Hikvision collapses across the board, will the leader of security be left out of the new infrastructure investment?

Hikvision (002415.SZ) released its Q3 2022 financial report (ending in September 2022) on the evening of October 28th, Beijing time, after the Longbridge A-share market closed. The highlights are as follows:

1. Revenue: Continued Weakness, No Signs of Recovery. Hikvision's Q3 revenue reached RMB 22.5 billion, lower than market expectations (RMB 24.3 billion). The company's domestic business performance was weak in the first half of the year due to the impact of the pandemic and the real estate industry, but there was no recovery in the Q3 revenue performance.

2. Gross Margin: The Increase in Cost has a Direct Impact. The company achieved a Q3 gross profit of RMB 9.2 billion, a YoY decline of 8.5%. The company's gross profit margin continued to decline in this quarter to 41%, lower than market expectations (43.3%). In terms of hardware, as the company's largest source of revenue, it directly drove the increase in manufacturing costs due to the impacts of the pandemic, raw material price increases, and more.

3. Core Expense: Rigidly Rising. The company's three core expenses in Q3 continued to rise to RMB 5.98 billion, a historic high. Although the revenue has become weak, the expense side still exhibits rigid characteristics. The growth in R&D investment demonstrates the company's emphasis on research and development, but the increase in sales and management expenses has further eroded the company's profits.

4. Net Profit Attributable to Parent Company: New Low in the Same Period for Nearly 5 Years. The company achieved a net profit attributable to the parent company of RMB 3.08 billion in Q3, a YoY decrease of 31.3%, far lower than market expectations (RMB 4.4 billion). With the revenue weakening and the increase in costs and expenses, the performance of the company collapsed this quarter.

Overall, Hikvision's performance this quarter was overall below expectations. The expected recovery in revenue due to the easing of the pandemic's impacts was not met. Growth in costs and expenses directly eroded the company's profits this quarter. In other words, from the data in this quarter's report, Hikvision's "inflection point" has not yet been seen.

So, when will Hikvision recover from its high point of RMB 68 per share to its current RMB 28 per share and see the "inflection point"?

Dolphin Analyst believes that Hikvision still needs to take more measures to save costs. ①Open Source (revenue side): The continued depressed scale expansion will depend on the government's expenditure rebound, the real estate or the purchasing rebound of other enterprises and institutions. However, in the current situation where government procurement and overall economic growth are slowing, no signs of recovery have been seen yet. ②Cost Reduction (cost and expenses side): Whether it is manufacturing costs or operating costs, try to compress expenses as much as possible. From Q3's report, the cost and expense sides heavily eroded the company's final profit. The company's employees have a certain level of rigidity, and controlling the relative scale is expected to provide the company with certain profit space at specific times.

However, at the current level, although the stock price has fallen by more than 50%, no signs of the company's recovery have been seen yet.

Below is a detailed analysis:

1. Revenue: Continued Weakness, No Signs of Recovery

Hikvision achieved revenue of RMB 22.5 billion in Q3 2022, a YoY increase of 3.4%, lower than market expectations (RMB 24.3 billion). Hikvision's Q3 continues to be sluggish compared to Q2, and year-on-year growth continues to fall below 4%. Dolphin Analyst believes that the company's Q2 growth slowdown was mainly affected by factors such as the domestic epidemic and project construction. However, from the Q3 growth rate, the company's performance has yet to show significant improvement.

2. Gross profit margin: Cost-side improvement directly affects

In Q3 2022, Hikvision's gross profit was CNY 9.2 billion, a year-on-year decrease of 8.5%. While the company's revenue increased this quarter, gross profit continued to decline, mainly due to the decline in the company's gross profit margin.

Hikvision's gross profit margin continues to be weak, reaching only 41% this quarter, a year-on-year decrease of 5.4 percentage points, lower than market expectations (43.3%). This is mainly due to the fact that over 70% of Hikvision's revenue comes from hardware, and the increase in the cost side of hardware products due to factors such as the epidemic and rising raw material prices has lowered the company's gross profit margin level.

3. Core cost situation: Rigid upward trend

The core cost situation of Hikvision is mainly composed of sales expenses, management expenses, and R&D expenses. In Q3 2022, the three core expenses of Hikvision totaled 5.98 billion yuan, a year-on-year increase of 17.3%. The three core cost ratio reached 26.6%. The cost side of Hikvision's this quarter is still at a high level.

1) Sales expenses: The company's sales expenses in Q3 were CNY 2.569 billion, a year-on-year increase of 13.3%. The sales expense ratio in Q3 was 11.4%, a year-on-year increase of 1 percentage point, and the proportion of sales expenses increased.

2) Management expenses: The company's management expenses in Q3 were CNY 734 million, a year-on-year increase of 12.8%, mainly due to the corresponding growth in accordance with the expansion of the company's business scale and personnel. The management expense ratio in Q3 was 3.3%, a year-on-year increase of 0.3 percentage points.

3) R&D expenses: The company's R&D expenses in Q3 were CNY 2.681 billion, a year-on-year increase of 22.7%. The ratio of R&D expenses in Q3 was 11.9%, an increase of 1.8 percentage points compared to the same period last year. The company continues to increase its investment in R&D. For example, in 2021, the company has increased the number and treatment of R&D personnel.

The proportion of R&D personnel continued to maintain a high level of 48%, while the average salary of R&D personnel reached CNY 3.255 million, a year-on-year increase of 5.1%. The growth of R&D expenses in the past two quarters indicates that the company still insists on R&D investment even under the condition of low performance.

IV. Net Profit Attributable to the Parent Company: Five-year Lowest in the Same Period

In the third quarter of 2022, Hikvision achieved a net profit attributable to the parent company of 3.08 billion yuan, a year-on-year decrease of 31.3%, which was lower than the market expectation of 4.4 billion yuan. The decline in profitability was the main reason for the poor performance this quarter.

In Q3 2022, Hikvision's net profit margin was only 14.4%, down 10 percentage points year-on-year, mainly due to the decline in the company's gross profit margin and the increase in expense ratio caused by factors such as the epidemic.

Dolphin Analyst's Research on Hikvision

In-depth

On December 22, 2021, the company published an in-depth report titled "Hikvision (Part 2): Copying Zhang Kun's Homework, Will It Be Harvested?"

On December 14, 2021, the company published an in-depth report titled "Hikvision (Part 1): Countercyclical Buying, What is Zhang Kun Betting on?"

Earnings Season

On August 14, 2022, the earnings conference call was held, entitled "The impact of the epidemic is short-term, and the economic slowdown is the main culprit (Hikvision Q2 2022 Conference Call)."

On August 13, 2022, Longbridge published an earnings review article titled "Another White Horse Mounting Eleventh-Hour Stock Market Crash, Can Hikvision Turn the Tide?"

On April 21, 2022, Longbridge published a conference call summary titled "Hikvision's Outlook for 2022: What Does Management Think? (Conference Call Minutes)."

On April 16, 2022, Longbridge published an earnings review article titled "Hikvision: Inflation and Epidemic Bringing Pressure on Security Stocks."

Risk Disclosure and Disclaimer of this article: Dolphin Investment Research Disclaimer and General Disclosure