Hikvision: How Can It Withstand the Decline Without Layoffs, a Precious Asset?
On the evening of April 14, 2023 Beijing time, Hikvision released its 2022 annual report and Q1 2023 financial report (ending in March 2023) after China's A-share market close, with the following highlights:
1. Overall performance: both revenue and net profit are lower than expected. Hikvision achieved revenue of RMB 16.2 billion in Q1 2023, a YoY decrease of 1.9%, which is lower than the market expectation of RMB 18.1 billion. Net profit attributable to the parent company was RMB 1.81 billion, down 20.7% YoY, also lower than the market expectation of RMB 2.681 billion. The weak performance in income is mainly due to the absence of timely recovery in demand. Although the gross profit margin has slightly rebounded, the company's profit has suffered a significant decline due to the increase in rigid costs.
2. Progress of various businesses: innovative business is the main source of growth. In the second half of 2022, there were still macro environment impacts, and all three major domestic business groups showed decline. Among them, the Public Service Business Group (PBG) and Small and Medium-sized Business Group (SMBG) both experienced double-digit declines, mainly due to poor performance of the main domestic product business. However, the innovative business continued to grow at 20% in the second half of the year, especially the overseas innovative business, which grew at the fastest rate of 27.5%.
3. Software-hardware integration: significant reduction in software, hardware support. Since transforming from a hardware vendor selling only surveillance products to a security leader with software empowerment, the company has always maintained a software-hardware integrated business model. According to Dolphin, the company's software business in the second half of 2022 has continued to decline, and its revenue proportion has further declined to 20%. The company's hardware business in the second half of the year still maintained positive growth. The unstable macro environment has a greater impact on software services, and the hardware side has relatively strong risk resistance.
Overall, Hikvision's financial report this time is below market expectations. With the release of the macro environment, Hikvision's income decline has narrowed, but it is still lower than market expectations. Dolphins believe that the severely damaged Public Service Business Department and Small and Medium-sized Business Department have made some improvements in the previous year, but repairs still cannot be done overnight. However, operating expenses are still growing rigidly, further squeezing profits, resulting in a significant decline in profit.
With the recovery of the economy, Hikvision's performance is expected to continue to be repaired. However, the macro environment still shows some fatigue, which will also affect the degree of Hikvision's performance repair. Hikvision's current business fundamentals are mainly concentrated in China. Public service-related investments may rebound, but the extent to which small and medium-sized enterprises can be repaired after suffering heavy losses is still worth attention.
In addition, Hikvision's state-owned enterprise attributes have to some extent restricted the release of operating profits. When last year's performance was impacted, the company's cost side still maintained growth. In the past weak year, Hikvision's staff size has expanded by more than 5,000 people. In the period of weak performance, many companies will carry out cost control, but it was not seen in Hikvision's financial report last year. On the trading side, the Dolphin believes that the stock price of Hikvision has risen from below 30 yuan to nearly 50 yuan. Part of this includes macroeconomic and performance repair expectations, and the other part is driven by the heat of artificial intelligence/robotics. However, from the company's disclosed financial reports, the company's performance repair did not meet market expectations. In addition, the rigidity of the cost side reflected in the financial report will continue to squeeze the release of the company's performance.
Overall, the Dolphin believes that Hikvision's business side is expected to continue to recover, but the current stock price has anticipated the performance repair. In order to further open up the rising space, the company still needs Hikvision's business recovery to exceed expectations or achieve significant results in cost control.
Below is the Dolphin's specific analysis of Hikvision's financial report:
I. Overall performance: both revenue and net profit are lower than expected
1.1 Revenue situation:
Hikvision achieved a revenue of 16.2 billion yuan in the first quarter of 2023, a year-on-year decrease of 1.9%, lower than market expectations (18.1 billion yuan). Compared with Hikvision's revenue in the fourth quarter, Hikvision's revenue in this quarter has narrowed, but it is still below the market's expected recovery.
The Dolphin believes that the company's decline this quarter is mainly due to the drag on domestic business, while overseas business still maintains a growth trend. Although the economic situation has rebounded since the beginning of the year, the repair of demand from small and medium-sized enterprise customers has not been achieved "at one go".
1.2 Gross margin situation
Hikvision achieved a gross profit of 7.3 billion yuan in the first quarter of 2023, a year-on-year increase of 1.3%. Although the company's revenue has slightly declined this quarter, the gross profit has increased, mainly due to the increase in the gross profit margin of the company this quarter.
Hikvision's gross profit margin this quarter was 45.2%, a year-on-year increase of 1.5 percentage points, better than market expectations (42.24%). The increase in the company's gross profit margin this quarter is mainly due to the increase in the gross profit margin of the hardware business. The Dolphin estimated that the company's average hardware shipment price has slightly increased, while the average cost has decreased, bringing the increase in gross profit margin of the hardware side.
1.3 Core cost situation
Hikvision's core cost situation mainly includes sales expenses, management expenses, and research and development expenses. Hikvision's three core cost items totaled 5.25 billion yuan in the first quarter of 2023, a year-on-year increase of 14.9%. The three core cost rates reached 32.4%. The growth of the cost side this quarter is faster than the revenue growth, and the cost side shows a rigid feature. 1. Sales expenses: The company's sales expenses were RMB 2.185 billion this quarter, a YoY increase of 10.7%. The sales expense ratio for this quarter was 13.5%, up 1.6pct YoY.
2. Administrative expenses: The company's administrative expenses were RMB 603 million this quarter, a YoY increase of 13.9%, with personnel costs rising during the quarter. The administrative expense ratio for this quarter was 3.7%, up 0.5pct YoY.
3. R&D expenses: The company's R&D expenses were RMB 2.464 billion this quarter, a YoY increase of 19.2%. The R&D expense ratio for this quarter was 15.2%, up 2.7pct YoY. The company continues to increase its R&D investment, with an increase in both the number and remuneration of R&D personnel in 2022. The proportion of R&D personnel remains at a high level of 48%, while the average salary of R&D personnel has reached RMB 3.5111 million, a YoY increase of 7.9%.
1.4 Net profit attributable to shareholders
Hikvision achieved a net profit attributable to shareholders of RMB 1.81 billion in the first quarter of 2023, a YoY decrease of 20.7%, which is lower than the market expectations (RMB 2.681 billion). Declining profitability is the main reason for the poor performance this quarter.
The company's net profit margin for this quarter was only 12%, down 2.6pct YoY, mainly due to the increase in expenses eroding gross profit margin against the backdrop of income pressure.
II. Business Progress: Innovation Business is the Main Growth Source
Starting from 2021, Hikvision no longer specifically discloses the segment situation of "front-end products", "back-end products", and "central control products", but directly includes them in the "main business products and other products" of the company. In the financial report, the company focuses on disclosing the progress of various innovation businesses, and the development focus of the company is also shifting towards innovative business.
1. The main business products and other products are still the company's largest source of revenue, contributing 80% of the revenue in the second half of 2022. However, the overall proportion of main business products is trending downward but still has the largest share.
2. The proportion of innovative business continues to increase. The share of innovative business in the second half of 2022 continued to rise to 18%, a YoY increase of 4pct. Among them, robots and other innovative businesses are the main sources of growth.
2.1 Main Products and Services
In the second half of 2022, Hikvision's main products and services achieved revenue of 37.85 billion yuan, a year-on-year decrease of 7.3%. The instability in the second half of the year caused the company's main business to decline.
In the domestic main product business, the performance of the three major business groups was relatively sluggish in the second half of 2022. The Public Service Business Group (PBG) in China fell by 24.2% year-on-year; the Enterprise Business Group (EBG) which serves large companies in China fell by 3% year-on-year; and the Small and Medium-sized Business Group (SMBG) in China fell by 16.6% year-on-year. The instability environment had a greater impact on small and medium-sized enterprises and government procurement, which is the reason why both SMBG and PBG businesses declined by double digits in the second half of the year according to Hai Tianjun.
In the international main product business, revenue in the second half of 2022 reached 12.346 billion yuan, a year-on-year increase of 14.5%. Although the domestic business declined, the international business still maintained growth.
2.2 Innovative Business
In the second half of 2022, Hikvision's revenue from innovative business reached 8.062 billion yuan, a year-on-year increase of 20.5%. The growth rate of the company's innovative business has also declined significantly due to the impact of the macro environment. However, growth is still maintained, which is mainly due to the high growth rate of the robotics and storage businesses, which increased by more than 25% year-on-year.
In the domestic innovative business, Hikvision achieved revenue of 5.846 billion yuan, a year-on-year increase of 18%. In terms of revenue volume, the innovative business is still mainly concentrated in the domestic business.
In the international innovative business, Hikvision achieved revenue of 2.217 billion yuan in the second half of 2022, a year-on-year increase of 27.5%. Although the revenue volume is still significantly smaller than the domestic portion, the international portion has shown a high growth rate. The main reason is that the growth of the international market was repaired due to the macro environment in the first half of the year, and the overseas market has also increased its purchases of robotics and other businesses.
III. Software and Hardware Integration: Significant Drop in Software, Hardware Holding Steady
Hikvision relies on hardware carriers such as cameras for shipments, and follows up with customers with software services, thereby realizing the company's "software-hardware integration" business framework. According to the financial report released this time, how did Hikvision perform on both the software and hardware sides?
3.1 Software Side
Although Hikvision disclosed its product categories separately in the annual report, the company's software revenue situation was not separately disclosed. Since the company's software products can enjoy the value-added tax refund policy, it can be seen from the company's annual report that there is a VAT super-tax refund project, and the software revenue can be calculated by deducting the amount of the VAT refund. "Software product revenue = VAT refund amount / refund ratio"
(Note: "Refund ratio = VAT payment ratio - actual VAT payment ratio")
By estimating Hikvision's software revenue for the second half of 2022 at 9.251 billion yuan, a YoY decrease of 23.1%, Dolphin believes that software value-added accounted for 20% of the company's total revenue, mainly due to the increase in the shipment of Hikvision's devices, which led to a decrease in the average usage fee for a single device.
3.2 Hardware division
After calculating the software value-added, Hikvision's hardware revenue can be obtained based on annual revenue. Hikvision's hardware revenue in the second half of 2022 was 36.656 billion yuan, a YoY increase of 3.3%.
Comparing Hikvision's software and hardware revenue growth rates, we can see that the company's decline in the second half of the year was mainly due to the decline in software revenue. Dolphin believes that macroeconomic impact has a significant effect on software services, while the hardware division is barely maintaining its growth momentum, primarily due to demand from foreign markets.
Dolphin's related articles on Hikvision:
In depth:
December 22, 2021 "Hikvision (Part 2): Will copying Zhang Kun's homework lead to cutting leeks?"
December 14, 2021 "Hikvision (Part 1): Buying into the "security moat" against the trend, what is Zhang Kun betting on?"
Earnings season:
October 28, 2022 Earnings review: "Hikvision collapses across the board, will the new infrastructure investment cycle exclude the security leader?"
August 14, 2022 Conference call: "The impact of the epidemic is short-term, economic slowdown is the main culprit (Hikvision 22Q2 conference call)"
August 13, 2022 Earnings review: "Another white horse stumbles, can Hikvision come out of its hardships?" On April 21, 2022, phone meeting "Hikvision's Outlook for 2022, How does Management View it? (Summary of Phone Meeting)" was held.
On April 16, 2022, financial report review "Hikvision: Inflation and Epidemic Pressure the "Security Fence"" was released.
Risk disclosure and statement for this article: Dolphin Research and Analysis disclaimer and general disclosures.
