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Deutsche Bank Markets Research
Rating
Buy Asia
China
Technology
Hardware & Equipment
Company
Hikvision Digital
Date
21 September 2015
Initiation of Coverage
Global footprint, gaining share, expanding business
Reuters Bloomberg Exchange Ticker 002415.SZ 002415 CH SHZ 002415
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
Initiating with Buy, with 44% potential share price upside to our TP at CNY46
________________________________________________________________________________________________________________
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.
Price at 18 Sep 2015 (CNY) 31.90
Price target - 12mth (CNY) 46.00
52-week range (CNY) 52.30 - 18.28
Shenzhen Index 1,756
Andrew-C Chang
Research Analyst
(+886) 2 2192 2845
andrew-c.chang@db.com
Price/price relative
0
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90
9/13 3/14 9/14 3/15
Hikvision Digital
Shenzhen Index (Rebased)
Performance (%) 1m 3m 12m
Absolute -1.5 -23.8 71.9
Shenzhen Index -22.8 -42.4 31.4
Source: Deutsche Bank
Stock data
Market cap (CNYm) 129,801
Market cap (USDm) 20,398
Shares outstanding (m) 4,069.0
Free float (%) 71
Source: Deutsche Bank
Key indicators (FY1)
ROE (%) 39.6
Net debt/equity (%) -44.8
Book value/share (CNY) 4.65
Price/book (x) 6.86
Net interest cover (x) –
Operating profit margin (%) 25.0
Source: Deutsche Bank
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 product cycle, and consolidation of the industry. We forecast a 2015-2018 CAGR of 41% in sales and 39% in EPS for Hikvision, with ROE rising from 36% in 2014 to 43.6% in 2018. Its solid home-base advantage in China, successful overseas market expansion, and rising net cash position should boost its earnings upside and share price performance.
Five reasons why we are more optimistic than the Street (1) Exciting opportunity for smart city and IoT business: Investors may
underestimate the demand for video surveillance applications in the smart city and IoT markets. We expect this segment’s sales contribution to increase from 12% in 2014 to 25% in 2018 (sales CAGR of 70%).
(2) Robust upgrade demand for its front-end (analog to IP cameras, 2015-2018E sales CAGR of 44%) and back-end (DVR to NVR, 2015-2018E sales 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%.
(3) Ongoing market share gains in China (on a sales basis) from 28% in 2014 to 48% in 2018E, helped by its competitive sales footprints, its solid relationships with system integrators and commercial customers, and the government’s encouraging policies for safe city and Made in China 2025.
(4) Successful overseas market expansion for its brand business in 20 countries, ahead of Chinese peers, further boosting its EPS momentum.
(5) Potential growth in other security business (access control, total solution).
Valuation and risks We base our valuation of CNY46 on 19x our 2016E EPS, which is lower than Hikvision’s historical P/E (23x) since 2011 (when it became a total solutions supplier). Our 10-year DCF valuation model suggests a fair price of CNY51. Downside risks: weaker demand, order loss to peers, and inventory.
21 September 2015
Hardware & Equipment
Hikvision Digital
Page 2 Deutsche Bank AG/Hong Kong
M odel updated: 16 September 2015 Fiscal year end 31-Dec 2013 2014 2015E 2016E 2017E 2018E
Sales revenue 10,746 17,233 26,265 38,569 51,839 68,132
Gross profit 5,189 7,763 11,554 17,026 22,910 30,530
EBITDA 3,137 4,515 6,754 10,344 13,931 18,676
Depreciation 66 97 164 236 315 401
Amortisation 5 13 19 28 38 50
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
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
DB adjustments (including dilution) 0 0 0 0 0 0
DB Net profit 3,067 4,665 6,681 9,868 13,103 17,253
Cash Flow (CNYm)
Cash flow from operations 1,863 3,706 4,870 7,042 10,008 13,388
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
Dividends paid -602 -1,030 -2,338 -3,454 -4,586 -6,039
Net inc/(dec) in borrowings 181 426 48 53 57 62
Other investing/financing cash flows -1,995 -381 49 38 50 68
Net cash flow -941 2,606 1,957 2,954 4,745 6,617
Change in working capital -1,625 -1,374 -2,191 -3,311 -3,568 -4,440
Balance Sheet (CNYm)
Cash and other liquid assets 4,593 7,200 9,156 12,111 16,856 23,473
Tangible fixed assets 1,030 1,529 2,037 2,527 2,995 3,456
Goodwill/intangible assets 171 214 214 214 214 214
Associates/investments 128 325 459 547 648 753
Other assets 8,150 12,022 16,289 22,251 28,683 36,477
Total assets 14,072 21,291 28,156 37,650 49,397 64,374
Interest bearing debt 184 607 656 708 766 828
Other liabilities 2,775 5,804 8,534 11,862 14,761 18,162
Total liabilities 2,959 6,411 9,190 12,570 15,527 18,990
Shareholders' equity 11,087 14,842 18,914 25,019 33,800 45,302
M inorities 26 37 52 60 69 82
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
Key Company Metrics
Sales growth (%) na 60.4 52.4 46.8 34.4 31.4
DB EPS growth (%) na 50.2 43.2 47.7 32.8 31.7
EBITDA M argin (%) 29.2 26.2 25.7 26.8 26.9 27.4
EBIT M argin (%) 28.5 25.6 25.0 26.1 26.2 26.7
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
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
Net debt/equity (%) -39.7 -44.3 -44.8 -45.5 -47.5 -49.9
+886-2-2192 2845 Net interest cover (x) nm nm nm nm nm nm
Source: Company data, Deutsche Bank estimates
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
Technology/Hardware BVPS (CNY) 2.76 3.65 4.65 6.15
4,069 4,069 4,069 4,069
1.13 1.48
8.31 11.13
4,069
Average market cap (CNYm) 80,540 77,998 129,801 129,801 129,801 129,801
Weighted average shares (m) 4,017
Hikvision Digital Enterprise value (CNYm) 76,029 71,117 120,893 117,912 113,132 106,485
Reuters: 002415.SZ Bloomberg: 002415 CH Valuation MetricsP/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 31.90FCF Yield (%) 1.8 4.0 3.2 4.9 7.1 9.6
3.06
Target price CNY 46.00 Dividend Yield (%) 1.2 2.1 1.8
5.7
2.7 3.5 4.7
52-week Range CNY 18.28 – 52.30EV/Sales (x) 7.08 4.13 4.60
16.1 18.4
2.18 1.56
EV/EBITDA (x) 24.2 15.8 17.9 11.4 8.1
11.7 8.3 5.8
US$ 20,387mIncome Statement (CNYm)
C o mpany P ro f ile
Market Cap CNY 129,801mEV/EBIT (x) 24.8
andrew-c.chang@db.com
Hangzhou Hikvision Digital Technology Co., Ltd
develops, produces and sells video surveillance
equipments. The Company manufactures video card,
network video recorders, digital video recorders,
video servers, cameras, storage, and other products.
1yr Price Performance
M argin Trends
Growth & Profitability
Solvency
A ndrew-C Chang
10
15
20
25
30
35
40
45
50
Sep-14 Dec-14 Mar-15 Jun-15
002415.SZ HANG SENG INDEX (Rebased)
22
23
24
25
26
27
28
29
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13 14 15E 16E 17E 18E
EBITDA Margin EBIT Margin
0
10
20
30
40
50
0
10
20
30
40
50
60
70
13 14 15E 16E 17E 18E
Sales growth (LHS) ROE (RHS)
0
0
0
1
1
1
1
-60
-50
-40
-30
-20
-10
0
13 14 15E 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
21 September 2015
Hardware & Equipment
Hikvision Digital
Deutsche Bank AG/Hong Kong Page 3
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.
21 September 2015
Hardware & Equipment
Hikvision Digital
Page 4 Deutsche Bank AG/Hong Kong
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.
21 September 2015
Hardware & Equipment
Hikvision Digital
Deutsche Bank AG/Hong Kong Page 5
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.
21 September 2015
Hardware & Equipment
Hikvision Digital
Page 6 Deutsche Bank AG/Hong Kong
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
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Ma
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Price 3x 6x 9x 12x 15x
Source: Deutsche Bank, estimates, Company data, Bloomberg Finance LP
Source: Deutsche Bank, estimates, Company data, Bloomberg Finance LP
21 September 2015
Hardware & Equipment
Hikvision Digital
Deutsche Bank AG/Hong Kong Page 7
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 millio n) 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
assumptions
Figure 6: Target price sensitivity analysis based on 2016
assumptions
2016E Sales growth (%)
2 7 % 3 7 % 4 7 % 5 7 % 6 7 %
16 .1% 1.4 1.5 1.6 1.7 1.8
2016 OPM 21.1% 1.8 1.9 2.0 2.1 2.2
(%) 26 .1% 2.1 2.3 2.4 2.6 2.7
31.1% 2.5 2.7 2.8 3.0 3.2
36 .1% 2.9 3.1 3.3 3.5 3.7
2016E Sales growth (%)
2 7 % 3 7 % 4 7 % 5 7 % 6 7 %
16 .1% 27 28 30 32 34
2016 OPM 21.1% 34 36 38 40 43
(%) 26 .1% 40 43 46 49 52
31.1% 47 51 54 57 61
36 .1% 54 58 62 66 70
Source: Deutsche Bank estimates, Company data
Source: Deutsche Bank estimates, Company data
21 September 2015
Hardware & Equipment
Hikvision Digital
Page 8 Deutsche Bank AG/Hong Kong
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.
21 September 2015
Hardware & Equipment
Hikvision Digital
Deutsche Bank AG/Hong Kong Page 9
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
-
5,000
10,000
15,000
20,000
2014 2015E 2016E 2017E 2018ERevenue for IoT and Smart City business
2015-2018E CAGR at 70.1%
(CNYmn)
11.9%
15.1%
19.1%
22.7%
25.2%
0%
5%
10%
15%
20%
25%
30%
2014 2015E 2016E 2017E 2018E
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.
21 September 2015
Hardware & Equipment
Hikvision Digital
Page 10 Deutsche Bank AG/Hong Kong
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
21 September 2015
Hardware & Equipment
Hikvision Digital
Deutsche Bank AG/Hong Kong Page 11
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).
21 September 2015
Hardware & Equipment
Hikvision Digital
Page 12 Deutsche Bank AG/Hong Kong
Figure 13: Hikvision’s revenue by segments
53% 55% 55% 57% 58%
20% 17% 18% 18% 18%
27% 28% 27% 25% 24%
0%
20%
40%
60%
80%
100%
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
products
Figure 15: Revenue growth for Hikvision’s front-end
products
50% 52%56%
63%68%
49%47%
43%
36%
31%
1%
1%
1%
1%
1%
0
10,000
20,000
30,000
40,000
50,000
2014 2015E 2016E 2017E 2018EIP Camera Analog Camera Others
2015-2018E CAGR at 44.4%
(CNYmn)
81%
67%
59%53%
45%66%
51%
37%
20%15%
73%
58%48%
39%
34%
0%
20%
40%
60%
80%
100%
2014 2015E 2016E 2017E 2018E
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).
21 September 2015
Hardware & Equipment
Hikvision Digital
Deutsche Bank AG/Hong Kong Page 13
Figure 16: Revenue mix for Hikvision’s back-end
products
Figure 17: Revenue growth for Hikvision’s back-end
products
50% 53%58%
66%70%
49%46%
41%
33%
29%
1%1%
1%
1%
1%
0
3,000
6,000
9,000
12,000
15,000
2014 2015E 2016E 2017E 2018ENVR DVR Others
2015-2018E CAGR at 37.2%
(CNYmn)
9.1%
34.3%
68.2%
53.6%
45.0%
-5.1%
18.6%
35.7%
11.1% 15.0%1.1%
26.6%
52.7%
35.8%34.8%
-20%
0%
20%
40%
60%
80%
2014 2015E 2016E 2017E 2018E
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).
21 September 2015
Hardware & Equipment
Hikvision Digital
Page 14 Deutsche Bank AG/Hong Kong
Figure 18: Hikvision’s operation footprints in China
Source: Deutsche Bank, Company data
Figure 19: Hikvision’s solid home base in China (sales
contribution in 2014)
Figure 20: Hikvision’s market share in China
China75%
Overseas markets
25%
28.0%
35.0%42.1%
45.9%48.2%
0%
20%
40%
60%
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.
21 September 2015
Hardware & Equipment
Hikvision Digital
Deutsche Bank AG/Hong Kong Page 15
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
21 September 2015
Hardware & Equipment
Hikvision Digital
Page 16 Deutsche Bank AG/Hong Kong
Figure 24: Hikvision’s global market share Figure 25: Rising sales exposure to overseas markets
12.3%
16.4%
21.1%
25.2%
29.3%
0%
10%
20%
30%
40%
2014 2015E 2016E 2017E 2018EHikvision Digital
25%27%
30%
34%
39%
15.0%
25.0%
35.0%
45.0%
2014 2015E 2016E 2017E 2018ERevenue Exposure to overseas markets
Source: Deutsche Bank estimates
Source: Deutsche Bank estimates, Company data
Figure 26: Top 20 global video surveillance suppliers
2014 YoY Growth (%) Market share (%) OPM (%)
Ranking Company Country 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%
Total Revenue (US$ mn)
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.
21 September 2015
Hardware & Equipment
Hikvision Digital
Deutsche Bank AG/Hong Kong Page 17
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
Ma rgin a na lysis (%)
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%
Sa le s bre a kdown (%)
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
21 September 2015
Hardware & Equipment
Hikvision Digital
Page 18 Deutsche Bank AG/Hong Kong
Figure 29: The revenue trend for Hikvision Figure 30: Revenue growth for Hikvision
17,233
26,265
38,569
51,839
68,132
0
20,000
40,000
60,000
80,000
2014 2015E 2016E 2017E 2018E
Sales
(CNYmn) 2015-2018E CAGR at 41%
60.4%52.4%
46.8%
34.4% 31.4%
0%
20%
40%
60%
80%
100%
2014 2015E 2016E 2017E 2018ESales 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
44.4%43.3% 43.5% 43.5% 44.1%
30%
35%
40%
45%
50%
2014 2015E 2016E 2017E 2018EGross Margin
25.6%25.0%
26.1% 26.2%26.7%
20%
25%
30%
2014 2015E 2016E 2017E 2018EOperating 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
1.15
1.64
2.43
3.22
4.24
0.00
1.00
2.00
3.00
4.00
5.00
2014 2015E 2016E 2017E 2018EEPS
(CNYmn) 2015-2018E CAGR at 38.7%
36%
39.6%
44.9% 44.5% 43.6%
20%
30%
40%
50%
2014 2015E 2016E 2017E 2018E
ROE
Source: Deutsche Bank estimates, Company data
Source: Deutsche Bank estimates, Company data
21 September 2015
Hardware & Equipment
Hikvision Digital
Deutsche Bank AG/Hong Kong Page 19
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
Re ve nue (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
Tota l Re ve nue 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%
Tota l Re ve nue 6 0 % 5 2 % 4 7 % 3 4 % 3 1%
Re ve nue (%) 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%
Tota l Re ve nue 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.
21 September 2015
Hardware & Equipment
Hikvision Digital
Page 20 Deutsche Bank AG/Hong Kong
Figure 36: Hikvision’s capex Figure 37: Hikvision’s cash conversion cycle
611 672
726 784
862
-
200
400
600
800
1,000
2014 2015E 2016E 2017E 2018E
Capex
(CNYmn)
97
128
101
85
107
138
91
7570
80
90
100
110
120
130
140
2012 2013 2014 2015E
Days of Receivable Days of Inventory
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
3,101 4,148
6,217
9,143
12,436
-
4,000
8,000
12,000
16,000
2014 2015E 2016E 2017E 2018E
Free Cash Flow
(CNYmn)
6,593 8,501
11,402
16,090
22,645
-
5,000
10,000
15,000
20,000
25,000
2014 2015E 2016E 2017E 2018ENet Cash Position
(CNYmn)
Source: Deutsche Bank estimates, Company data
Source: Deutsche Bank estimates, Company data
21 September 2015
Hardware & Equipment
Hikvision Digital
Deutsche Bank AG/Hong Kong Page 21
Figure 40: Our assumptions for Hikvision’s balance sheet and cash flow
Ba la nc e she e t (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
Curre nt Asse ts 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- c urre nt Asse ts 1,6 8 2 2 ,18 3 2 ,8 2 7 3 ,4 0 7 3 ,9 7 9 4 ,5 4 7
Tota l Asse ts 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
Lia bilitie s
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
Tota l lia bilitie s 2 ,9 5 9 6 ,4 11 9 ,19 0 12 ,5 7 0 15 ,5 2 7 18 ,9 9 0
Sha re holde rs' 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
Tota l Sha re holde rs' 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
Tota l Lia bilitie s a nd Sha re holde rs' 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
Ca sh 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
Operat ing Cashf low 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
Invest ing Cashf low -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 Cashf low -419 -120 -2,291 -3,403 -4,531 -5,979
FX Adjustment -15 60 -20 -21 -23 -24
Change in cash and cash equ ivalen ts -941 2,606 1,957 2,954 4,745 6,617 Source: Deutsche Bank estimates, Company data
21 September 2015
Hardware & Equipment
Hikvision Digital
Page 22 Deutsche Bank AG/Hong Kong
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.
21 September 2015
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Hikvision Digital
Deutsche Bank AG/Hong Kong Page 23
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
Na 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 Invest ment Part ners 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 St anley & Co. Int ernat ional Plc. 0.66%
New China Lif e Insurance 0.65%
Wei-Ping Shen 0.54%
BNP Paribas Invest ment Part ners 0.44% Source: Deutsche Bank, Company data
Figure 43: Hikvision’s key parent companies
Source: Deutsche Bank, Company data
Hik
visio
n D
igita
l
Hard
ware
& E
qu
ipm
en
t
21
Sep
tem
ber 2
01
5
Pag
e 2
4
Deu
tsch
e B
an
k A
G/H
on
g K
on
g
Figure 44: Hikvision’s key direct holding subsidiaries
HangzhouHikvisionSystem
Technology Co.,Ltd
(Hangzhou)
Hangzhou Hikvision
Technology Co., Ltd
(Hangzhou)
Chongqing Hikvision
Technology Co., Ltd
(Chongqing)
ChongqingHik Technology
Co., Ltd
(Chongqing)
Beijing Hikvision Security
TechnologyCo., Ltd
(Beijing)
ShanghaiGoldway ITS
Co., Ltd
(Shanghai)
Henan HuaanSecurity Corp
(Henan)
Henan HuaanSecurity
Services Co., Ltd
(Henan)
Hikvision Australia PTY
Ltd.
(Australia)
HikvisionFZE
(Dubai)
HikvisionUSA, Inc.
(USA)
Prama Hikvision Indian Private
Limited
(India)
Hikvision Europe BV
(Netherland)
Hikvision Singapore Pte.
Ltd
(Singapore)
Hikvision South Africa (Pty) Ltd.
(South Africa)
Hikvision International Co., Limited
(Hong Kong)
Hikvision do Brasil
Comercio deEquipamentosde Seguranca
Ltda.(Brazil)
HDT International
Ltd.
(Hong Kong)
Hikvision Italy (S.R.L.)
(Italy)
Hikvision FRANCE SAS
(France)
Hikvision Spain,S.L.
(Spain)
ZAO Hikvision
(Russia)
Hikvision UK Limited
(U.K)
Hangzhou Hikvision Digital Technology Co., Ltd
100% 100% 100% 100% 100% 100% 51% 90% 100% 100% 100% 87.4% 100%
100% 95%95%100%100%100%100%58%100%100%
Direct Holding
Indirect Holding
Source: Deutsche Bank, Company data
21 September 2015
Hardware & Equipment
Hikvision Digital
Deutsche Bank AG/Hong Kong Page 25
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)
0.00
10.00
20.00
30.00
40.00
50.00
60.00
Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15
Secu
rity
Pri
ce
Date
Previous Recommendations
Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating
Current Recommendations
Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002
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Page 26 Deutsche Bank AG/Hong Kong
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:
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
52 %
37 %
11 %22 %17 % 15 %
0
50
100
150
200
250
300
350
400
450
Buy Hold Sell
Asia-Pacific Universe
Companies Covered Cos. w/ Banking Relationship
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.
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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.
21 September 2015
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Deutsche Bank AG/Hong Kong Page 27
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