Hikvision Earnings: Shares Attractive as Long-Term Digitization in China Overshadowed by Macro Woes

We cut our fair value estimate for Hikvision 002415 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.

Hikvision’s second-quarter results and comments on the second half contributed to our more-than-9% cuts to 2023-27 revenue and EPS forecasts. Without providing concrete guidance, Hikvision projects full-year 2023 public business group, or PBG, sales to be lower than 2022 as government spending remains weak despite pockets of resilience. The enterprise business group, or EBG, stayed resilient owing to customers’ incessant quest for efficiency. The small-medium business group, or SMBG, would remain sluggish, being more vulnerable to economic shocks. Overseas trends are similar to previous quarters, with Hikvision performing better in developing regions than developed ones as political climates in the latter have deterred customers. We suppose recovery will be more marked from 2024 onward, but we lower our stage 2 EBI growth rate to 10% from 12%. This is because we expect surveillance equipment replacements will be driven by upgrades in add-on functions like business analytics instead of fresh deployments.

Longer-term, we anticipate Hikvision to steer its efforts toward innovative businesses. Apart from spinning off its robotics wing, we think the automotive electronics division is the best candidate for a spinoff, as client and product mixes are more distinct.