Hikvision reported in-line FY20 while FY1Q21 core profit beat on higher than expected top-line growth (+48% YoY). Enterprise segment (EBG) grew at +21% YoY in FY20, reflecting expanding camera applications to non-surveillance with AI/sensors. We expect Hikvision strong R&D to drive +17%/+19% revenue/net profit CAGR in FY20-23E. Maintain BUY.
- FY1Q21 decent beat. Hikvision reported in-line FY20 with pre-announced numbers. Revenue was at RMB63.5bn (+10% YoY) and net profit was at RMB13.4bn (+8% YoY). Highlight of FY20 came to its operating cash flow improvement (+107% YoY to RMB16.1bn), thanks to shorter receivable days for sales to enterprise. FY1Q21 was a decent beat with top line growth of +48% YoY to RMB14bn, beating our/consensus estimates by 22%/17% respectively. Operating profit was also above expectation at RMB2.6bn (+74% YoY) although net profit missed on higher forex loss.
- More than just surveillance, expanding applications with AI /sensors. We maintain our view that Enterprise is replacing Public security segment as the new growth driver. Hikvision products cover 70 industries now as camera applications expanded by embedding AI/ sensor technology. Despite COVID-19, Hikvision EBG (Enterprise) revenue was up +21% YoY in FY20 vs. PBG (Public security) was up merely 5% YoY. Also, Hikvision innovative businesses (smart home products/ robotics/ fire detection products, etc.) already accounted for 10% of FY20 revenue (+39% YoY to RMB6.2bn). We expect Hikvision FY21E revenue to grow at +22% YoY to RM77.7bn.
- Margin increased despite record high R&D ratio. Hikvision GPM in FY20 was up to 46.5% (+0.5 pct pts YoY) and OPM improved to 21.4% (+1.4 pct pts YoY). Operating profit per employee increased by +11% YoY to RMB318k, thanks to better opex control although R&D reached record high level of RMB6.4bn (+16% YoY, 10% R&D ratio). We believe R&D ratio will remain at above 10% level throughout FY21-23E.
- Maintain BUY. We raised FY21-22E net profit by 2-3% to reflect stronger top-line growth. Maintain BUY with new target price of RMB75.65 (based on unchanged 36x FY22 P/E). Key downside risk is the chip shortage that could last for longer time. Hikvision maintains high inventory level with inventory to sales ratio of 18% in FY20 (vs. 11% pre-US sanction time in 2018).
