On the morning of August 19th, Hikvision (002415.SZ) fell by 3.12%, closing at 26.68 yuan, approaching the pre-rights adjusted low of 25.2 yuan at the end of October 2022.

Previously, on August 16th, Hikvision released its financial performance for the first half of 2024, achieving a revenue of 41.21 billion yuan, a year-on-year increase of 9.68%; it realized a net profit attributable to the parent company of 5.064 billion yuan, a year-on-year decrease of 5.13%; and it achieved a net profit of 5.243 billion yuan after deducting non-recurring gains and losses, a year-on-year increase of 4.11%.

At the board secretary's statement on August 17th, Huang Fanghong mentioned that the expectation for the full-year net profit attributable to the parent company in 2024 is tentatively set with a bottom line of 14 billion yuan. Judging from the market performance on Monday, investors are not "buying into it."

Some industry insiders analyzed that Hikvision's security business relies on government revenue, which is still insufficient at present. The domestic business growth is slowing down, while the overseas business has seen some increase. On the other hand, the innovation business is gradually going to be spun off and listed, but it also requires time. Considering the current IPO market environment, there are certain uncertainties, and it is also difficult to predict the impact on the company's valuation.

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"The full-year net profit with a bottom line of 14 billion yuan."

At the performance exchange meeting held on August 17th, Huang Fanghong stated that, in general, the revenue growth situation in the first half of this year was mainly affected by the capital aspect, which is quite obvious. Industries that rely on local fiscal capital investment are generally more difficult; industries that rely mainly on their own capital for development maintain a certain level of investment; fields supported by government bonds are relatively active.

In terms of expenses, there was a special expense in the second quarter. The company wrote off the 2021 equity incentive in the second quarter, and all the undepreciated equity incentive expenses will be fully charged as expenses at one time. The amount of this expense is 471 million yuan, which, according to the attribution of the motivated employees, has been included in the second quarter sales, management, and R&D expenses, and is marked as non-recurring gains and losses. This expense has a significant impact on the net profit of the second quarter.

When asked whether to maintain the expectation of positive growth for the whole year, Huang Fanghong expressed that he is still more optimistic about the market, and considering the current external environment, the expectation for the full-year net profit attributable to the parent company in 2024 is tentatively set with a bottom line of 14 billion yuan.

The semi-annual report shows that the net cash flow from operating activities of Hikvision turned negative, at -190 million yuan. Huang Fanghong explained that historically, it is rare for Hikvision to have a positive net cash flow from operations in the first half of the year, and most of the time it is negative. It is usually that there is a large cash expenditure in the first quarter, cash recovery in the second and third quarters, and an upward trend in the fourth quarter, so there is no anomaly this year. From the perspective of accounts receivable management, Hikvision's accounts receivable management is currently good, and the quality of accounts receivable is also relatively good.

In terms of overseas main business, in the first half of the year, the revenue was 11.441 billion yuan, a year-on-year increase of 15.46%, and the overseas main business revenue accounted for about 28% of the company's business (excluding overseas revenue of innovative businesses, if the overseas revenue of innovative businesses is included, the overseas revenue accounts for 34.41%). Revenue from the United States continued to decline, and the proportion of revenue continued to decrease; excluding the impact of the US market, the four major regions of the Americas, Pan-Europe, Pan-Asia-Pacific, and the Middle East and Africa all achieved growth. Currently, the revenue contribution ratio of overseas developing countries and developed countries is about 7:3, and the vast number of developing countries have become the main force in driving the growth of overseas business.The recent management reshuffle in the company was primarily aimed at embracing a younger direction. Following this adjustment, all executives from the post-1960s generation have stepped down from the management team at Hikvision, as stated by Huang Fanghong.

Regarding Hikvision's semi-annual performance, Lin Jiayi, General Manager of Xuanjia Fund, told reporters from Yicai that Hikvision's core business is overly reliant on government spending, which has led to a decline in performance during the current round of local government deleveraging. The revenue contribution from overseas regions is insufficient to offset the profit decline caused by domestic deleveraging. At present, the overall logic is when local governments will end deleveraging and re-increase investment in security in government and public areas, and when domestic demand consumption will regain confidence to drive enterprises or residents to consume in security scenarios.

Can innovative businesses support growth?

Innovative businesses were the fastest-growing segment for Hikvision in the first half of the year. The company's innovative business revenue reached 10.328 billion yuan in the first half, a year-on-year increase of 26.13%, accounting for 25.06% of total revenue. Among them, possibly influenced by the recovery of the storage industry, the storage business grew the strongest, with a growth rate of 65.51%; the automotive electronics business continued to maintain rapid growth, with a growth rate of 60.35%.

Huang Fanghong stated that the automotive electronics business grew by more than 60% year-on-year in the first half, mainly due to several reasons: First, the company completed the reorganization of Hikvision Automotive Technology and Sensitec last year, and part of the growth is due to the consolidation effect. Sensitec is mainly engaged in the research and development and manufacturing of automotive millimeter-wave radars and ultrasonic radars, and has been included in the company's consolidated financial statements since March 2023. Second, the rapid development of passenger car manufacturers and the excellent expansion of some manufacturers in overseas markets have benefited the automotive electronics business as a component supplier. Third, the market share of the automotive electronics business has also increased, which has a positive impact on its performance.

Hikvision's semi-annual report shows that its subsidiaries, including Ezviz Network, Hikvision Robotics, and Hikvision Microvision, have established advantageous positions in their respective fields. The overall development of innovative businesses is good, becoming a strong engine for the company's development. In the future, the main business and innovative businesses will together form an intelligent IoT business combination, with continuous improvement in business synergy. At the same time, Hikvision is actively promoting the listing of Hikvision Robotics on the ChiNext board.

Some investment banking professionals also told Yicai reporters that in the past, when Hikvision's stock price rose to about 70 yuan, the price-to-earnings (P/E) ratio was about 50 times, and investors believed that the security business could maintain high growth, so they were willing to give a high valuation. As the growth rate of the security business slows down, the future will need to rely on the listing of innovative businesses to maintain growth. Investors' valuation of Hikvision itself is increasingly inclined to be a holding company benchmark, generally with a P/E ratio of about ten times, which is a normal state, not as good as each sub-business being benchmarked against the same industry. On the other hand, the current IPO environment is not ideal, and there is still a certain degree of uncertainty about whether each business can be successfully listed.