Company Reports

Hangzhou Hikvision Digital Technology is the world’s largest maker of video surveillance equipment and is the leader in China, which is its biggest market and accounts for 70% of its revenue. Hikvision was the first domestic player to reorganize its business and offer customized total solutions across different industry verticals. This first-mover advantage has enabled it to accumulate deep industry knowledge and better solutions with higher efficacy. As a result, it has established leading market share across the value chain, from cameras and servers to VMS software, and has delivered attractive ROICs above its peers in China. We believe that Hikvision’s dominance across the value chain, especially in software and artificial intelligence platforms, will reinforce switching costs for customers and allow it to outgrow the market at the expense of smaller players with more limited financial resources and product offerings. In the medium term, we expect the nationwide “Xueliang” project, robust software solution growth, and continued market share gains in China to drive earnings.

We nudge our fair value estimate on Hikvision down to CNY 39 from CNY 40.50 per share. First-quarter revenue growth fell slightly below our forecasts, and we have trimmed our revenue and earnings per share estimates for 2024-28 by up to 6%. We no longer forecast a high-growth phase in China until 2026, pushing down our five-year forward revenue compound annual growth rate to 12.5% from 13.4%. Budding economic recovery has not yet translated into more aggressive corporate investments. Regional government spending on municipal and public safety projects may remain restrained as the central government is preoccupied with big-ticket projects and managing the property sector.

After Hikvision announced preliminary 2023 financials that are slightly above our forecasts, we hold our fair value estimate at CNY 40.50 per share pending the company’s release of complete full-year results. We view Hikvision as undervalued as the market seems to be overly pessimistic on China’s multiyear resolve in introducing automation to more industries, partially stoked by commentary that is bearish on industrial semiconductor demand in the first half of 2024. Even though government stimulus was largely absent in 2023, we believe monetary easing in January foreshadows fiscal support.

Hangzhou Hikvision Digital Technology is the world’s largest maker of video surveillance equipment and is the leader in China, which is its biggest and fastest-growing market and accounts for 70% of its revenue. Hikvision was the first domestic player to reorganize its business and offer customized total solutions across different industry verticals. This first-mover advantage has enabled it to accumulate deep industry knowledge and better solutions with higher efficacy. As a result, it has established leading market share across the value chain, from cameras and servers to VMS software, and has delivered attractive ROICs above its peers in China. We believe that Hikvision’s dominance across the value chain, especially in software and artificial intelligence platforms, will reinforce switching costs for customers and allow it to outgrow the market at the expense of smaller players with more limited financial resources and product offerings. In the medium term, we expect the nationwide “Xueliang” project, robust software solution growth, and continued market share gains in China to drive earnings.

We cut our fair value estimate on Hikvision to CNY 40.50 from CNY 43.00 after increasing operating expense assumptions and reducing nonoperating income. The need to continuously perfect recognition or sensing algorithms for dozens of industries makes costs less flexible than we thought. However, in our view, shares of Hikvision are undervalued, as China’s economy is showing early signs of recovery, and we do not see any issues with the firm’s long-term profitability. We expect a steady flow of supportive government policies and the approval of the spinoff of its robotics operations to bolster the share price.

We cut our fair value estimate for Hikvision to CNY 43 from CNY 49, corresponding to 20 times 2024 P/E after cutting our 2023-27 revenue and EPS forecasts by more than 9%. The revision stems from our more downbeat view of the macroeconomic environment and Hikvision’s weaker-than-expected June-quarter results. Even so, the stock has become attractive after the hype around artificial intelligence gave way to pessimism in China’s economy. Hikvision remains a beneficiary of commercial digital transformation, in our view, and a higher likelihood of government stimulus and approval of spinoff of its robotics operations would be upside catalysts for the stock.

Hangzhou Hikvision Digital Technology is the world’s largest maker of video surveillance equipment and is the leader in China, which is its biggest and fastest-growing market and accounts for 70% of its revenue. Hikvision was the first domestic player to reorganize its business and offer customized total solutions across different industry verticals. This first-mover advantage has enabled it to accumulate deep industry knowledge and better solutions with higher efficacy. As a result, it has established leading market share across the value chain, from cameras and servers to VMS software, and has delivered attractive ROICs above its peers in China. We believe that Hikvision’s dominance across the value chain, especially in software and artificial intelligence platforms, will reinforce switching costs for customers and allow it to outgrow the market at the expense of smaller players with more limited financial resources and product offerings. In the medium term, we expect the nationwide “Xueliang” project, robust software solution growth, and continued market share gains in China to drive earnings.

We retain our fair value estimate on Hikvision at CNY 49, corresponding to 25 times 2023 P/E after minor changes to our model. The stock is now fairly valued, in our view, after the company’s rally in the last few months, which could've been inspired by artificial intelligence excitement brought on by ChatGPT. While we continue to believe Hikvision will benefit from commercial digital transformation globally, this and China’s recovery have been priced in, leaving limited upside to the stock. The stock may overshoot in the near term if the spinoff of its robotics operations is approved by Chinese authorities.

Hangzhou Hikvision Digital Technology is the world’s largest maker of video surveillance equipment and is the leader in China, which is its biggest and fastest-growing market and accounts for 70% of its revenue. Hikvision was the first domestic player to reorganize its business and offer customized total solutions across different industry verticals. This first-mover advantage has enabled it to accumulate deep industry knowledge and better solutions with higher efficacy. As a result, it has established leading market share across the value chain, from cameras and servers to VMS software, and has delivered attractive ROICs above its peers in China. We believe that Hikvision’s dominance across the value chain, especially in software and artificial intelligence platforms, will reinforce switching costs for customers and allow it to outgrow the market at the expense of smaller players with more limited financial resources and product offerings. In the medium term, we expect the nationwide “Xueliang” project, robust software solution growth, and continued market share gains in China to drive earnings.

No change was made to our fair value estimate and forecasts after Hikvision released preliminary full-year 2022 items. We intend to finalize our forecasts once full results are announced in mid-April. We see several upside catalysts for Hikvision, namely progress in listing its robotics business and announcing a carve out of the automotive electronics business, follow-up policies in robotics and automation segments, and possible expansionary fiscal spending. We still find the stock undervalued as it continues to benefit from global digital transformation despite geopolitical risks.

We leave our fair value estimate on Hikvision unchanged at CNY 49 per share, corresponding to 23 times 2023 earnings, after reducing our 2022 and 2023 revenue and EPS forecasts to reflect global macro headwinds and the lack of a fiscal boost in China. The stock remains undervalued, in our view, as the company still benefits from commercial digital transformation globally and is trading near five-year lows at 13.5 times forward earnings. The shares seem to have limited downside as domestic political uncertainty has declined following China’s 20th Communist Party congress, paving the way for tangible support in municipal and infrastructure projects.

We reduce our fair value estimate on Hikvision to CNY 49 per share from CNY 51, corresponding to 21 times 2023 P/E, after reducing our revenue and gross margin forecasts by 4% and about 50 basis points, respectively, to reflect intensifying competition and short-term macroeconomic headwinds in China. The stock remains undervalued in our view, as the company still benefits from commercial digital transformation globally (supported by over 20% sales growth abroad), and is trading near five-year lows at 16 times forward P/E. Hikvision’s shares appear to have little downside from here and may rebound once the Chinese government announces tangible policies supporting infrastructure projects and consumption.

Hangzhou Hikvision Digital Technology is the world’s largest maker of video surveillance equipment and is the leader in China, which is its biggest and fastest-growing market and accounts for 70% of its revenue. Hikvision was the first domestic player to reorganize its business and offer customized total solutions across different industry verticals. This first-mover advantage has enabled it to accumulate deep industry knowledge and better solutions with higher efficacy. As a result, it has established leading market share across the value chain, from cameras and servers to VMS software, and has delivered attractive ROICs above its peers in China. We believe that Hikvision’s dominance across the value chain, especially in software, will reinforce switching costs for customers and allow it to outgrow the market at the expense of smaller players with more limited financial resources and product offerings. In the medium term, we expect the nationwide “Xueliang” project, robust software solution growth, and continued market share gains in China to drive earnings.

Hikvision shares dived 10% on China Thursday hours after Financial Times reported the U.S. is considering imposing additional sanctions on the company. We expect the rumor will do nothing but prolong fleeting sentiment that seesaws the share price daily. Taking most risks into account, we believe Hikvision is still on track to deliver midteens revenue and earnings CAGR by providing integrating surveillance and business management solutions for enterprise and government customers, thus we retain our view that Hikvision’s shares are undervalued.

We maintain our fair value estimate at CNY 51 per share for Hangzhou Hikvision, corresponding to 25 times 2022 P/E, after making minor changes in our forecasts, including higher revenue offset by lower profitability assumptions. Tweaks in revenue incorporate possible favorable fiscal policies in the short term and better long-term visibility in the company’s innovative businesses. Lower profitability forecasts factor in more indirect competition, like from artificial intelligence firms. The stock is now appealing after a month-long selloff in Chinese tech names amid supply chain disruptions worsened by lockdowns. We believe now is a good time to add in anticipation of fiscal support, especially after China’s central bank has just cut the reserve requirement ratio by 25 basis points.

Hangzhou Hikvision Digital Technology is the world’s largest maker of video surveillance equipment and is the leader in China, which is its biggest and fastest-growing market and accounts for 70% of its revenue. Hikvision was the first domestic player to reorganize its business and offer customized total solutions across different industry verticals. This first-mover advantage has enabled it to accumulate deep industry knowledge and better solutions with higher efficacy. As a result, it has established leading market share across the value chain, from cameras and servers to VMS software, and has delivered attractive ROICs above its peers in China. We believe that Hikvision’s dominance across the value chain, especially in software, will reinforce switching costs for customers and allow it to outgrow the market at the expense of smaller players with more limited financial resources and product offerings. In the medium term, we expect the nationwide “Xueliang” project, robust software solution growth, and continued market share gains in China to drive earnings.

No change was made to our fair value estimate of CNY 51 and earnings forecasts, based on a mixed impression from stronger fourth-quarter sales and lower gross margins that we have inferred from Hikvision’s preliminary numbers. We intend to finalize our forecasts once full results are released in mid-April. We believe the potential IPO proceeds from spinning off Ezviz and robotics businesses, as well as new factory bases that are recently announced, support our view that Hikvision can grow its revenue and EPS near the current pace (2020-25 sales CAGR of 16.8%). We believe Hikvision’s shares are fairly valued as margins remain pressured under chip shortage, but possible policy support for cloud computing platforms presents modest upside surprise potential for the stock in the short term.

We retain our fair value estimate of CNY 51 and earnings forecasts on narrow-moat Hangzhou Hikvision. We intend to finalize our estimates once Hikvision releases December 2021 and March 2022 quarters results in mid-April, but there should be no material change in our view on the company achieving mid-teens CAGR up to 2025. The stock appears fairly valued, but we see several potential upside surprises to the share price. These surprises include renewed government spending; eventual valuation of smart home division "Ezviz" once it lists on Shanghai Stock Exchange Science and Technology Innovation Board, or STAR; and faster-than-expected review of the spin-off of its robotics segment.

Hangzhou Hikvision Digital Technology is the world’s largest maker of video surveillance equipment and is the leader in China, which is its biggest and fastest-growing market and accounts for 70% of its revenue. Hikvision was the first domestic player to reorganize its business and offer customized total solutions across different industry verticals. This first-mover advantage has enabled it to accumulate deep industry knowledge and better solutions with higher efficacy. As a result, it has established leading market share across the value chain, from cameras and servers to VMS software, and has delivered attractive ROICs above its peers in China. We believe that Hikvision’s dominance across the value chain, especially in software, will reinforce switching costs for customers and allow it to outgrow the market at the expense of smaller players with more limited financial resources and product offerings. In the medium term, we expect the nationwide “Xueliang” project, robust software solution growth, and continued market share gains in China to drive earnings.

We retain our fair value estimate of CNY 51 per share for Hikvision with no material change to revenue and margin assumptions. Hikvision looks fairly valued after worries of cost pressures and China’s soft macroeconomic outlook replaced the previous excitement on the company’s transformation to AI analytics and valuation of the to-be-spun-off smart home segment. Hikvision’s approach to maintaining high inventories minimized the impact of supply shocks, which may translate into an entry opportunity should sentiment toward China’s economy and raw material shortage further deteriorate and the share price dips as a result.