Non-GAAP net profit increased by 13.3%, is the right-side signal for the surveillance industry leader coming?

Hikvision$HIKVISION(002415.SZ) was once held, but was liquidated in August last year, held for less than a year, with a small profit of about 25%

Currently, the company is still a backup stock for Brother Cai, for two reasons

① Wait for the company to show a right-side signal before re-entering. Here, the right-side refers to the fundamental right-side, not the stock price's right-side. Brother Cai doesn't trust the stock price's right-side much. Looking back, many so-called right-side signals in stock prices are just traps.
 

② The stock price is low enough, so low that the negatives have been overreacted in the falling price

On Friday, Hikvision announced its 2023 annual report and 2024 Q1 results. Let's see if they meet the above two conditions.
 

.......

1. Has the fundamental right-side signal appeared?
 

On the evening of April 19th, Hikvision announced its 2023 annual results and 2024 Q1 results, while Hikvision Technology released its 2023 earnings forecast at the end of January.

This time, Brother Cai combined the annual report and quarterly report for analysis.

According to the company's announcement, Q4 revenue was 28.1 billion yuan, up 19.74% YoY, and net profit attributable to shareholders was 5.27 billion yuan, up 31.75% YoY.

However, in Q1 2024, Hikvision's revenue was 17.82 billion yuan, up 10% YoY, and net profit attributable to shareholders was 1.92 billion yuan, up 6.08% YoY, which was mediocre.

Last year's Q4 performance was explosive, but this year's Q1 growth slowed significantly. What's the reason?
 

We can spot the trick from the quarterly tracking chart.
 

As shown, last year's Q4 high growth actually corresponded to the ultra-low base in Q4 2022.

In Q4 2022, the domestic COVID situation was severe. Hikvision's business model is highly fragmented, requiring employees to travel for negotiations, which was heavily impacted by the pandemic.

Thus, Q4 2022 saw Hikvision's revenue drop 9.1% YoY, and profits plummet 31.5% YoY. From a quarterly perspective, Q4 2022 was Hikvision's worst quarter in history.
 

Therefore, last year's Q4 high growth is not meaningful for comparison, as it was achieved on the lowest base, lacking reference value.

Similarly, this year's Q1 faces a comparable situation, as Q1 2023 was Hikvision's second-worst quarter, with profits down 20.6% and revenue down 1.9%.

Against this low-base effect, this quarter's 10% revenue growth and 5.8% profit growth are clearly underwhelming.

Although the company's revenue and profits grew, aligning with the broader economic recovery, the overall performance rebound was weaker than market consensus expectations.

This year's Q1 performance clearly reflects macroeconomic pressures.
 

Dahua Technology's performance was similar, with decent last-quarter results, but Q1 was even worse than Hikvision's.

Thus, overall, Hikvision's fundamental right-side signal has not yet appeared.
 

.......

Next, let's analyze how these results were achieved, as focusing solely on revenue and profits can be misleading.

We'll mainly examine the three expenses, especially sales and R&D costs.
 

In Q1, the company's sales expenses were 2.46 billion yuan, up 270 million YoY, a 12.3% increase.

Administrative expenses were 680 million yuan, up 80 million YoY, a 13.3% increase.

R&D expenses were 2.67 billion yuan, up 210 million YoY, an 8.5% increase.

The growth rates of sales and administrative expenses exceeded revenue growth.

The sales expense ratio was 13.8%, slightly lower than the abnormal Q1 2020 but still the second-highest on record.

The high sales expense ratio likely reflects the actual macroeconomic conditions. To maintain high sales, more marketing expenses are needed, while demand-side pull is weak.

This suggests Hikvision's Q1 performance faced tougher conditions than it appears. The growth in sales expenses didn't proportionally translate into revenue.

Since sales are a leading indicator of revenue, Q2 is unlikely to see a growth miracle.

Meanwhile, the company slightly cut R&D. Brother Cai thinks this isn't a big deal, as the industry isn't rapidly evolving. A slight R&D reduction during tough times won't hurt competitive advantages.
 

In summary, the analysis shows no right-side signal in Q1, and Q2 likely won't see a major growth miracle either. Thus, we still need to wait for the right-side signal.
 

2. Is the stock price low enough?

The second condition for entering Hikvision is whether the stock price is low enough, so low that negatives are overreacted in the falling price.
 

At the time of writing, Hikvision's PE is 21x and PB is 3.8x.
 

Without a fundamental right-side signal, this valuation is reasonable.

Brother Cai said: A high-probability strategy is to enter at ultra-low valuations for average companies and at reasonable valuations for excellent companies.

Hikvision is a widely recognized blue-chip. No need for Brother Cai to elaborate—everyone knows it's an excellent company.

As shown, even during the tough 2022-2023 period with COVID and weak economic recovery, Hikvision maintained an ROE of around 19.5%.
 

This outperforms 95% of A-share and Hong Kong-listed companies.
 

Given Hikvision's excellence and the latest results showing reasonable valuation, current holders can stay invested.
 

It's said excellent companies can be entered at reasonable valuations—Buffett advises the same. So, is it time to enter?

This question will be explored in detail in the next article. Stay tuned!

What do you think about Hikvision? Leave a comment—Brother Cai will reply. Let's discuss!
 

$SENSETIME-W(00020.HK) $DAHUA INC(002236.SZ) 

That's all for today's analysis. Hope it helps! I'm StockPro, an investor who loves reading financial reports, specializing in Hong Kong IPO subscriptions and investments across Hong Kong, US, and A-shares, with a long-term focus and short-term supplements. See you next time!