with the report indicating that Hikvision is re-rating due to its strong performance and innovation.
  • The P/E band is shown in the report, with the mean and median values at 35.1x and 22.7x, respectively, for FY21E.

Operating Model and Financial Summary

• Operating Model:

  • The company's operating model is detailed in the report, with a focus on revenue growth, cost management, and profitability.
  • Gross margin is expected to rise from 46.0% in FY19 to 46.9% in FY23E.
  • Operating margin is projected to increase from 20.0% in FY19 to 23.1% in FY23E.
  • Net margin is expected to rise from 21.5% in FY19 to 22.2% in FY23E.

• Cash Flow and Balance Sheet:

  • Net cash from operating is projected to increase from RMB7.8bn in FY19 to RMB36.4bn in FY23E.
  • Inventory turnover days decreased to 54 in FY21E, indicating better inventory management.
  • Current ratio is expected to remain stable, with values ranging from 2.72 in FY19 to 2.43 in FY23E.
  • Total assets are projected to increase from RMB74.8bn in FY19 to RMB142.9bn in FY23E.

Key Risks and Outlook

• Key Risks:

  • The chip shortage could persist and impact gross margin.
  • Market competition and supply chain issues may affect future performance.

• Outlook:

  • Hikvision is expected to maintain a BUY rating due to its innovative business growth and strong top-line performance.
  • The company is spinning off its smart home business (Ezviz Network) to the STAR board, which could provide new financing channels for IoT/AI R&D.

Shareholding and Performance

• Shareholding Structure:

  • CETC holds 38.9% of shares.
  • Kung Hong Ka - Chairman holds 10.3%.

• Share Performance:

  • 1-month return: +12.7%.
  • 3-month return: +7.4%.
  • 6-month return: +1.2%.
  • 12-month return: not provided.

Conclusion

Hikvision is showing strong growth in both revenue and profitability, with innovative business becoming a significant contributor. The high inventory strategy has helped secure customers, and the spin-off of the smart home business is expected to enhance R&D capabilities and financial flexibility. Despite margin pressures from raw material costs, the BUY rating is maintained, with an increased target price to RMB80.00. The company's financial health is robust, with improved cash flow and strong balance sheet indicators.