Hikvision Earnings: China’s Bottoming Economy and Firm’s Smarter Hardware Backing our Optimism

We cut our fair value estimate on Hikvision 002415 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 think Hikvision can improve its switching cost moat as it spends more on research and development, primarily on refinement of various algorithms, and their integration into a wide range of hardware. Hikvision excels at integrating hardware with detection algorithms for real-life use cases. One example is a surveillance system that detects and warns children who venture too close to rivers. Such integration across dozens of industries and thousands of products is very costly to replicate, and customers are discouraged from buying hardware separately due to compatibility issues and the extra time spent. While there are many companies offering artificial intelligence services, they focus on generative AI, application of web-content-centric models, or generic model training, which Hikvision does not operate in.

We are not bothered by Hikvision’s full-year 2023 net profit guidance of CNY 13.5 billion to CNY 14 billion, as most of the CNY 1.5 billion difference compared with our August forecast came from nonoperating items. We have not changed our revenue estimates as we maintain our view that China’s economy is on track to recovery, backed by an improving purchasing managers index and retail sales data.

Hikvision posted third-quarter 2023 results that slightly missed our expectations.