20210603-招银国际-Still_a_lot_of_Hisilicon_inventories_12页_1mb

CMB International Securities | Equity Research | Sector Update Summary

Core Content

This report focuses on the China AI surveillance sector, with particular attention to Hikvision and Dahua, two major players in the security camera market. It also touches on broader U.S. export control regulations and their implications for the sector. The report includes financial performance, earnings forecasts, valuation metrics, and supply chain risks.

Main Points

1. Ambarella (AMBA) and AI Camera Demand

• AMBA delivered strong FY1Q22 results, with revenue growth of +28% YoY and +13% QoQ, slightly above its guidance.
• Security camera segment showed >20% sequential growth, indicating strong demand.
• CV products are expected to account for >25% of FY22E revenue, with security cameras as the main contributor.
• Hisilicon inventories are still substantial, potentially enough to last another 12 months.
• Hikvision and Dahua combined revenue contribution was below 10% in FY1Q22, which is a significant drop from FY1Q21.
• AMBA has not yet penetrated Hikvision’s CV supply chain, but has made inroads with Dahua and Uniview.
• Dahua and Hikvision are both expected to see revenue growth of +21% YoY and +18% YoY respectively in FY2Q21E, driven by post-COVID-19 demand recovery.

2. Supply Chain Risk

• Dahua faces higher supply chain risk compared to Hikvision due to less Hisilicon inventory buffer.
• Dahua’s GPM dropped by 8.3 pct pts YoY to 40.9%, while Hikvision’s GPM only fell by 0.5 pct pts YoY to 46.8%.
• Dahua has to source from other suppliers, which are more expensive, leading to higher margin pressure.
• Hikvision has sufficient Hisilicon inventory to support 2021 demand, reducing its exposure to supply chain disruptions.

3. U.S. Export Control and Foreign Investment

• The U.S. may tighten export control and foreign investment regulations on emerging technologies.
• On 2 Jun 2021, the USCC published a report urging the definition of “emerging and foundational” technologies, which could lead to broader restrictions.
• The existing export control framework (EAR and ITAR) targets specific entities like Hikvision and Dahua, which are already on the Entity List.
• This could hinder the import and investment of U.S. technologies by Chinese companies, affecting their supply chain and profitability.

4. Investment Recommendation

• Hikvision is recommended as a BUY, with a target price of RMB75.65 (36x FY22 P/E).
• Dahua is recommended as a HOLD, with a revised target price of RMB24.11 (17x FY22 P/E).
• The valuation gap between Hikvision and Dahua is expected to widen, due to Hikvision’s stronger margin performance and lower supply chain risk.

Key Information

• AMBA has strong CV demand and high growth in the security camera segment.
• Hisilicon inventory is still a critical factor in the supply chain stability of Chinese surveillance companies.
• Dahua is more vulnerable to margin pressure due to limited Hisilicon inventory.
• U.S. export control could have a negative impact on the AI surveillance sector, especially for companies not on the Entity List.
• Hikvision is expected to outperform Dahua in terms of revenue growth and profitability.

Valuation Table Summary

Company	Ticker	Rating	Mkt Cap (US$ mn)	Price (LC)	TP (LC)	Up/down-side (%)	P/E FY21E	ROE FY22E	FY21E	FY22E
Hikvision	002415 CH	BUY	90,157	61.62	75.65	23%	34.9	28.3	28.3	28.9
Dahua	002236 CH	HOLD	10,456	22.29	24.11	8%	18.3	17.0	17.0	17.0

Financial Highlights

Hikvision (002415 CH)

• Revenue is expected to grow from RMB77,684 million (FY21E) to RMB102,261 million (FY22E).
• Gross margin is projected to increase from 46.8% (FY21E) to 47.7% (FY22E).
• Net profit is forecasted to rise from RMB16,493 million (FY21E) to RMB22,811 million (FY22E).
• EPS is expected to grow from RMB2.10 (FY21E) to RMB2.44 (FY22E).

Dahua (002236 CH)

• Revenue is expected to grow from RMB30,473 million (FY21E) to RMB34,514 million (FY22E).
• Gross margin is projected to decline from 42.9% (FY21E) to 41.9% (FY22E).
• Net profit is forecasted to decrease from RMB3,774 million (FY21E) to RMB4,468 million (FY22E).
• EPS is expected to drop from RMB1.26 (FY21E) to RMB1.49 (FY22E).

Conclusion

The report highlights Hikvision's stronger position in the AI surveillance sector due to better margin performance and more stable supply chain. It also warns of the potential impact of U.S. export controls on the sector, especially for companies not on the Entity List. The valuation gap between Hikvision and Dahua is expected to widen, with Hikvision being more attractive to investors.