Hikvision: Can the "Security Industry Giant" catch the AI express train?

Hikvision released its 2023 annual report and Q1 2024 financial report after the A-share market closed on the evening of April 19, 2024 Beijing time, with the following key points:

1. Overall Performance: Revenue & Net Profit Below Expectations. In Q1 2024, Hikvision achieved revenue of 17.8 billion RMB, a year-on-year growth of 10%, below market expectations (19.4 billion RMB) ; Net profit attributable to shareholders in Q1 2024 was 1.9 billion RMB, a year-on-year growth of 5.8%, below market expectations (2.89 billion RMB). Although the revenue and profit of Hikvision in this quarter have increased to varying degrees, the overall recovery performance is weaker than market expectations.

2. Progress of Various Businesses: Economic Recovery, Business Improvement. In the second half of 2023, the overall performance of the three major business groups in China began to improve. Both the Enterprise Business Group (EBG) and Small and Medium Business Group (SMBG) achieved double-digit growth, while the decline of the Public Services Business Group (PBG) narrowed to 0.9%. The innovation business saw an increase in growth rate to 28.6% in the second half of the year, with good growth performance in both domestic and international innovation businesses.

3. Software and Hardware Integration: Accelerating Growth. Since transforming from a hardware manufacturer selling only surveillance products to a leading security company with software empowerment, the company has maintained an integrated software and hardware business model. According to Dolphin Jun's calculation, the revenue share of the company's software business remained at 22% in the second half of 2023. Both software and hardware businesses have seen varying degrees of accelerated growth, especially with software business growth reaching 21.4%.

Overall, Hikvision's financial report this time is still not very good. In the report, the company's revenue and profit have both increased, which is in line with the general economic recovery situation. However, the overall performance recovery is still weaker than market expectations.

Looking at the business segments, the company's innovation business is performing well, with growth rates already back above 20%, but the "core products and services" mainly consisting of surveillance equipment are still relatively weak, which has dragged down the company's production and sales rate, affecting its performance release.

In terms of investment, although Hikvision's financial report is not ideal, the overall operation of the company is relatively stable. With the economic recovery, the company's performance is expected to continue to improve. Considering the company's current market value of 300 billion RMB, it roughly corresponds to a P/E ratio of around 20 times. If the company can catch the fast lane of AI, it may bring more expectations to the company, which is still relatively reasonable overallBelow is Dolphin's specific analysis of Hikvision's financial report:

1. Core Data: Revenue & Net Profit Below Expectations

1.1 Revenue Situation

In the first quarter of 2024, Hikvision achieved revenue of 17.8 billion yuan, a year-on-year increase of 10%, below market expectations (19.41 billion yuan). The growth in revenue was mainly driven by the enterprise sector and innovative businesses.

1.2 Gross Profit Margin Situation

In the first quarter of 2024, Hikvision achieved a gross profit of 8.2 billion yuan, a year-on-year increase of 11.4%. The growth in gross profit exceeded the revenue side, mainly due to the improvement in the company's gross profit margin this quarter.

Hikvision's gross profit margin for this quarter was 45.8%, a year-on-year increase of 0.6 percentage points, better than market expectations (44.8%). The year-on-year increase in the company's gross profit margin this quarter was mainly due to the increase in the proportion of software business, which structurally impacted 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 first quarter of 2024, Hikvision's three core expenses totaled 5.81 billion yuan, a year-on-year increase of 10.7%. The three core expense ratio reached 32.6%, slightly up year-on-year.

Sales Expenses: The company's sales expenses this quarter were 2.462 billion yuan, a year-on-year increase of 12.7%. The sales expense ratio for this quarter was 13.8%, up 0.3 percentage points year-on-year, remaining relatively stable;
Management Expenses: The company's management expenses this quarter were 680 million yuan, a year-on-year increase of 12.8%, as the company began to control personnel costs. The management expense ratio for this quarter was 3.8%, up 0.1 percentage point year-on-year;
R&D Expenses: The company's R&D expenses this quarter were 2.671 billion yuan, a year-on-year increase of 8.4%. The R&D expense ratio for this quarter was 15%, down 0.2 percentage points year-on-year. Although the company reduced the growth rate of R&D expenses, it still maintained a growth trend, indicating 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 also increased to 400,000 yuan.

[Images are not translated]1.4 Net Profit Attributable to Shareholders

In the first quarter of 2024, Hikvision achieved a net profit attributable to shareholders of 1.92 billion yuan, a year-on-year increase of 5.8%, which was lower than market expectations (2.89 billion yuan). The company's net profit margin for this quarter was only 12.5%, an increase of 0.5 percentage points compared to the same period last year.

With the recovery of the economy, the company's performance has also shown some improvement, but the recovery situation is still below expectations.

2. Progress of Various Business Segments: Economic Recovery, Business Improvement

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. The financial report now focuses on the progress of various innovative businesses, indicating a shift of the company's development focus towards innovative businesses.

1) Main products and other products business remain the largest source of revenue for the company, contributing 77% of the revenue in the second half of 2023. Although the proportion of main products is declining overall, it still holds the largest share.

2) The proportion of innovative businesses continues to increase, with the share of innovative businesses in the second half of 2023 maintained at 20%, a year-on-year increase of 2.4 percentage points. The growth is mainly driven by the robot and automotive businesses.

2.1. Main Products and Services

In the second half of 2023, Hikvision's main products and services business achieved revenue of 41.404 billion yuan, a year-on-year increase of 9.4%. With the recovery of economic activities, the company's main products and services have returned to growth.

In the domestic main products business, the overall performance of the three major business groups in the second half of 2023 has started to improve. ① Domestic Public Service Business Group (PBG) decreased by 0.9% year-on-year, with a significant narrowing of the decline; ② Domestic Enterprise Business Group (EBG) for large enterprises grew by 12.1% year-on-year; ③ Domestic Small and Medium Business Group (SMBG) grew by 11.5% year-on-year.

In the second half of 2023, the overseas main products business achieved 14.068 billion yuan, a year-on-year increase of 13.9%, with overall growth outperforming the domestic performance.2.2 Innovative Business

Hikvision's innovative business achieved revenue of 10.365 billion yuan in the second half of 2023, a year-on-year increase of 28.6%. With the recovery of economic activities, the growth rate of the company's innovative businesses has also improved, with the growth rates of the robotics business and automotive business reaching 28.3% and 57.7% respectively. The company's domestic and international innovative businesses both showed good growth performance this time.

In the domestic innovative business, Hikvision achieved revenue of 7.533 billion yuan in the second half of 2023, a year-on-year increase of 28.9%. In terms of revenue volume, innovative businesses are still mainly concentrated in domestic operations.

In the international innovative business, Hikvision achieved revenue of 2.832 billion yuan in the second half of 2023, a year-on-year increase of 27.8%.

Integrated Software and Hardware: Accelerating Growth

Hikvision relies on hardware carriers such as cameras for shipments and follows up with customers for subsequent software services, thereby realizing the company's business framework of "integrated software and hardware." 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 value-added tax refund policies, it can be seen from the annual report that there is a project for excess value-added tax refund, and software revenue can be calculated by reversing the value-added tax refund amount.

"Software Product Revenue = Value-added Tax Refund Amount / Refund Ratio"

(Note: "Refund Ratio = Value-added Tax Calculation and Payment Ratio - Actual Value-added Tax Payment Ratio")

By estimating, in the second half of 2023, Hikvision's software business revenue was 11.232 billion yuan, a year-on-year increase of 21.4%. The added value of Hikvision's software accounts for around 22% of the total revenue.

3.2 Hardware End

After calculating the software added value, the hardware revenue of Hikvision can be obtained from the company's annual total revenue. In the second half of 2023, Hikvision's hardware business revenue was 40.537 billion yuan, a year-on-year increase of 10.6%.

Comparing the growth rates of Hikvision's software and hardware revenues, it is evident that both hardware and software growth rates accelerated significantly in the second half of the year. The changes in the economy have a greater impact on the software end, while the hardware end has maintained a growth performance.Overall, hardware procurement has better risk resistance, but software empowerment can help improve the company's profitability.