20210304-招银国际-Ambarella_suggested_strong_AI_demand_10页_1mb

CMB International Securities | Equity Research | Sector Update Summary

China AI Surveillance Market Overview

The China AI surveillance camera sector is experiencing strong demand, with Ambarella (AMBA) reporting significant growth in AI SoC adoption. AMBA's FY4Q21 results indicate that AI SoCs are expected to account for over 25% of revenue in CY21, up from 10% in CY20. Dahua and Hikvision are key customers, with Dahua starting mass production of multiple CV products in FY4Q21.

• AI Penetration: Estimated to be less than 5% in 2020, suggesting substantial growth potential.
• Market Share: Ambarella's market share in the AI surveillance segment is estimated at 20%, with global surveillance camera shipments exceeding 300 million units annually.
• CV SoC Shipments: By the end of April 2021, Ambarella had shipped more than 2 million CV SoCs cumulatively, with 1.7 million related to security cameras.

Hikvision vs. Dahua: R&D and Growth Gap

Hikvision is positioned as a stronger player in the AI surveillance market due to its superior R&D capabilities and strategic focus on enterprise AI applications. Dahua, while a strong customer, faces challenges in catching up.

• Revenue Growth: In FY4Q20, Hikvision reported a 20% YoY revenue increase to RMB21.4bn, compared to Dahua's 6% YoY increase to RMB10.3bn.
• Net Margin: Hikvision's net margin was 23.2%, versus Dahua's 15.3%.
• R&D Investment: Hikvision's R&D expenses were RMB5.5bn in FY19, nearly double Dahua's RMB2.8bn, leading to better growth and margin performance.

Valuation and Target Prices

The report outlines the valuation differences between Hikvision and Dahua, with Hikvision showing a stronger outlook due to its R&D focus and supply chain transition benefits.

• Target Price Adjustments: Hikvision's target price was slightly reduced to RMB73.78 from RMB74.28, while Dahua's was cut to RMB25.35 from RMB26.72.
• Valuation Gap: The valuation gap is expected to widen further as Hikvision benefits from AI adoption in enterprise markets and supply chain de-Americanization.

Earnings and Financial Performance

Hikvision

• Revenue: Raised FY20E revenue and net profit by 2% and 5%, respectively, due to better-than-expected results.
• Gross Margin: Improved to 47.6% in FY20E, with continued growth expected.
• Net Profit: Increased to RMB13,782m in FY20E, with a projected rise to RMB19,151m in FY22E.
• EPS: Expected to grow from RMB1.47 in FY20E to RMB2.05 in FY22E.

Dahua

• Revenue and Net Profit Cuts: FY20E revenue and net profit were reduced by 5% to 12% due to weaker performance, lower gross margins, and higher R&D expenses.
• Gross Margin: Declined to 42.9% in FY20E, with further reductions expected.
• Net Profit: Projected to decrease to RMB3,980m in FY20E, with continued downward pressure in FY21E and FY22E.

Key Ratios and Financial Highlights

• Revenue Mix: Hikvision's revenue is primarily from front-end equipment, with a smaller portion from back-end and central control.
• Growth Rates: Hikvision is expected to grow at a higher rate than Dahua, with revenue CAGR of 14% and net profit CAGR of 10%.
• Margins: Hikvision maintains higher gross, operating, and net profit margins compared to Dahua.
• Liquidity: Hikvision has a strong current ratio and improved receivable and inventory turnover days.

Conclusion

The report emphasizes that Hikvision is better positioned to capitalize on AI adoption in non-public security markets due to its stronger R&D and supply chain capabilities. Dahua, while a strong player, faces challenges in catching up. The valuation gap between the two is expected to widen, with Hikvision being recommended as a "BUY" and Dahua as a "HOLD."