海康威视(002415)

The US agreed to hold off on raising the tariff on US$200bn worth of Chinese goods from 10% to 25% on 1 January 2019. We believe a sustainable truce between China and the US may benefit Hangzhou Hikvision Digital Technology. We maintain our EPS forecasts of Rmb1.25 in 18E (+21.4% YoY), Rmb1.58 in 19E (+26.4% YoY) and Rmb1.86 in 20E (+17.7% YoY). Our target price is unchanged at Rmb68.48 (43.3x 19E PE). With 155% upside, we maintain our BUY recommendation.

Minimal revenue exposure to US. The US restricted exports of 14 types of emerging technologies in November, and added 44 Chinese companies to its export control list in August, which we expect to have a limited impact on Hikvision at present. In order to cope with a potential escalation of the Sino-US trade war, Hikvision has aimed to promote high-value-added solutions in developing countries and increased sales of low-end products in North America. It derived c.29% of 17A revenue from overseas markets, with less than 6% from the US.

Shifting supply chain. According to Hikvision’s IPO prospectus, its upstream suppliers include integrated circuit (IC), printed circuit board (PCB), power supply, case, and audio & video algorithm firms. We see its IC imports as a potential weak link, which may impede its growth if Sino-US trade tensions intensify. We note domestic firms started the development of application specific integrated circuit (ASIC) for artificial intelligence (AI) products in 2016-17, which may satisfy robust demand from surveillance, internet and automation companies in the future. An industry fund, set up by Hikvision’s parent CET Hik Group, invested Rmb200m in the series A funding of chip developer NextVPU in October. We believe domestically produced AI chips are already capable of replacing imported visual processing units (VPU) for Hikvision, and may become good alternatives for graphic processing units (GPU) going forward.

Growing market. We estimate sales from distributors, government clients and corporate clients account for 30%, 30-35% and 35-40% of Hikvision’s domestic sales, respectively. Hikvision initiated a campaign to help its distributors reduce inventories this year, which we expect to affect sales from distributors by Rmb2bn. We note the firm’s incremental accounts receivable-to-quarterly revenue ratio declined to 8.5% in 2Q18 and 9.5% in 3Q18, from 13.5% in 1Q18, and therefore anticipate improving performance from the distributor channel in 4Q18. Meanwhile, public tenders for security and surveillance projects recovered significantly in October-November, with the number of tenders up 52% YoY and a combined tender value jumping 82% YoY, beating both figures in 4Q17.

Maintain BUY. We maintain our EPS forecasts of Rmb1.25 in 18E (+21.4% YoY), Rmb1.58 in 19E (+26.4% YoY) and Rmb1.86 in 20E (+17.7% YoY). Our target price is unchanged at Rmb68.48 (43.3x 19E PE). The stock is currently trading at 21.5x 18E PE and 17.0x 19E PE. With 155% upside, we maintain our BUY recommendation.