Ambarella (AMBA) FY4Q21 results shed some lights on the China AI surveillance camera sector. AMBA expects AI SoC to account for >25% of revenue in CY21 (vs. 10% in CY20) with Dahua being a strong customer. Meanwhile, Hikvision preliminary FY4Q20 delivered impressive revenue growth of +20% YoY. We like surveillance camera leader Hikvision (BUY) over Dahua (HOLD) given strong R&D to benefit from AI adoption in non-public security market.
- Ambarella sees strong AI outlook in 2021. AMBA derived 60% of revenue from security camera SoC with Hikvision and Dahua contributed around low-teens % of revenue. AMBA started mass production of Computer Vision AI SoC (CV) in late CY2019 and revenue contribution >10% in CY2020. In CY2021, company guided CV to be >25% of total revenue. By end of Apr 2021, AMBA will have shipped more than 2mn CV SoCs on a cumulative basis (1.7mn related to security camera). We estimate that security camera AI penetration is less than 5% in 2020 (assuming AMBA 20% market share, global surveillance camera annual shipment >300m units). There is still large room for growth when AI use cases expand to non-public security.
- AMBA CV only penetrated into Dahua but not Hikvision. Dahua began mass production of multiple CV products using AMBA chipsets in FY4Q21. However, AMBA has not received any design wins from Hikvision on the CV side yet. We believe it suggested 1) Hikvision was able to pile up more Hisilicon AI chips and 2) Hikvision is trying on non-US chipsets such as SigmaStar (subsid. of Mediatek) and Novatek, in our view.
- R&D gap resulted in growth and margin difference between Hikvision and Dahua. Hikvision and Dahua announced preliminary FY20 results on 26 Feb. Hikvision FY4Q20 revenue delivered impressive sequential improvement of +20% YoY to RMB21.4bn vs. Dahua +6% YoY to RMB10.3bn. As Dahua R&D size is halved of Hikvision (FY19 Dahua R&D RMB2.8bn vs. Hikvision RMB5.5bn), Dahua is likely to face slower growth (weaker AI) and lower margins (longer time to transit to use non-US chipsets).
- Prefer Hikvision (BUY) over Dahua (HOLD). We largely maintained Hikvision FY20-22E estimates but lowered Dahua FY20-22E net profit by -7% to -12% to reflect slower growth, lower gross margin and higher R&D. We slightly lowered Hikvision target price to RMB73.78 (prior RMB74.28) on unchanged 36x FY22 P/E. We cut Dahua target price to RMB25.35 (prior RMB26.72) on unchanged 17x FY22 P/E. We expect valuation gap between Hikvision and Dahua will continue to widen.
