Another White Knight crisis, can Hikvision finally turn the corner this time? input: ====== 小米手环 5 和 Fitbit Charge 4 哪个好？ ====== output: Which is better, Xiaomi Mi Band 5 or Fitbit Charge 4?

On the evening of August 12, Beijing time, Hikvision (002415.SZ) released its 2022 interim financial report (as of June 2022) after the Longbridge A-share market closed, with the following highlights:

1. Overall performance: all data are below market expectations. Hikvision's Q2 revenue was RMB 20.7 billion, a YoY increase of only 4.1%, which was lower than market expectations (RMB 22.775 billion). The net profit attributable to shareholders of the parent company was RMB 3.475 billion, a YoY decrease of 19.4%, which was lower than market expectations (RMB 4.232 billion). Affected by the unstable factors such as the epidemic in the first half of the year, Hikvision's revenue and gross profit margin were greatly affected. The profit decline was mainly due to the situation of low revenue, declining gross profit margin, and accelerating expansion of costs. Its expenses increased instead of decreasing during the epidemic, leading to the final collapse of profits.

2. Progress of various businesses: overseas business becomes the main driving force of growth. In the first half of 2022, affected by the domestic epidemic, all three major domestic business groups of Hikvision performed poorly, especially the domestic Public Service Business Group (PBG) experienced a YoY decline. However, in the first half of the year, overseas businesses were less affected by the epidemic and showed higher growth: ① overseas main business product revenue increased by 18.9% YoY in the first half of the year; ② overseas innovative business revenue increased by 53.5% YoY in the first half of the year, and overseas business was the main source of growth for the company in the first half of the year.

3. Integration of software and hardware: software declines, hardware still has double-digit growth. Since its transformation from a hardware manufacturer that only sells monitoring equipment to a security leader with software empowerment, the company has always maintained an integrated operation mode of software and hardware. Dolphin Analyst estimates that the company's software business declined in the first half of 2022, and its revenue proportion also declined somewhat. In the first half of the year, the hardware business still had double-digit growth. The uncertain factors such as the epidemic had a greater impact on software services, and the hardware side had relatively strong risk resistance.

Overall view: Hikvision's performance in this interim report is comprehensively lower than market expectations. This is mainly due to the poor performance of all three major domestic business groups, especially the domestic Public Service Business Group (PBG), which is mainly based on government/unit procurement and experienced a YoY decline. In the first half of the year, the government's focus was on epidemic prevention and control, and the procurement of company's products slowed down. In the situation of the epidemic and economic growth slowdown, companies have also adjusted their expense spending to some extent.

Although the innovative businesses such as robots bring growth space to the company, nearly 80% of the company's revenue still comes from the main products and services, which has a major impact on the company's performance. Looking ahead to the second half of the year, Dolphin Analyst believes that with the fading of epidemic factors, the growth of domestic business is expected to rebound. The procurement of the domestic Public Service Business Group (PBG), which is mainly based on government/unit procurement, is expected to speed up in the second half of the year. Although the company is still affected by the slowdown in economic growth, with the resumption of work and production after the epidemic, the company's procurement of products is also expected to improve to some extent.

Although Hikvision's market value has fallen by 34.32% from the beginning of the year to the present, and its valuation has also fallen to the bottom range in the past five years, a comprehensive report lower than market expectations may cause downward adjustment of market performance expectations. Dolphin Analyst will continue to focus on the company's bottom range. When domestic business rebounds and performance returns to double-digit growth, the company is expected to regain investor confidence.

In terms of specific financial performance, Dolphin analyst will focus on the following aspects:

1. Under the influence of unstable factors such as the epidemic, how did Hikvision perform in the first half of 2022?

2. Under the company's continuous emphasis on innovative business development, how did innovative business perform in the first half of 2022? What are the characteristics of the performances of the three major business groups in the main business?

3. The company has always been practicing the "software and hardware integration" business model, but was the growth in the first half of 2022 mainly driven by the hardware end or the software end? How did the software end perform? Where did the growth in the hardware end come from?

Dolphin analyst seeks answers to these questions in the financial report:

I. Overall performance: all data is lower than market expectations

1.1 Revenue

Hikvision achieved a revenue of RMB 20.7 billion in the second quarter of 2022, a year-on-year increase of 4.1%, which was lower than the market expectation (RMB 22.775 billion). Although Hikvision's revenue in the second quarter continued to grow compared with the first quarter, its growth rate dropped sharply from double digits in the past to 4% in this quarter. Dolphin believes that the company's second-quarter growth rate decline was mainly affected by domestic factors such as the epidemic, and as the impact of the epidemic fades, the company's growth rate is expected to pick up in the second half of the year.

1.2 Gross margin

Hikvision achieved a gross profit of RMB 8.85 billion in the second quarter of 2022, a year-on-year decrease of 3.2%. In this quarter, the company's gross profit declined despite the growth in revenue, mainly due to the decline in gross margin.

Hikvision's gross margin continued to be weak, with a gross margin of only 42.7% this quarter, a year-on-year decrease of 3.2 percentage points, which was lower than market expectations (44.83%). This is mainly because ① the proportion of software business with high gross margin declined in this quarter, which had a structural impact on the gross margin; ② Hikvision still relies mainly on hardware products for overall performance, and the rise in cost due to factors such as the epidemic and rising raw material prices has lowered the company's gross margin level.

1.3 Core expenses

Hikvision's core expenses mainly include sales expenses, management expenses, and research and development expenses. The total of the three core expenses in the second quarter of 2022 was RMB 5.841 billion, a year-on-year increase of 15.2%. The three core expense ratios reached 28.2%. Hikvision's expense side reached a new high this quarter, and the three expense ratios also rose significantly. 1) Sales expenses: In the second quarter, the company's sales expenses reached 2.563 billion yuan, a year-on-year increase of 6.6%. The sales expense rate in the second quarter was 12.4%, up 0.3 percentage points year-on-year. The proportion of sales expenses is relatively stable compared with the same period in history.

2) Management expenses: In the second quarter, the company's management expenses were 671 million yuan, a year-on-year increase of 41%, mainly due to the corresponding growth in line with the company's business expansion and personnel growth. The management expense rate in the second quarter was 3.2%, up 0.8 percentage points year-on-year.

3) Development expenses: In the second quarter, the company's research and development expenses reached 2.607 billion yuan, a year-on-year increase of 19%. The R&D expense rate in the second quarter was 12.6%, up 1.6 percentage points year-on-year. The company continues to increase investment in research and development. For example, in 2021, the company has increased the number and treatment of research and development personnel. The proportion of R&D personnel continued to maintain a high level of 48%, and at the same time, the average salary of R&D personnel reached 325,500 yuan, a year-on-year increase of 5.1%.

1.4 Net Profit Attributable to Shareholders

Hikvision achieved a net profit attributable to shareholders of 3.475 billion yuan in the second quarter of 2022, a year-on-year decrease of 19.4%, which was lower than market expectations (4.232 billion yuan). The decline in profitability is the main reason for the poor performance of this quarter.

In the second quarter of 2022, Hikvision's net profit margin was only 17.9%, a year-on-year decrease of 4.3 percentage points, mainly due to the decline in gross profit margin and the increase in expense ratio under the impact of factors such as the epidemic.

II. Progress of Various Businesses: Overseas Business Becomes the Main Growth Driver

Since 2021, Hikvision no longer specifically discloses the subdivision of "front-end products", "back-end products", and "central control products", but directly includes them in the company's "main business and other products" item. In the financial report, the progress of various innovative businesses is emphasized, and the company's development focus is shifting to innovative businesses.

Main business and other product business is still the company's largest source of revenue, contributing nearly 80% of the revenue in the first half of 2022. However, the overall proportion is trending downward. The proportion of main business and other products has dropped from 82.3% in the first half of last year to 78.8% this year. Innovative business continues to increase its share, and the share of the company's innovative business in the first half of 2022 continued to increase to 18.8%, an increase of 2.3 percentage points year-on-year. Even under the influence of factors such as the epidemic, innovative businesses still have relatively fast growth rates, achieving a growth rate of 25% year-on-year.

The two most important innovative businesses at Hikvision are the smart home and robotics businesses, with smart home business growth slowing to 4.7% in the first half of 2022, while robotics business continued to grow rapidly at 44.7%. Among other innovative businesses, thermal imaging and automotive electronics achieved growth of more than 30% in the first half of the year, while storage business growth slowed to 7%, with the proportion of these three businesses still less than 4%.

2.1. Main Products and Services

Hikvision's main products and services achieved revenue of 30.25 billion RMB in the first half of 2022, a year-on-year increase of 6.8%. Unstable factors such as the epidemic hit again in the first half of the year, leading to the growth rate of the company's main business dropping from more than 30% in the same period last year to single-digit growth. The growth of the main business in the first half of the year mainly came from the growth of overseas main business income due to the appearance of the epidemic in China.

The performance of the three major business groups in China's domestic main product business was relatively poor in the first half of 2022. Ⅰ. The Public Service Business Group (PBG) declined by 1.4% year-on-year; Ⅱ. The Domestic Enterprise and Business Business Group (EBG) of large enterprises increased by 2.6% year-on-year; Ⅲ. The Small and Medium-sized Enterprise Business Group (SMBG) in China increased by 4% year-on-year. Dolphin Analyst believes that the growth of the three major business groups in China was directly affected by epidemic prevention and control measures in the first half of the year. With the background of a decline in economic growth, some companies also reduced their departmental growth by tightening cost expenses.

The overseas main product business achieved 9.686 billion RMB in revenue in the first half of 2022, a year-on-year increase of 18.9%, with a smaller impact from the epidemic on its growth performance and a return to double-digit growth in overseas areas.

2.2 Innovative Business

Hikvision's innovative business achieved revenue of 7 billion RMB in the first half of 2022, a year-on-year increase of 25.6%. The growth rate of the company's innovative business also declined significantly under the influence of the epidemic, but its growth rate is still faster than that of its main product business, mainly due to the high year-on-year growth of its robotics, thermal imaging, and automotive electronics businesses of over 30%.

In China's domestic innovative business, Hikvision achieved revenue of 4.981 billion RMB in the first half of 2022, a year-on-year increase of 17%. From the perspective of revenue scale, innovative business is still mainly concentrated in domestic operations. Innovation business overseas: Hikvision achieved revenue of 2.027 billion yuan in the first half of 2022, a year-on-year increase of 53.5%, although the revenue volume is still significantly smaller than the domestic part, the overseas part has shown a very high growth rate. The main reason is that the overseas market growth in the first half of the year was less affected by the epidemic, and overseas also increased its procurement efforts for businesses such as thermal imaging and robots.

3. Integrated Software and Hardware: Software Declines, Hardware Still Achieves Double-Digit Growth

Hikvision relies on hardware carriers such as cameras for shipment, and follows up with customers for subsequent software services to achieve the company's business framework of "integrated software and hardware." From the mid-year financial report released this time, how did Hikvision perform on both software and hardware fronts?

3.1 Software Side

Although Hikvision disclosed its product categories separately in the annual report, the company's software revenue was not separately disclosed. As Dolphin Analyst wrote in the previous in-depth stock report "Hikvision (Part I): Betting on "Security Mao" Against the Trend, What is Zhang Kun Betting on?," "Since the company's software products can enjoy the policy of value-added tax refund, the annual report shows that there is a return project for value-added tax exceeding the tax burden, which can be calculated backwards through the amount of value-added tax refund, and the software revenue of Hikvision can be calculated."

"Software product revenue = amount of value-added tax refund / refund rate"

(Note: "refund rate = value-added tax payment ratio - actual value-added tax payment ratio")

Dolphin Analyst estimated that Hikvision's software business revenue in the first half of 2022 was 8.286 billion yuan, a year-on-year decrease of 2.7%. In the first half of the year, the added value of Hikvision's software was 22% of the company's total revenue. Affected by the epidemic and the decline in economic growth, the company's software service revenue declined, and the proportion also declined.

3.2 Hardware side

After calculating the software added value, the hardware revenue of Hikvision can be obtained through the company's annual total revenue. Hikvision's hardware business revenue in the first half of 2022 was 28.972 billion yuan, a year-on-year increase of 14.1%.

Comparing the growth rates of Hikvision's software and hardware revenue, the company's growth in the first half of the year mainly came from the hardware side. Dolphin Analyst believes that the impact of the epidemic and the macro-economy on software services is greater, while the hardware side still shows double-digit growth. The growth of the hardware side in the first half of the year mainly came from the demand of overseas markets.

Research on Hikvision by Dolphin Analyst

In-depth

December 22, 2021, Deep Dive by the company "Hikvision (1): copying Zhang Kun's homework, will it be cut?"

December 14, 2021, Deep Dive by the company "Hikvision (2): Contrary to the trend, adding bets on "security", what is Zhang Kun betting on?"

Earnings Season

April 21, 2022, conference call "What is Hikvision's outlook for 2022? How does management view it?"

April 16, 2022, earnings review "Hikvision: Inflation and pandemic add pressure to "security""

Risk Disclosure and Statement of this article: Dolphin Research Disclaimer and General Disclosure.