Deutsche Bank Markets Research
Rating Company Date 21 September 2015 Buy Hikvision Digital Initiation of Coverage Asia China Reuters Bloomberg Exchange Ticker Price at 18 Sep 2015 (CNY) 31.90 Technology 002415.SZ 002415 CH SHZ 002415 Price target - 12mth (CNY) 46.00 Hardware & Equipment 52-week range (CNY) 52.30 - 18.28
Shenzhen Index 1,756
Global footprint, gaining share, Andrew-C Chang expanding business Research Analyst (+886) 2 2192 2845 Initiating with Buy, with 44% potential share price upside to our TP at CNY46 [email protected] There is a significant growth opportunity in the video surveillance industry, and we believe Hikvision should be one of the major beneficiaries of new demand for smart city and IoT (Internet of Things) applications, the ongoing upgrade Price/price relative product cycle, and consolidation of the industry. We forecast a 2015-2018 90 CAGR of 41% in sales and 39% in EPS for Hikvision, with ROE rising from 36% 75 in 2014 to 43.6% in 2018. Its solid home-base advantage in China, successful 60 overseas market expansion, and rising net cash position should boost its 45 30 earnings upside and share price performance. 15 0 Five reasons why we are more optimistic than the Street 9/13 3/14 9/14 3/15 (1) Exciting opportunity for smart city and IoT business: Investors may Hikvision Digital underestimate the demand for video surveillance applications in the smart Shenzhen Index (Rebased)
city and IoT markets. We expect this segment’s sales contribution to Performance (%) 1m 3m 12m increase from 12% in 2014 to 25% in 2018 (sales CAGR of 70%). Absolute -1.5 -23.8 71.9 (2) Robust upgrade demand for its front-end (analog to IP cameras, 2015- Shenzhen Index -22.8 -42.4 31.4
2018E sales CAGR of 44%) and back-end (DVR to NVR, 2015-2018E sales Source: Deutsche Bank CAGR of 37%) products plus integrated software lead to our higher 2016- 2018 OPM forecasts of 26.1-26.7% than the Street’s 25-26%. Stock data Market cap (CNYm) 129,801 (3) Ongoing market share gains in China (on a sales basis) from 28% in 2014 Market cap (USDm) 20,398 to 48% in 2018E, helped by its competitive sales footprints, its solid relationships with system integrators and commercial customers, and the Shares outstanding (m) 4,069.0 government’s encouraging policies for safe city and Made in China 2025. Free float (%) 71 Source: Deutsche Bank (4) Successful overseas market expansion for its brand business in 20 countries, ahead of Chinese peers, further boosting its EPS momentum. Key indicators (FY1) ROE (%) 39.6 (5) Potential growth in other security business (access control, total solution). Net debt/equity (%) -44.8 Valuation and risks Book value/share (CNY) 4.65 We base our valuation of CNY46 on 19x our 2016E EPS, which is lower than Price/book (x) 6.86 Hikvision’s historical P/E (23x) since 2011 (when it became a total solutions Net interest cover (x) – supplier). Our 10-year DCF valuation model suggests a fair price of CNY51. Downside risks: weaker demand, order loss to peers, and inventory. Operating profit margin (%) 25.0 Source: Deutsche Bank
Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 10,746 17,233 26,265 38,569 51,839 EBIT (CNYm) 3,065 4,406 6,571 10,079 13,578 Reported NPAT (CNYm) 3,067 4,665 6,681 9,868 13,103 DB EPS FD(CNY) 0.76 1.15 1.64 2.43 3.22 DB EPS growth (%) – 50.2 43.2 47.7 32.8 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
______Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.
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Hardware & Equipment Hikvision Digital
M odel updated: 16 September 2015 Fiscal year end 31-Dec 2013 2014 2015E 2016E 2017E 2018E
Running the Numbers Financial Summary Asia DB EPS (CNY) 0.76 1.15 1.64 2.43 3.22 4.24 Reported EPS (CNY) 0.76 1.15 1.64 2.43 3.22 4.24 China DPS (CNY) 0.25 0.40 0.57 0.85 1.13 1.48 Technology/Hardware BVPS (CNY) 2.76 3.65 4.65 6.15 8.31 11.13 Weighted average shares (m) 4,017 4,069 4,069 4,069 4,069 4,069 Average market cap (CNYm) 80,540 77,998 129,801 129,801 129,801 129,801 Hikvision Digital Enterprise value (CNYm) 76,029 71,117 120,893 117,912 113,132 106,485
Reuters: 002415.SZ Bloomberg: 002415 CH Valuation Metrics P/E (DB) (x) 26.3 16.7 19.4 13.2 9.9 7.5 Buy P/E (Reported) (x) 26.3 16.7 19.4 13.2 9.9 7.5 P/BV (x) 8.10 6.06 6.86 5.19 3.84 2.87 Price (18 Sep 15) CNY 31.90 FCF Yield (%) 1.8 4.0 3.2 4.9 7.1 9.6 Target price CNY 46.00 Dividend Yield (%) 1.2 2.1 1.8 2.7 3.5 4.7 EV/Sales (x) 7.08 4.13 4.60 3.06 2.18 1.56 52-week Range CNY 18.28 – 52.30 EV/EBITDA (x) 24.2 15.8 17.9 11.4 8.1 5.7 EV/EBIT (x) 24.8 16.1 18.4 11.7 8.3 5.8 Market Cap CNY 129,801m US$ 20,387m Income Statement (CNYm) Sales revenue 10,746 17,233 26,265 38,569 51,839 68,132 C o mpany P ro file Gross profit 5,189 7,763 11,554 17,026 22,910 30,530 Hangzhou Hikvision Digital Technology Co., Ltd EBITDA 3,137 4,515 6,754 10,344 13,931 18,676 develops, produces and sells video surveillance Depreciation 66 97 164 236 315 401 equipments. The Company manufactures video card, Amortisation 5 13 19 28 38 50 network video recorders, digital video recorders, video servers, cameras, storage, and other products. EBIT 3,065 4,406 6,571 10,079 13,578 18,225 Net interest income(expense) 0 0 0 0 0 0 Associates/affiliates 39 151 134 88 101 105 Exceptionals/extraordinaries 0 0 0 0 0 0 Other pre-tax income/(expense) 282 649 899 1,011 1,157 1,207 Profit before tax 3,386 5,205 7,604 11,178 14,836 19,537 Income tax expense 309 526 907 1,302 1,724 2,270 M inorities 10 15 16 8 9 13 1yr Price Performance Other post-tax income/(expense) 0 0 0 0 0 0 Net profit 3,067 4,665 6,681 9,868 13,103 17,253 50 45 40 DB adjustments (including dilution) 0 0 0 0 0 0 35 30 DB Net profit 3,067 4,665 6,681 9,868 13,103 17,253 25 20 15 10 Cash Flow (CNYm) Sep-14 Dec-14 Mar-15 Jun-15 Cash flow from operations 1,863 3,706 4,870 7,042 10,008 13,388
002415.SZ HANG SENG INDEX (Rebased) Net Capex -390 -605 -672 -726 -784 -862 Free cash flow 1,474 3,101 4,198 6,317 9,224 12,526 Equity raised/(bought back) 2 489 0 0 0 0 M argin Trends Dividends paid -602 -1,030 -2,338 -3,454 -4,586 -6,039 Net inc/(dec) in borrowings 181 426 48 53 57 62 30 29 Other investing/financing cash flows -1,995 -381 49 38 50 68 28 27 Net cash flow -941 2,606 1,957 2,954 4,745 6,617 26 Change in working capital -1,625 -1,374 -2,191 -3,311 -3,568 -4,440 25 24 23 22 Balance Sheet (CNYm) 13 14 15E 16E 17E 18E Cash and other liquid assets 4,593 7,200 9,156 12,111 16,856 23,473 EBITDA Margin EBIT Margin Tangible fixed assets 1,030 1,529 2,037 2,527 2,995 3,456 Goodwill/intangible assets 171 214 214 214 214 214 Growth & Profitability Associates/investments 128 325 459 547 648 753
70 50 Other assets 8,150 12,022 16,289 22,251 28,683 36,477 60 40 Total assets 14,072 21,291 28,156 37,650 49,397 64,374 50 40 30 Interest bearing debt 184 607 656 708 766 828 30 20 Other liabilities 2,775 5,804 8,534 11,862 14,761 18,162 20 10 10 Total liabilities 2,959 6,411 9,190 12,570 15,527 18,990 0 0 Shareholders' equity 11,087 14,842 18,914 25,019 33,800 45,302 13 14 15E 16E 17E 18E M inorities 26 37 52 60 69 82 Sales growth (LHS) ROE (RHS) Total shareholders' equity 11,113 14,879 18,966 25,080 33,870 45,384 Net debt -4,409 -6,593 -8,501 -11,402 -16,090 -22,645 Solvency
0 1 Key Company Metrics -10 1 Sales growth (%) na 60.4 52.4 46.8 34.4 31.4 -20 1 DB EPS growth (%) na 50.2 43.2 47.7 32.8 31.7 -30 1 -40 0 EBITDA M argin (%) 29.2 26.2 25.7 26.8 26.9 27.4 -50 0 EBIT M argin (%) 28.5 25.6 25.0 26.1 26.2 26.7 -60 0 13 14 15E 16E 17E 18E Payout ratio (%) 32.8 34.9 35.0 35.0 35.0 35.0 ROE (%) 27.7 36.0 39.6 44.9 44.6 43.6 Net debt/equity (LHS) Net interest cover (RHS) Capex/sales (%) 3.6 3.5 2.6 1.9 1.5 1.3 Capex/depreciation (x) 5.5 5.6 3.7 2.7 2.2 1.9 Andrew-C Chang Net debt/equity (%) -39.7 -44.3 -44.8 -45.5 -47.5 -49.9 +886-2-2192 2845 [email protected] Net interest cover (x) nm nm nm nm nm nm
Source: Company data, Deutsche Bank estimates
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Hardware & Equipment Hikvision Digital
Investment thesis
Business outlook
Our positive view on sector demand and Hikvision We are positive on the growth of the video surveillance business. We forecast a 2015-2018 revenue CAGR of 13.5% for the sector, higher than IHS's forecast of 12.0%, given our optimistic outlook on the following:
more, new applications for smart city and IoT business,
robust upgrade in sales of video surveillance products, and
rising shipments to emerging countries. We believe Hikvision should benefit from these trends and be one of the winners in the video surveillance sector. We estimate a 2015-2018 CAGR of 41% in revenue and 39% in EPS for the company, thanks to its (a) market share gains from peers, (b) successful expansion in overseas markets, (c) rising project-based orders from government and state-owned enterprises in China, and (d) new service and solutions demand.
We assume Hikvision’s ROE will increase from 36% in 2014 to 43.6% in 2018 on increasing shipment scale, improving cost structures, and higher margins and profits for project-based orders (for hardware, software, and services). The company’s rapidly growing earnings and solid balance sheet (rising net cash) should support its share price performance going forward.
Rising sales for smart city and IoT business We are seeing Hikvision aggressively leverage its outstanding R&D capability, competitive product portfolio, and lower cost structure than peers to penetrate the smart city and IoT market. We estimate that the sales contribution from this segment could rise from 12% in 2014 to 25% in 2018, implying a 2015- 2018 sales CAGR of 70% for the smart city and IoT business. This is one of the major growth drivers because its growth is higher than our forecast 2015-2018 CAGR of 41% for Hikvision’s total revenue. We believe the Street may be underestimating the demand for video surveillance applications in the smart city and IoT markets.
Solid demand for the upgrade product cycle There is ongoing upgrade demand for both front-end video surveillance products, from analog to IP (Internet Protocol) cameras, and back-end hardware devices, from DVR (digital video recorder) to NVR (networking video recorder) – and integrated software and solutions sales can easily help Hikvision’s business momentum. We forecast 2015-2018 sales CAGRs of 44% and 37% for Hikvision’s front-end and back-end products, respectively, and we expect the solid upgrade demand to help its gross (GM) and operating (OPM) margins increase from 43.3% and 25% in 2015E to 43.5-44.1% and 26.1-26.7% in 2016-2018E. Our assumptions for its 2016-2018 GM and OPM are higher than consensus expectations of 42-43% and 25-26%, respectively, due to higher sales and margins for its smart city and IoT business.
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Hardware & Equipment Hikvision Digital
Market share gainer in China With its well-established logistics and sales footprints, sufficient R&D resources to develop new products quickly and competitively, good relationships with customers (system integrators, value-added retailers, state- own enterprises, and other corporate clients), and slimmer cost structures than peers, we expect Hikvision’s market share for video surveillance sales in China to increase from 28% in 2014 to 48% in 2018, with the company set to maintain its No. 1 position. The strategic policy incentives offered by the Chinese government to push investment in safe city, Made in China 2015, and smart factory for automation businesses should lead to further upside for Hikvision’s video surveillance sales in China.
Emerging countries – the next key driver of growth Hikvision’s business expansion into overseas markets was earlier and more successful than its Chinese peers’. Its better global footprint with brand operations in 20 counties, rising shipment scale, and ongoing improvement in cost structures should help its robust sales growth outside China. We expect the sales contribution from overseas markets to increase from 25% in 2014 to 39% in 2018.
New investment in other security business and services We think it makes sense for Hikvision to gradually expand its core operational scope from the video surveillance business to access control, integrated solutions, and security-related services for existing customers. This could offer operational leverage benefits for Hikvision to further boost its sales and profit growth.
Valuation
We base our target price of CNY46 on 19x our 2016E EPS, which reflects Hikvision’s robust business growth and earnings momentum on new sales of smart city and IoT applications, upgrade demand in video surveillance products, and successful overseas expansion. Our target P/E multiple is lower than its historical P/E multiple (23x) since 2011, when the company launched its new fully integrated solutions for clients, and also below the current trading P/E multiple (24x) for the Shenzhen CSI (China Securities Index) 300 Information Technology Index. Our cautious target P/E assumption reflects the weaker outlook for the Chinese economy. However, our target P/E multiple is higher than consensus P/E for its global peers (17x), given Hikvision’s higher 2016 EPS growth (47.7% YoY) and ROE (44.9%) than the global peer average (13% YoY and 25%).
On 10 February 2015, Canon paid ~30x consensus 2016E P/E (a total amount of US$2.64bn) to acquire 84.83% of Axis Communications (AXIS SS, 2016E ROE at 52.9%), the third-largest global video surveillance vendor. The 2016E PE-to-ROE ratio for Hikvision (0.51x) is close to the deal payment (0.56x). Hence, we think our target P/E multiple for Hikvision is rational.
Our 10-year DCF valuation model suggests a fair stock price of CNY51. We take the more conservative P/E valuation as the basis of our final target price of CNY46.
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Hardware & Equipment Hikvision Digital
Downside risks
Any market share loss to peers in video surveillance products would result in lower sales and EPS vs. our assumptions.
Weaker demand from system integrators, governments, and/or corporate customers could have a negative impact on shipments, margins, and earnings momentum.
Higher inventory and component cost hikes.
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Hardware & Equipment Hikvision Digital
Valuation and risks
Initiating with Buy and 12-month target price of CNY46
Target price basis P/E methodology: We adopt a P/E methodology for our valuation, as we believe it best reflects Hikvision’s robust growth in the video surveillance business and new total solutions for the security industry and smart city. Our target price of CNY46 is based on 19x our 2016E EPS; this is below its historical P/E multiple (23x) since 2011, when Hikvision became a total solutions supplier for the video surveillance sector, and lower than the current trading P/E multiple (24x) for the Shenzhen CSI (China Securities Index) 300 Information Technology Index. Our lower target P/E reflects the risk of slower- than-expected improvement in the Chinese economy. However, our target P/E multiple for Hikvision is higher than the consensus target P/E multiple (17x) for its global peers, given its higher 2016E EPS growth (47.7% YoY) and ROE (44.9%) than the global peer average (13% YoY and 25%).
DCF methodology: We also use a 10-year DCF methodology (Figure 3) to evaluate Hikvision’s fair price. Our analysis suggests a valuation of CNY51, implying 21x P/E on our 2016E EPS.
Canon’s acquisition of Axis Communications: On 10 February 2015, Canon reportedly paid SEK19.62bn (US$2.64bn) for an 84.83% stake in Axis Communications. The acquisition price is SEK340 per share or 30x P/E (Figure 4) on consensus 2016E EPS. Axis (AXIS SS, 2016E ROE at 52.9%) is the third- largest video surveillance industry supplier, next to Hikvision and Dahua. Our analysis shows that the 2016E P/E-to-ROE ratio for Hikvision (0.51x) is close to Canon’s payment for the Axis acquisition (0.56x). Hence, we believe our target P/E multiple of 19x for Hikvision is reasonable.
Based on our analysis above, we take the most conservative valuation (P/E) as the basis of our final target price of CNY46 for Hikvision.
Figure 1: Forward P/E band of Hikvision Figure 2: Forward P/B band of Hikvision
100.00 100.00
80.00 80.00
60.00 60.00
40.00 40.00
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Feb Feb Feb Feb
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Price 10x 20x 30x 40x 50x Price 3x 6x 9x 12x 15x
Source: Deutsche Bank, estimates, Company data, Bloomberg Finance LP Source: Deutsche Bank, estimates, Company data, Bloomberg Finance LP
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Hardware & Equipment Hikvision Digital
Figure 3: DCF methodology for Hikvision valuation
Valuation data Assumptions Share & Market Information Valuation date 2016 Current Stock Price (CNY) 31.90 Shares (m) 4,069 Weighted average shares
DCF Target Price (CNY) 50.87 Implied Upside (Downside) 59.5% FY16 PER 21.0 FY16 PBR 8.3
Cost of Equity 11.45% Risk Free Rate (%) 3.55% China risk-free rate from Bloomberg Beta 0.96 2-year CAPM linear regression from Bloomberg Market Risk Premium (%) 8.26% China market risk premium from Bloomberg
Cost of Debt (after tax) 3.12% Cost of Debt 3.55% Long-term borrowing rate from Bloomberg Tax Rate 12.00% DBe
Target Debt / (Debt + Equity) 10.00% DBe target D/(D+E) ratio WACC 10.62%
Gordon Growth Model LT growth 1.5% Assume lower long-term growth due to market saturation and consolidation Source: Deutsche Bank estimates, Bloomberg Finance LP
Figure 4: Consensus P&L assumptions for Axis Communciations
(In SEK million) 2014 2015E 2016E 2017E
Revenue 5,450 6,563 7,454 8,454
Gross M argin (%) 51.8% 50.9% 50.3% 50.0%
Operating M argin (%) 13.1% 13.5% 14.0% 13.8%
Net Income 542 676 787 865
EPS 7.81 9.69 11.29 12.38
ROE (%) 53.0% 53.9% 52.9% 48.9%
P/E 43.3 34.9 29.9 27.3 Source: Deutsche Bank, Bloomberg Finance LP
Sensitivity analysis of target price Our analysis indicates favorable risk/reward for Hikvision, with 119% upside potential under a bull-case valuation of CNY70 if we assume 2016 sales growth of 67% YoY and a consolidated operating margin (OPM) of 36.1%. Our target price of CNY46 is based on a 2016E sales growth rate of +47% YoY and a consolidated OPM of 26.1%. On the downside, 2016 sales growth of 27% YoY and an OPM of 16.1% would generate a valuation of CNY27. These sensitivities assume the same target P/E in each case.
Figure 5: EPS sensitivity analysis based on 2016 Figure 6: Target price sensitivity analysis based on 2016 assumptions assumptions 2016E Sales growth (%) 2016E Sales growth (%) 27% 37% 47% 57% 67% 27% 37% 47% 57% 67% 16 .1% 1.4 1.5 1.6 1.7 1.8 16 .1% 27 28 30 32 34 2016 OPM 2 1.1% 1.8 1.9 2.0 2.1 2.2 2016 OPM 2 1.1% 34 36 38 40 43 (%) 2 6 .1% 2.1 2.3 2.4 2.6 2.7 (%) 2 6 .1% 40 43 46 49 52 3 1.1% 2.5 2.7 2.8 3.0 3.2 3 1.1% 47 51 54 57 61 3 6 .1% 2.9 3.1 3.3 3.5 3.7 3 6 .1% 54 58 62 66 70
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
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Hardware & Equipment Hikvision Digital
Risks
Weaker orders from system integrators, value-added retailers, governments, and/or corporate clients would lead to lower shipments, margins, and EPS results than we forecast.
Any market share loss to video surveillance peers would have a negative impact on our sales and EPS forecasts.
A slower macro demand recovery in China and/or other countries could negatively influence the expenditure of governments and state- owned enterprises.
Higher component costs or labor cost hikes in China.
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Hardware & Equipment Hikvision Digital
Strong earnings growth
New drivers of growth for smart city and IoT business
2015-2018E CAGR for smart city and IoT business sales at 70.1% Hikvision is leveraging its outstanding design capability (5,300 engineers, or 44% of its total manpower), competitive product portfolio, and slimmer cost structure advantages than peers to grow new smart city and IoT fields. These products have accounted for 12% of group revenue, but we forecast a revenue CAGR of 70% for this division, raising its share of total revenue to 25% by 2018 (Figures 7 and 8). This compares with an increase of 41% for the core products of the group. We believe the Street may underestimate the robust demand and Hikvision’s orders of video surveillance applications for smart city and IoT- related business.
Figure 7: Hikvision’s sales for smart city and IoT business Figure 8: Rising sales contribution for smart city and IoT business (CNYmn) 30% 20,000 25.2% 2015-2018E CAGR at 70.1% 25% 22.7% 19.1% 15,000 20% 15.1% 15% 11.9% 10,000 10% 5,000 5%
- 0% 2014 2015E 2016E 2017E 2018E 2014 2015E 2016E 2017E 2018E Revenue for IoT and Smart City business Sales Exposure to IoT & Smart City
Source: Deutsche Bank estimates Source: Deutsche Bank estimates
An exciting business for smart city We are positive on the video surveillance applications for the smart city business. We have seen Hikvision’s successful expansion into smart city for smart office/building, smart banking/financing, smart education & campus, smart police & traffic, smart energy, and smart court. The increasing demand and applications for smart city and related service/solution sales should help Hikvision’s business upside in the coming years. One example of the smart city application for Hikvision’s smart office solution is the following:
Smart office system
Hikvision’s smart office solutions (Figure 9) enable administrators and superintendents to monitor the office in real time. The access control system can also record employees’ attendance and send records to business managers and HR managers. Receptionists are able to remotely identify guests with IP cameras at the gate and issue access cards with the card issuer. Police reporting systems and alarms alert the police department, security companies, and on-site superintendents of any intrusion or trespass.
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Hardware & Equipment Hikvision Digital
Figure 9: Smart office applications
Source: Deutsche Bank, Company data
Facial recognition system Hikvision is developing its own competitive solutions (hardware device, software and platform) for facial recognition technology with its video surveillance products (Figures 10 and 11), which can be used in the smart police, smart office, and safe city fields. The real-time, quickly responsive, and accurate facial recognition system can help enhance public security, anti- terrorist activities, and also for crowd flow control. Given the higher barriers to entry for facial recognition technology, we believe Hikvision has much better margins and earnings for the system than other businesses.
Figure 10: Hikvision’s facial recognition system Figure 11: Hikvision’s facial recognition devices
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Ezviz product family for Hikvision While most of Hikvision’s end customers are government/state-owned enterprise system integrators and commercial clients, management also has an aggressive intention to launch its sub brand, called Ezviz, for the smart home and IoT consumer segments (Figure 12). With the affordable and friendly-UI (user interface) devices, including IP cameras, NVRs, police reporting boxes, sensors, detectors, and emergency buttons, consumers can easily enjoy real-time remote access to video images at home on their smartphone, NB, and/or tablets. The system can also connect local police
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Hardware & Equipment Hikvision Digital
and/or fire station upon detection of any intrusion. We see rising demand for the applications because it can effectively satisfy the needs of consumers for safe home, baby, and health-care products.
Figure 12: Hikvision’s Ezviz products for IoT market
Source: Deutsche Bank, Company data
Solid upgrade demand for the video surveillance market
We can break down Hikvision’s business by different segments, including
Front-end products: analog cameras and IP cameras;
Back-end products: mainly DVR (digital video recorder) and NVR (networking video recorder);
Central Controlling Equipment: system integration, software, etc.;
Engineering construction; and
Others: total solutions and service.
Among the businesses above, the front-end and back-end products are the most important segments, with revenue contributions for Hikvision at 53% and 20%, respectively, in 2014 (Figure 13).
We are seeing consistent upgrade demand in the video surveillance market for both front-end and back-end products plus integrated solutions and software, which we believe should easily boost Hikvision’s business growth in the coming years. We forecast the sales contribution for frond-end and back-end products to reach 58% and 18%, respectively, in 2018 (Figure 13).
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Hardware & Equipment Hikvision Digital
Figure 13: Hikvision’s revenue by segments
100%
27% 28% 27% 25% 24% 80%
18% 18% 18% 60% 20% 17%
40%
53% 55% 55% 57% 58% 20%
0% 2014 2015E 2016E 2017E 2018E
Front-end Products Back-end Products Others
Source: Deutsche Bank estimates, Company data
Front-end products: from analog to IP cameras We estimate the 2015-2018 revenue CAGR for Hikvision’s front-end products to come in at 44% (Figure 14). Our assumptions include faster sales growth for IP cameras (2015-2018 CAGR of 56%) than analog cameras (2015-2018 CAGR of 30%). Hikvision is one of the major market share gainers, and its growth rates for analog and IP cameras are above those of the entire market (overall market 2015-2018E sales CAGR for analog cameras of 4% and IP cameras of 23%; refer to our sector report).
Figure 14: Revenue mix for Hikvision’s front-end Figure 15: Revenue growth for Hikvision’s front-end products products
(CNYmn) 100% 50,000 81% 80% 2015-2018E CAGR at 44.4% 67% 40,000 1% 73% 59% 1% 60% 58% 53% 31% 66% 30,000 48% 45% 39% 1% 36% 40% 51% 20,000 1% 43% 37% 34% 1% 68% 20% 10,000 47% 63% 49% 56% 20% 50% 52% 15% 0 0% 2014 2015E 2016E 2017E 2018E 2014 2015E 2016E 2017E 2018E IP Camera Analog Camera Others IP Camera Analog Camera Front-end Products
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
Back-end products: from DVR to NVR Our assumption for Hikvision’s 2015-2018 sales CAGR for back-end products is 37% (Figure 16), and this includes our forecasts of 2015-2018 revenue CAGRs for DVR at 20% and NVR at 50%. These numbers are also higher than our assumptions for growth of the entire market, with 2015-2018E sales CAGRs for DVR at -12% and NVR at 21% (refer to our sector report).
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Hardware & Equipment Hikvision Digital
Figure 16: Revenue mix for Hikvision’s back-end Figure 17: Revenue growth for Hikvision’s back-end products products
(CNYmn) 80% 68.2% 15,000 2015-2018E CAGR at 37.2% 1% 60% 53.6% 12,000 52.7% 45.0% 1% 29% 34.3% 35.8% 40% 9,000 34.8% 1% 33% 9.1% 35.7% 6,000 20% 1% 41% 26.6% 1% 70% 1.1% 46% 18.6% 15.0% 3,000 49% 66% 11.1% 58% 0% 50% 53% 2014 2015E 2016E 2017E 2018E 0 -5.1% 2014 2015E 2016E 2017E 2018E -20% NVR DVR Others NVR DVR Back-end Products
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
The robust and consistent upgrade demand and the company’s ongoing market share gains from peers for back-end and front-end video surveillance products should continue to help Hikvision’s gross and operating margins rise and imply upside risks for EPS vs. consensus expectations.
The industry leader in China
Hikvision is the leader in the video surveillance market in China, with sales market share at 28% in 2014 (Figure 20), according to our study. Its sales exposure in China was 75% (Figure 19) in the same year. With more than 12,000 employees worldwide, including 5,300 R&D engineers (44% of total manpower), the company has established competitive logistics, sales, and manufacturing footprints in China, including its R&D clusters in Hangzhou and Wuhan and manufacturing campuses in Hangzhou, Beijing, Shanghai, and Chongqing (Figure 18).
We believe its R&D resources, strategic policy incentives offered by the government, and close partnership with large enterprises can enhance Hikvision’s time-to-market advantages for new product launch and help it gain in high-margin project-based or custom-designed businesses.
We also expect its solid product portfolio, higher shipment scale, and good relationships with system integrators, value-added retailers, state-own enterprises, and corporate clients to support its business momentum, and we look for market share to climb to 48% in 2018 (Figure 20).
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Figure 18: Hikvision’s operation footprints in China
Source: Deutsche Bank, Company data
Figure 19: Hikvision’s solid home base in China (sales Figure 20: Hikvision’s market share in China contribution in 2014)
60% 48.2% 45.9% 42.1% Overseas 40% 35.0% markets 28.0% 25%
20% China 75%
0% 2014 2015E 2016E 2017E 2018E Hikvision Digital
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates
Industrial cameras for smart factory business On 18 June 2015, Hikvision launched its new industrial camera products (Figures 21 and 22), with outstanding functions for 3D positioning, dimension measure, 3D sense rebuilding, defect detection, bar code recognition, and automatic categorization. These products are key elements for automation and robot applications for smart factory business and artificial intelligence, which can help improve manufacturing efficiency and accuracy and reduce costs. This technology is also one of key-focused investment items for “Made in China 2025”, pushed by the Chinese government.
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Figure 21: Hikvision’s industrial 3D IP Camera Figure 22: Hikvision’s industrial camera
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Exciting expansion into overseas markets
Hikvision has built global footprints for its own brand operations for the video surveillance business in the Pan-Americas, Europe, and Pan-Asia-excluding- China markets (Figure 23). According to our study, Hikvision is the No. 1 video surveillance supplier, with global market share of the business’s sales at 12.3% in 2014 (Figures 24 and 26). The company decided to grow the overseas markets with its own brand strategy earlier than other China local peers. It currently has active operations in 20 cities. We are confident that Hikvision can leverage its higher shipment scale and slimmer manufacturing costs in China to compete against the other video surveillance suppliers outside China, and we estimate its global market share of the business’s sales to reach 39% in 2018 (Figure 25). The consolidation trend in the industry should also benefit Hikvision’s overseas sales growth, although margins (higher operating expenses) could be lower than those in China.
Figure 23: Hikvision’s global footprint
Source: Deutsche Bank, Company data
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Figure 24: Hikvision’s global market share Figure 25: Rising sales exposure to overseas markets
40% 45.0%
29.3% 39% 30% 25.2% 34% 35.0% 21.1% 30% 20% 16.4% 27% 12.3% 25% 25.0% 10%
0% 15.0% 2014 2015E 2016E 2017E 2018E 2014 2015E 2016E 2017E 2018E Hikvision Digital Revenue Exposure to overseas markets
Source: Deutsche Bank estimates Source: Deutsche Bank estimates, Company data
Figure 26: Top 20 global video surveillance suppliers
2014 Total Revenue (US$ mn) YoY Growth (%) Market share (%) OPM (%) Ran kin g Compan y Cou n try 2014 2013 2014 2014 2014 1 Hikvision Digital Technology China 2,693 1,679 60% 12.3% 25.6% 2 Dahua Technology China 1,146 845 36% 5.2% 13.6% 3 Axis Communications Sweden 802 694 16% 3.7% 13.1% 4 Flir Systems U.S. 354 727 -51% 1.6% 16.9% 5 Infinova U.S. 159 154 3% 0.7% -3.8% 6 Tamron Japan 125 121 3% 0.6% 8.3% 7 Vivotek Taiwan 119 130 -9% 0.5% 10.1% 8 IDIS Korea 115 115 0% 0.5% 5.2% 9 Verint Systems U.S. 110 120 -8% 0.5% 7.0% 10 Synectics U.K. 97 76 28% 0.4% -3.8% 11 Dynacolor Taiwan 87 75 16% 0.4% 18.2% 12 GeoVision Taiwan 72 74 -3% 0.3% 25.1% 13 Hitron Systems Korea 67 95 -30% 0.3% -7.6% 14 ITX Security Korea 66 81 -18% 0.3% 18.4% 15 Indigovision U.K. 64 55 16% 0.3% 6.6% 16 Dali Technology China 58 42 39% 0.3% 9.8% 17 CNB Technology Korea 47 65 -27% 0.2% -23.7% 18 Vicon U.S. 35 40 -12% 0.2% -18.0% 19 Hi Sharp Electronics Taiwan 25 30 -17% 0.1% -2.3% 20 Hunt Electronic Taiwan 24 30 -21% 0.1% 11.1% Others (*) 15,637 13,953 12% 71.4% Total 21,900 19,200 14.1% 100.0% Source: Deutsche Bank, Asmag, Bloomberg Finance LP Note: * including multiple-solution vendors in the security industry
Our 2016E net income and EPS are higher than consensus
We forecast Hikvision to achieve 2015-2018 CAGRs for total revenue and EPS of 41% and 39% (Figures 29 and 33). We also assume stable gross margin (Figure 31, GM: 43.3-44.1%) and rising operating margins (Figure 32, OPM: 25- 26.7%) trends for 2015-2018, mainly due to Hikvision’s (a) increasing shipment scale, (b) improving procurement power and cost structures, (c) growing software and integrated solutions, and (d) successful expansion to new, high- margin smart city application devices.
On our assumptions, its EPS will increase from CNY1.15 in 2014 to CNY4.24 in 2018 (Figure 33), with ROE (Figure 34) improving from 36% to 43.6% over the same period. Our 2015 and 2016 EPS estimates are 3% and 7% higher than the Street’s expectation (Figure 27). We expect its robust earnings momentum and rising net cash position to support its share price performance.
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Figure 27: Our 2015 and 2016 P&L assumptions vs. consensus forecasts
2015E 2016E (CNY$ mn) DBe Conse nsus Diff YoY DBe Conse nsus Diff YoY Sales 26,265 25,125 5% 52% 38,569 35,990 7% 47% Gross profit 11,370 11,005 3% 49% 16,761 15,440 9% 47% Operating expenses 4,800 4,616 4% 48% 6,682 6,392 5% 39% Operating profit 6,571 6,389 3% 49% 10,079 9,048 11% 53% Net income 6,681 6,509 3% 43% 9,867 9,119 8% 48% EPS (CNY) 1.64 1.60 3% 43% 2.43 2.26 7% 48% Outstanding shares (mn) 4,069 4,069 Financial ratio Gross margin 43.3% 43.8% -0.5% -1.1% 43.5% 42.9% 0.6% 0.2% Opex ratio 18.3% 18.4% -0.1% -0.6% 17.3% 17.8% -0.4% -0.9% Operating margin 25.0% 25.4% -0.4% -0.5% 26.1% 25.1% 1.0% 1.1% Net margins 25.4% 25.9% -0.5% -1.6% 25.6% 25.3% 0.2% 0.1% Source: Deutsche Bank estimates, Bloomberg Finance LP
Figure 28: Hikvision quarterly P&L highlights
Unit: CNY mn 1Q15 2 Q15 3 Q15 E 4 Q15 E 2 0 15 E 1Q16 E 2 Q16 E 3 Q16 E 4 Q16 E 2 0 16 E Sales 4,288 5,508 7,048 9,421 26,265 6,077 7,917 10,116 14,459 38,569 Gross profit 1,897 2,309 3,114 4,050 11,370 2,591 3,302 4,537 6,331 16,761 Operating profit 1,024 1,246 1,768 2,533 6,571 1,515 1,932 2,787 3,844 10,079 Non- operating items 209 139 200 485 1,033 99 145 273 582 1,099 Pre- tax income 1,233 1,385 1,968 3,018 7,604 1,614 2,077 3,060 4,426 11,178 Net profit 1,045 1,161 1,701 2,775 6,681 1,401 1,806 2,628 4,032 9,867 EPS (CNY) 0.26 0.29 0.42 0.68 1.64 0.34 0.44 0.65 0.99 2.43 No. of shares (m) 4,069 4,069 4,069 4,069 4,069 4,069 4,069 4,069 4,069 4,069 Margin analysis (%) Gross margin 44.2% 41.9% 44.2% 43.0% 43.3% 42.6% 41.7% 44.8% 43.8% 43.5% Operating margin 23.9% 22.6% 25.1% 26.9% 25.0% 24.9% 24.4% 27.5% 26.6% 26.1% Pre- tax margin 28.7% 25.1% 27.9% 32.0% 29.0% 26.6% 26.2% 30.2% 30.6% 29.0% Net margin 24.4% 21.1% 24.1% 29.5% 25.4% 23.1% 22.8% 26.0% 27.9% 25.6% Tax rate 15% 15% 14% 8% 12% 13% 13% 14% 9% 12% YoY growth (%) Sales 65% 61% 51% 44% 52% 42% 44% 44% 53% 47% Gross profit 56% 40% 47% 52% 49% 37% 43% 46% 56% 47% Operating profit 54% 48% 46% 50% 49% 48% 55% 58% 52% 53% Pre- tax income 58% 49% 42% 43% 46% 31% 50% 55% 47% 47% Net profit 52% 39% 43% 42% 43% 34% 56% 55% 45% 48% QoQ growth (%) Sales - 35% 28% 28% 34% - 35% 30% 28% 43% Gross profit - 29% 22% 35% 30% - 36% 27% 37% 40% Operating profit - 39% 22% 42% 43% - 40% 28% 44% 38% Pre- tax income - 42% 12% 42% 53% - 47% 29% 47% 45% Net profit - 47% 11% 46% 63% - 49% 29% 46% 53% Sales breakdown (%) Front- end (Analog & IP Cameras) 55% 55% 53% 56% 55% 52% 54% 54% 58% 55% Back- end (DVR & NVR) 19% 19% 17% 14% 17% 20% 20% 17% 16% 18% Central Controlling Equipments 9% 9% 17% 14% 13% 9% 8% 18% 14% 13% Engineering Construction 3% 4% 6% 6% 5% 3% 3% 5% 6% 5% Others 14% 14% 7% 10% 11% 15% 15% 6% 7% 9% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Source: Deutsche Bank estimates, Company data
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Figure 29: The revenue trend for Hikvision Figure 30: Revenue growth for Hikvision 100% (CNYmn) 2015-2018E CAGR at 41% 80,000 68,132 80% 60.4% 60,000 51,839 52.4% 60% 46.8% 38,569 34.4% 40,000 40% 31.4% 26,265 17,233 20,000 20%
0 0% 2014 2015E 2016E 2017E 2018E 2014 2015E 2016E 2017E 2018E Sales Sales Growth
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
Figure 31: Gross margin trend for Hikvision Figure 32: Operating margin trend for Hikvision 50% 30%
44.4% 44.1% 45% 43.3% 43.5% 43.5% 26.7% 26.1% 26.2% 25.6% 25.0% 40% 25%
35%
30% 20% 2014 2015E 2016E 2017E 2018E 2014 2015E 2016E 2017E 2018E Gross Margin Operating Margin
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
Figure 33: EPS trend for Hikvision Figure 34: ROE trend for Hikvision 50% (CNYmn) 2015-2018E CAGR at 38.7% 44.9% 44.5% 43.6% 5.00 4.24 39.6% 4.00 40% 3.22 36% 3.00 2.43 2.00 1.64 30% 1.15 1.00
0.00 20% 2014 2015E 2016E 2017E 2018E 2014 2015E 2016E 2017E 2018E EPS ROE
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
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Revenue assumptions We offer our detailed revenue assumptions in Figure 35, in line with our investment thesis. We expect IP cameras in the front-end product segment, NVR in the back-end segment, and software & integrated solutions to act as the key revenue and earnings growth drivers for Hikvision.
Figure 35: Revenue breakdown by products
Revenue (CNYm) 2 0 14 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E Front- end Products 9,068 14,364 21,300 29,507 39,408 Back- end Products 3,510 4,443 6,787 9,214 12,424 Central Controlling Equipments 1,639 3,345 4,977 6,429 8,496 Engineering Constructions 807 1,335 1,868 2,616 3,610 Others 2,210 2,778 3,637 4,073 4,195 Total Revenue 17 ,2 3 3 2 6 ,2 6 5 3 8 ,5 6 9 5 1,8 3 9 6 8 ,13 2
YoY growth (%) 2 0 14 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E Front- end Products 73% 58% 48% 39% 34% Back- end Products 1% 27% 53% 36% 35% Central Controlling Equipments - 104% 49% 29% 32% Engineering Constructions 148% 65% 40% 40% 38% Others 29% 26% 31% 12% 3% Total Revenue 60% 52% 47% 34% 3 1%
Revenue (%) 2 0 14 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E Front- end Products 53% 55% 55% 57% 58% Back- end Products 20% 17% 18% 18% 18% Central Controlling Equipments 10% 13% 13% 12% 12% Engineering Constructions 5% 5% 5% 5% 5% Others 13% 11% 9% 8% 6% Total Revenue 10 0 % 10 0 % 10 0 % 10 0 % 10 0 % Source: Deutsche Bank estimates
Balance sheet and dividend policy
We expect Hikvision to increase its capex from CNY611m in 2014 to CNY862m in 2018 (Figure 36) for capacity expansion on new applications of smart city, IoT products, and related software and solution business.
For its cash conversion cycle (Figure 37), we see its days receivable increasing from 97 days in 2012 to 128 days in 2015 due mainly to rising orders for overseas system integration vendors and project-based clients (state-owned and multinational enterprises) in China. However, its tight control of inventory and longer days payable has helped hold its healthy cash conversion cycle at 75-80 days.
We expect Hikvision to maintain the dividend payout ratio at 35%, which is higher than Dahua’s dividend payout ratio at 10.2%, implying a dividend yield of 1.8-4.6% for 2015-2018E based on the current share price. Under the assumptions of capex expansion and dividend payout in 2015-2018, the trends of free cash flow (Figure 38) and net cash position (Figure 39) of Hikvision should still be healthy and increasing. We forecast free cash flow and net cash position increasing from CNY3.1bn and CNY6.6bn in 2014 to CNY12.4bn and CNY22.6bn in 2018, respectively.
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Figure 36: Hikvision’s capex Figure 37: Hikvision’s cash conversion cycle
(CNYmn) 140 138 1,000 130 862 128 784 120 800 726 672 110 611 107 101 600 100 90 97 91 85 400 80 75 70 200 2012 2013 2014 2015E - 2014 2015E 2016E 2017E 2018E Days of Receivable Days of Inventory Capex Days of Payable Cash conversion cycle
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
Figure 38: Hikvision’s free cash flow Figure 39: Hikvision’s net cash position
(CNYmn) (CNYmn) 16,000 25,000 22,645 12,436 20,000 12,000 16,090 9,143 15,000 11,402 8,000 6,217 10,000 8,501 4,148 6,593 4,000 3,101 5,000
- - 2014 2015E 2016E 2017E 2018E 2014 2015E 2016E 2017E 2018E Free Cash Flow Net Cash Position
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
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Figure 40: Our assumptions for Hikvision’s balance sheet and cash flow
Balance sheet (Unit: CNYmn) 2 0 13 2 0 14 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E Asse ts Cash and cash equivalents 4,593 7,200 9,156 12,111 16,856 23,473 Accounts receivables 3,663 6,157 9,211 13,526 18,179 23,893 Inventory 1,429 2,292 3,469 5,079 6,819 8,862 Other current assets 2,706 3,459 3,494 3,528 3,564 3,599 Current Assets 12 ,3 9 0 19 ,10 8 2 5 ,3 2 9 3 4 ,2 4 3 4 5 ,4 18 5 9 ,8 2 7 Fixed assets 1,030 1,529 2,037 2,527 2,995 3,456 Long- term investments 128 325 459 547 648 753 Intangible assets 171 214 214 214 214 214 Other non- current assets 352 114 116 118 121 123 Non- current Assets 1,6 8 2 2 ,18 3 2 ,8 2 7 3 ,4 0 7 3 ,9 7 9 4 ,5 4 7 Total Assets 14 ,0 7 2 2 1,2 9 1 2 8 ,15 6 3 7 ,6 5 0 4 9 ,3 9 7 6 4 ,3 7 4 Liabilities Accounts payables 1,609 3,592 5,631 8,245 11,071 14,387 Short- term debt 184 362 399 438 482 530 Other current liabilities 1,122 2,158 2,797 3,490 3,525 3,560 Current Liabilities 2,915 6,112 8,827 12,173 15,078 18,478 Long- term debt - 245 257 270 283 298 Other non- current liabilities 44 54 106 127 165 215 Non- current Liabilities 44 299 363 397 449 512 Total liabilities 2 ,9 5 9 6 ,4 11 9 ,19 0 12 ,5 7 0 15 ,5 2 7 18 ,9 9 0 Shareholders' Equity Share capital 4,017 4,069 4,069 4,069 4,069 4,069 Minority interests 26 37 52 60 69 82 Others 7,069 10,773 14,845 20,950 29,731 41,233 Total Shareholders' Equity 11,113 14 ,8 7 9 18 ,9 6 6 2 5 ,0 8 0 3 3 ,8 7 0 4 5 ,3 8 4 Total Liabilities and Shareholders' Equity 11,113 14 ,8 7 9 18 ,9 6 6 2 5 ,0 8 0 3 3 ,8 7 0 4 5 ,3 8 4
Cash flow (Unit: CNYmn) 2 0 13 2 0 14 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E Net income 3,077 4,681 6,697 9,876 13,112 17,266 Depreciation 66 97 164 236 315 401 Amortization 5 13 19 28 38 50 Working capital change -1,625 -1,374 -2,191 -3,311 -3,568 -4,440 Others 340 290 181 213 111 110 Operating Cashflow 1,863 3,706 4,870 7,042 10,008 13,388 Capex -391 -611 -672 -726 -784 -862 Others -1,979 -430 70 61 75 95 Investing Cashflow -2,370 -1,041 -602 -665 -709 -768 Issuance (retirement) of new shares 2 489 0 0 0 0 Increase (decrease) in debt 181 426 48 53 57 62 Dividend paid -602 -1,030 -2,338 -3,454 -4,586 -6,039 Others 0 -6 -1 -2 -2 -3 Financing Cashflow -419 -120 -2,291 -3,403 -4,531 -5,979 FX Adjustment -15 60 -20 -21 -23 -24 Change in cash and cash equivalents -941 2,606 1,957 2,954 4,745 6,617 Source: Deutsche Bank estimates, Company data
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Company profile
Company background
Established in November 2001 in Hangzhou, China, Hikvision is one of the leading video surveillance products and solution suppliers in the world, with No. 1 market share in revenue worldwide and in China. Its sales contributions in 2014 from front-end products (analog and IP cameras), back-end products (digital and networking video recorders), central controlling equipment (system integration and software), engineering construction, and other products are 53%, 20%, 10%, 5%, and 12%, respectively.
Hikvision was listed on the Shenzhen Stock Exchange (ticker: 002415 SZ) with share capital of CNY500m in May 2010. CETHik Group (China Electronic Technology Hik Group) is its largest shareholder, with ownership of 39.91% (August 2015).
Figure 41: Company milestones
Year Events 2001 Established by Hong-Jia Gong and Chun-Mei Chen. 2002 Launched DS-4000M card and DS-8000 DVR. 2003 Launched DS-4000H card. 2003 The era of H.264 began. 2004 Was awarded "Most Famous Brand in China Security Industry" and "Annual Top 10 Brand in China Security Industry" 2005 Was ranked no.5 in CCTV (Closed-Circuit TV) in "Top 10 Brands in Security Industry" 2005 Was awarded famous trademark of Hangzhou. 2006 Was ranked no.20 among "Forbes China Top 100 Potential Enterprises" 2007 Was awarded famous trademark of Zhejiang. 2008 Was ranked no.13 among global "Security 50" (no. 5 in Asia) by Asmag. 2008 Provided security control services to 2008 Olympic Games in Beijing. 2009 Launched video platform products. 2009 Launched DS-8100HS-S series DVR. 2010 Claimed no.1/no.5 share in DVR/CCTV market according to IHS. 2010 Listed in Shenzhen Stock Exchange in May 2010 with share capital of CNY500m. 2010 Ranked top 10 among global "Security 50" by Asmag. 2010 Won CNY5bn safe city project for Chongqing 2011 Unveiled 81/91HF-ST DVR and 6400 decoder. 2012 Launched 86/96N-ST NVR 2013 Launched ezviz and Smart IP Camera series. 2013 Unveiled solutions for safe city. 2014 Was ranked no.1/no.3 in video surveillance product group and all product group among "Security 50" by Asmag 2014 Cooperated with Baidu to launch ezviz smart video surveillance services. 2014 Provided video surveillance services and equipments to 2014 FIFA in Brazil. 2014 Was ranked no.1 in CCTV and video surveillance market according to IHS video surveillance research. 2015 Has been ranked no.1 in CCTV and video surveillance market according to IHS video surveillance research 4 years in a row. Source: Deutsche Bank, Company data
Management profile
Mr. Zong-Nian Chen (Chairman of the Board) Mr. Chen is now Head of CETC 52 Research Institute (China Electronics Technology Corporation 52 Research Institute) and Chairman of Hikvision Digital. He has been working at CETC 52 Research Institute for ~30 years. He was previously Deputy Head of CETC 52 Research Institute, Vice President at Shenzhen Gold Corolla Electronic Co., Ltd., and Director and President at Hik Group.
Mr. Hong-Jia Gong (Vice Chairman of the Board) Mr. Gong is the Founder and Vice Chairman at Hikvision Digital. He is also the Founder of Dongguan Tecsun Co., Ltd., and Watchdata. He holds 18.28% of shares of Hikvision Digital, making him the second-largest shareholder of the company.
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Mr. Yang-Zhong Hu (Director, CEO [Chief Executive Officer]) Mr. Hu has worked as the CEO at Hikvision Digital since the company was founded at the end of 2001. From 1989 to 2001, he was the Deputy Chief Engineer at CETC 52 Research Insitute. He has been working for CETC 52 Research Institute for over 25 years.
Mr. Wei-Qi Wu (Director, Vice President) Mr. Wu has been the Vice President at Hikvision Digital since 2002. He previously worked as Engineer at CETC 52 Research Institute from 1986 to 2001.
Mr. Yi-Bo Zheng (Vice President, CFO [Chief Financial Officer])
Mr. Zheng is now the Vice President and CFO at Hikvision Digital. He joined Hikvision Digital in 2004.
Shareholding structure
Figure 42: Shareholding structure
N a me S t a k e s ( %)
CETHik Group (China Elect ronics Technology Hik Group) 39.91%
Hong-Jia Gong 18.28% Xinjiang Weixun Invest ment Management 7.09%
Xinjiang Pukang Investment Partners 2.10%
CETC 52 Research Inst it ut e (China Elect ronics Technology Corporat ion 52 Research Inst it ut e) 1.97% Zhejiang Dongf ang Group Co 1.69%
Morgan Stanley & Co. International Plc. 0.66%
New China Lif e Insurance 0.65%
Wei-Ping Shen 0.54% BNP Paribas Investment Partners 0.44% Source: Deutsche Bank, Company data
Figure 43: Hikvision’s key parent companies
Source: Deutsche Bank, Company data
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(U.K) 100% Hikvision Hikvision UK Limited UK ZAO ZAO Direct Holding Direct Holding Indirect 87.4% (Russia) Hikvision S.L. (Spain) 100% Hikvision Spain, Hikvision Ltd. HDT 100% (France) 95% Hikvision Hikvision FRANCE SAS FRANCE International International (Hong Kong) (Hong (S.R.L.) (Italy) 100% Ltda. Hikvision Hikvision Brasil 95% (Brazil) Italy Hikvision do Hikvision Comercio de Comercio de Seguranca de Equipamentos Ltd 90% 100% (Henan) Security Security Hikvision Hikvision Co., Limited Co., Services Co., Services International International (Hong Kong) (Hong Henan Huaan Henan Hangzhou Hikvision Digital TechnologyHikvisionDigitalHangzhouLtdCo., Africa) 51% (Henan) 100% Security Corp Security Henan Huaan Henan (South Africa (Pty) (Pty) Ltd. Africa Hikvision South South Hikvision ITS Ltd 100% Co., Ltd Co., 100% Shanghai Hikvision Hikvision (Shanghai) Goldway (Singapore) Singapore Pte. Singapore
BV 100% Co., Ltd Co., 100% (Beijing) Security Security Technology (Netherland) Beijing Hikvision Hikvision Beijing Hikvision Europe Hikvision 100% Co., Ltd Co., (India) 58% Limited Chongqing (Chongqing) Hik Technology Hik Indian Private Private Indian Prama Hikvision Hikvision Prama Inc. Ltd 100% (USA) 100% Hikvision Hikvision Chongqing Chongqing Hikvision USA, (Chongqing) Technology Co., Technology
Ltd FZE 100% 100% Hikvision Hikvision (Dubai) Hangzhou Hangzhou Hikvision (Hangzhou) ompany data ompany C Technology Co., Technology , Hikvision’s key direct holding subsidiaries holding key Hikvision’sdirect
: 44 Ltd Ltd. 100% System 100% Hikvision Hangzhou Hikvision Hikvision (Hangzhou) (Australia) Australia PTY Australia Technology Co., Technology Figure Figure
Source: Deutsche Bank Deutsche Source:
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Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist Company Ticker Recent price* Disclosure Hikvision Digital 002415.SZ 31.90 (CNY) 18 Sep 15 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=002415.SZ
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Andrew-C Chang
Historical recommendations and target price: Hikvision Digital (002415.SZ) (as of 9/18/2015)
60.00 Previous Recommendations
Strong Buy 50.00 Buy Market Perform Underperform Not Rated 40.00 Suspended Rating
Current Recommendations 30.00 Buy
Hold SecurityPrice 20.00 Sell Not Rated Suspended Rating
10.00 *New Recommendation Structure as of September 9,2002
0.00 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Date
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Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 450 52 % share-holder return (TSR = percentage change in 400 share price from current price to projected target price 350 37 % plus pro-jected dividend yield ) , we recommend that 300 250 investors buy the stock. 200 Sell: Based on a current 12-month view of total share- 150 22 % 11 % holder return, we recommend that investors sell the 100 17 % 50 15 % stock 0 Hold: We take a neutral view on the stock 12-months Buy Hold Sell out and, based on this time horizon, do not recommend either a Buy or Sell. Companies Covered Cos. w/ Banking Relationship Notes: Asia-Pacific Universe 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends)
of -10% or worse over a 12-month period
Regulatory Disclosures 1.Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2.Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
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Additional Information
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness.
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Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor who is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.
Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities, and as such, investors should take expert legal and financial advice before entering into any transaction similar
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to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the amount of funds initially deposited. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options”, at http://www.optionsclearing.com/about/publications/character-risks.jsp. If you are unable to access the website please contact your Deutsche Bank representative for a copy of this important document.
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David Folkerts-Landau Group Chief Economist Member of the Group Executive Committee
Raj Hindocha Marcel Cassard Steve Pollard Global Chief Operating Officer Global Head Global Head Research FICC Research & Global Macro Economics Equity Research
Michael Spencer Ralf Hoffmann Andreas Neubauer Regional Head Regional Head Regional Head Asia Pacific Research Deutsche Bank Research, Germany Equity Research, Germany
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