Hikvision (A-Share):Consistency;reiterating TP of Rmb57

We maintain our bullish view on the AI universe (link, Jun 7) andsurveillance solutions. Hikvision attended our IMT conference in Beijingon Nov 21. Investors are particularly interested in: 1) the GM outlook; 2) AIfeaturedsurveillance and edge computing; 3) robots; and 4) the outlook foroverseas business. We expect the new AI-featured product cycle to transformsurveillance from passive observation to active prediction, driving a re-rating.

    Impact

    Long-term GM target unchanged at 40%: Management maintains theirconsistent guidance of revenue growth at 20%+ YoY in coming years andlong-term gross margin target at 40%. The company will continue to invest inR&D to support long-term revenue growth.

    AI-featured surveillance; empowered edge computing: Upgradingsurveillance camera specifications to include AI is more than an upgrade inresolution/image capture, like the shift from analog to digital. Rather it isempowering cameras with computing ability, lowering the computing burdenon central servers and reducing the amount of data to be transmitted.Hikvision believes “Edge computing + Cloud” will be mainstream in the future,especially in the surveillance sector, given that the video consumes largedatastreams and thus will rely more on edge devices to structure data beforesending it to central servers.

    AI-featured surveillance in transportation; structures data beforetransmission to central servers: AI-featured cameras could do basic dataanalysis. For example: 1) separate those images with cars passing by fromthose without, and only transmit those with cars to central servers; and 2) notonly capture images but also label the cars’ features, such as colour, type,brand, size, car plate, etc, supporting image search using these labels.

    Robots; dual-engine driven: Management maintains guidance for revenuefrom innovative businesses (home surveillance, robots, automotiveelectronics, SSD, infrared sensors) to at least double in 2017. The robotsbusiness is seeing strong growth driven by increasing automated productionin China and growing use of unmanned warehouses in e-commerce.

    Overseas business outlook: Management maintains the view that there aregreater uncertainties in overseas businesses compared to domestic/China,given relations among countries. Hikvision continues to expand their overseasmarket, especially in Southeast Asia, and upgrade their services from productsales (distributors’ channel) to total solutions, which have higher GM.

    Earnings and target price revision

    No change.

    Price catalyst

    12-month price target: Rmb57.00based on a PER methodology.

    Catalyst: 4Q17results.

    Action and recommendation

    Maintain Outperform.