Dahua:Accelerating growth from AI

Potential winner of a PPP project

    Dahua has submitted a bid for a PPP tender by Shache country in Xinjiang for asafe city project, which includes infrastructure as well as a public video sharingplatform. The Xinjiang government has announced that Dahua is the toprankedbidder and is likely to win this 10-year project (1year of constructionand 9years of operation), for a total amount of CNY4.3bn. Winning this PPPproject will be positive to Dahua’s growth outlook as we model this project tocontribute to 4%/12% of revenue in 2017/2018, respectively. While the bid isnot final, we have factored in the potential contribution to our earningsforecast. We maintain Buy.

    Video surveillance rides on the AI trend

    We have been highlighting that the video surveillance sector will ride on thefuture AI and deep learning trends with increasing video analytics applications.Surveillance cameras equipped with AI capability would be able to detectpotential public safety issues and alert officers more efficiently. Apart fromcrime monitoring, these AI-based surveillance systems can be used to improveemergency services and disaster response rates; to monitor traffic and toimplement smart manufacturing. Following the partnership with nVidia andIntel (Movidius), Dahua has introduced AI video surveillance products forvarious applications. Although the current contribution is limited, we expectthe AI products to further strengthen its suites of solution offerings andbecome its key growth drivers.

    Accelerated profit growth

    In addition to Dahua’s continual market share gain and rising contribution fromits solutions, the AI applications and potential PPP project should furtherpropel Dahua’s growth outlook, and we expect revenue growth to accelerateto 38%/36% in 2017/2018from 32% in 2016. The rise in revenue scale shouldalso enable Dahua to reverse the increasing opex ratio trend in 2013-16. Weexpect the opex ratio to decline from 27% in 2016to 26%/25% in 2017/2018,respectively. Our new 2017/2018EPS are CNY0.9/1.2, respectively.

    Valuation and risks

    We maintain Buy on Dahua and raise the TP from CNY19.4to CNY27.3on ourincreased 2017/2018earnings forecasts by 6%/14%. We also lift our target P/Emultiple from 20x 2H17-1H18to 22x 2018E due to its accelerated profitgrowth and ROE expansion. We now expect profit growth to accelerate to45%/36% in 2017/2018due to AI applications and the potential PPP. Thestrong profit growth should also enable ROE to expand from 24% in 2016to28%/30% in 2017/18, respectively. Risks: market share loss and weak demand.