Hikvision: Both government and enterprises are tightening their belts, the security industry is not "replacing equipment"

$HIKVISION(002415.SZ) released its second-quarter financial report for 2024 (ending in June 2024) after the A-share market closed on the evening of August 16, 2024, Beijing time, with the following key points:

1. Overall Performance: Revenue Growth Without Profit Growth. In the second quarter of 2024, Hikvision achieved a revenue of 23.4 billion yuan, a year-on-year increase of 9.5%, which was lower than market expectations. The revenue growth was mainly driven by innovative businesses. In the second quarter of 2024, the net profit attributable to the parent company was 3.1 billion yuan, a year-on-year decrease of 10.7%, which was also lower than market expectations. The decline in gross profit margin and the increase in expenses led to the situation of "revenue growth without profit growth".

2. Progress of Various Businesses: Innovative Business is the Main Growth Driver. In the first half of 2024, the overall performance of the three major domestic business groups remained relatively sluggish. The Large and Medium-sized Enterprise Business Group (EBG) and the Small and Medium-sized Business Group (SMBG) showed some growth, but the magnitude was not significant, while the Domestic Public Service Business Group (PBG) experienced a nearly double-digit decline. The growth rate of innovative businesses in the first half of the year was still 26.1%, with good growth performance in both domestic and overseas innovative businesses.

3. Software and Hardware Integration: Software Proportion Continues to Decline. Since transforming from a hardware manufacturer selling only surveillance products to a leading security company with software empowerment, the company has maintained an integrated operation model of software and hardware. According to Dolphin Jun's calculation, the proportion of software business revenue in the first half of 2024 has declined to 20%. Both software and hardware businesses experienced a decline in growth this quarter, but the software business showed significantly weaker risk resistance.

Dolphin Jun's Overall View:

Hikvision's revenue and net profit performance in this quarter were not very good. Although revenue rebounded in this quarter, the decline in gross profit margin directly led to a decrease in net profit.

Specifically, 1) Revenue: The innovative business continued to maintain double-digit growth, being the main source of revenue growth for the company. However, it is worth noting that the company is still affected by government and enterprise control spending, with the domestic public service business continuing to decline; 2) Profit: The proportion of software-related revenue for the company continued to decline to 20%, structurally affecting the company's comprehensive gross profit margin. Coupled with the growth in expenses, the company faced the situation of "revenue growth without profit growth" this quarter.

Dolphin Jun believes that in the current background of some customers "cutting costs", the company's government and enterprise business is unlikely to improve in the short term. Real estate development and commercial activities will directly impact the EBG and SMBG businesses. While overseas and innovative businesses can provide some support to the company through growth, the performance aspect will continue to face pressureAlthough the company's stock price has clearly declined, the current operating conditions still fail to bring enough confidence to the market.

Here is Dolphin's specific analysis of Hikvision's financial report:

I. Core Data: Revenue Growth Without Profit Growth

1.1 Revenue Situation

Hikvision achieved a revenue of 23.4 billion yuan in the second quarter of 2024, a year-on-year increase of 9.5%, which is lower than the market expectation of 25 billion yuan. The revenue growth of the company is mainly driven by the growth of innovative businesses.

1.2 Gross Profit Margin

In the second quarter of 2024, Hikvision achieved a gross profit of 10.4 billion yuan, a year-on-year increase of 7.8%. The growth rate of gross profit is lower than that of revenue, mainly due to the decline in the company's gross profit margin this quarter.

Hikvision's gross profit margin for this quarter is 44.5%, a year-on-year decrease of 0.7 percentage points, lower than the market expectation of 45.8%. The year-on-year decline in gross profit margin this quarter is mainly due to the decrease in the proportion of software revenue, which structurally affects the gross profit margin.

1.3 Core Expense Situation

Hikvision's core expenses mainly include sales expenses, management expenses, and research and development (R&D) expenses. In the second quarter of 2024, the company's three core expenses totaled 6.91 billion yuan, a year-on-year increase of 11.6%. The three core expense ratio reached 29.5%, slightly higher year-on-year.

Sales Expenses: The company's sales expenses this quarter were 3.101 billion yuan, a year-on-year increase of 14.8%. The sales expense ratio for this quarter is 13.3%, a year-on-year increase of 0.7 percentage points. The company has significantly increased its investment in sales activities this quarter.

Management Expenses: The company's management expenses this quarter were 784 million yuan, a year-on-year increase of 16.7%. The management expense ratio for this quarter is 3.4%, a year-on-year increase of 0.3 percentage points.

R&D Expenses: The company's R&D expenses this quarter were 3.027 billion yuan, a year-on-year increase of 7.3%. The R&D expense ratio for this quarter is 12.9%, a year-on-year decrease of 0.3 percentage points. The continuous growth of R&D expenses also indicates the company's emphasis on research and development.

As of the end of 2023, the number of R&D personnel in the company has increased to over 28,000, and the average salary of R&D personnel has reached 400,000 yuan.

1.4 Net Profit attributable to Shareholders Situation

Hikvision achieved a net profit attributable to shareholders of 3.15 billion yuan in the second quarter of 2024, a year-on-year decrease of 10.7%, lower than the market expectation of 4.03 billion yuanThe company's net profit margin for this quarter is 14.6%, a year-on-year decrease of 3.2 percentage points. The sluggish performance of the three major domestic business units has affected the company's overall performance.

II. Progress of Various Businesses: Innovative Business is the Main Source of Growth

Starting from 2021, Hikvision no longer specifically discloses details such as "front-end products," "back-end products," and "central control products," but directly includes them in the company's "main products and other products" category. In the financial report, the progress of various innovative businesses is emphasized, and the company's development focus is shifting towards innovative businesses.

1) Main products and other products business remain the company's largest source of revenue, contributing 73% of revenue in the first half of 2024. Although the main products saw growth in the first half of the year, the growth rate was lower than the company's overall performance, and the business proportion continued to decline;

2) The proportion of innovative businesses continues to increase, with the share of innovative businesses in the first half of 2024 remaining at 25%, a year-on-year increase of 3 percentage points. Among them, the main sources of growth are the robot business, storage business, and automotive business.

2.1. Main Products and Services

Hikvision's main products and services business achieved revenue of 30.88 billion yuan in the first half of 2024, a year-on-year increase of 5.1%.

Overall performance: In the domestic main product business, the overall performance of the three major business groups in the first half of 2024 began to improve. ① Domestic Public Service Business Group (PBG) decreased by 9.2% year-on-year, continuing to decline; ② Domestic Enterprise Business Group for Large Enterprises (EBG) increased by 7% year-on-year; ③ Domestic Small and Medium Business Group (SMBG) increased by 0.6% year-on-year.

In the first half of 2024, among the three major domestic business groups, EBG business and SMBG business are more closely related to economic life. Although there has been some recovery, they still remain relatively sluggish; while PBG is more from government-enterprise projects, and the number of government procurements is still declining.

In the overseas main product business, revenue reached 11.441 billion yuan in the first half of 2024, a year-on-year increase of 15.5%, with overall growth outperforming the domestic performance.

2.2 Innovative Business

The company's innovative business mainly includes smart home, robotics, thermal imaging, storage, and automotive businesses. Hikvision's innovative business achieved revenue of 10.328 billion yuan in the first half of 2024, a year-on-year increase of 26.1%, and is the main source of the company's growth. Innovative Business: Storage and Automotive Business Growth Rates Reached 65.5% and 60.4% respectively.

The company's innovative business has shown good growth both domestically and internationally. Specifically:

1) In the domestic innovative business, Hikvision achieved a revenue of 7.589 billion yuan in the first half of 2024, a year-on-year increase of 25.9%. In terms of revenue volume, the innovative business is still mainly concentrated in the domestic market.

2) In the international innovative business, Hikvision achieved a revenue of 2.739 billion yuan in the first half of 2024, a year-on-year increase of 26.9%.

III. Integration of Software and Hardware: Software Proportion Continues to Decline

Hikvision relies on hardware such as cameras for shipments and follows up with customers for software services, thereby realizing the company's "integration of software and hardware" business framework. How did Hikvision perform in terms of software and hardware based on the financial report released this time?

3.1 Software End

Although Hikvision disclosed product categories in the annual report, it did not separately disclose the company's software revenue situation. Since the company's software products can enjoy VAT refund policies, it can be seen from the annual report that there is a VAT refund project, and software revenue can be calculated backwards from the VAT refund amount.

"Software Product Revenue = VAT Refund Amount / Refund Ratio"

(Note: "Refund Ratio = VAT Calculation and Payment Ratio - Actual VAT Payment Ratio")

By estimating, Dolphin estimates that Hikvision's software business revenue in the first half of 2024 was 8.363 billion yuan, a year-on-year increase of 6.9%. The proportion of Hikvision's software value-added continued to decline to around 20% of total revenue.

3.2 Hardware End

After calculating the software value-added, the hardware revenue of Hikvision can be obtained from the company's annual total revenue. In the first half of 2024, Hikvision's hardware business revenue was 32.85 billion yuan, a year-on-year increase of 10.4%.

Comparing the growth rates of Hikvision's software and hardware revenue, it is found that both hardware and software growth rates have slowed down in the first half of the year. The economic changes have a greater impact on the software end, while the hardware end has maintained growth. Overall, hardware procurement is more resistant to risks, but software empowerment helps improve the company's profitability. However, the current weak recovery in overall demand has led to revenue growth in the hardware end, but the profit performance remains weak.