Hikvision: "Security Leader" fails to turn the tide again

Hikvision released its Q3 2023 earnings report (as of September 2023) after the A-share market closed on the evening of October 20, 2023. The key points are as follows:

Revenue: Slight recovery. Hikvision achieved revenue of 23.7 billion yuan in Q3, a year-on-year increase of 5.5%, which was lower than market expectations (24.2 billion yuan). After being affected by the pandemic, Hikvision's business operations have started to recover, but the recovery is relatively weak.

Gross margin: Trending towards stability. Hikvision achieved a gross profit of 10.5 billion yuan in Q3, a year-on-year increase of 14%. The company's gross margin for this quarter was 44.3%, a year-on-year increase of 3.3 percentage points, which was better than market expectations (43.6%). The cost increase caused by the pandemic has significantly decreased, which is beneficial to the recovery of the gross margin.

Core expenses: Continuously increasing. Hikvision's three core expenses in Q3 continued to rise to 6.47 billion yuan, reaching a new historical high. Although the company's revenue recovery is slow, the cost side still exhibits rigid characteristics. The growth in research and development investment reflects the company's emphasis on research and development. The increase in sales expenses and management expenses further eroded the company's profits.

Net profit attributable to shareholders: Recovery below expectations. Hikvision achieved a net profit attributable to shareholders of 3.5 billion yuan in Q3, a year-on-year increase of 14%, which was lower than market expectations (4.2 billion yuan). The performance of this quarter's profit was mainly affected by the lower-than-expected revenue and the increase in expenses.

Overall, Hikvision's performance in this quarter is not very good. Although both revenue and profit have improved year-on-year, they are still below market expectations. After all, the market itself expects the company's performance to recover after the pandemic, and the current gross margin is still relatively low. There is no obvious recovery in the business, but the continuous increase in expenses directly puts pressure on the company's profits.

After Hikvision released this below-expectation earnings report, the market will further lower its performance expectations for the company. Considering Hikvision's current market value, Dolphin Research believes that the corresponding PE ratio of over 20 times is not cheap. The underperformance of this earnings report will put short-term pressure on the company's stock price. Although the company's business has shown some signs of recovery and has a clear leading advantage in the security field, it has more investment value after the stock price has fallen to a relatively low range.

The following is Dolphin Research's specific analysis of Hikvision's earnings report:

1. Revenue: Slight Recovery

Hikvision achieved a revenue of 23.7 billion yuan in the third quarter of 2023, a year-on-year increase of 5.5%, which was lower than market expectations (24.2 billion yuan). The third quarter saw a slight recovery for Hikvision, mainly due to seasonal factors. The company's revenue in the second half of the year is usually better than the first half, mainly due to accelerated project delivery in the second half.

2. Gross Margin: Stabilizing

Hikvision achieved a gross profit of 10.5 billion yuan in the third quarter of 2023, a year-on-year increase of 14%. The growth rate of gross profit was higher than that of revenue, mainly due to the year-on-year increase in gross margin.

The gross margin of Hikvision in this quarter was 44.3%, a year-on-year increase of 3.3 percentage points, which was better than market expectations (43.6%). The company's gross margin usually experiences a seasonal decline in the second half of the year, mainly due to increased hardware shipments. The year-on-year increase in gross margin is mainly due to the increase in costs during the epidemic period, and now the gross margin has returned to a relatively normal level.

3. Core Expenses: Continuously Rising

Hikvision's core expenses mainly include sales expenses, management expenses, and research and development expenses. In the third quarter of 2023, the total of these three core expenses reached 6.47 billion yuan, a year-on-year increase of 8.2%. The expense ratio of the three core expenses reached 27.3%. Hikvision's expense ratio remains relatively stable, but the absolute value of expenses continues to rise.

Sales expenses: The company's sales expenses in the third quarter were 2.815 billion yuan, a year-on-year increase of 9.6%. The sales expense ratio in the third quarter was 11.9%, an increase of 0.5 percentage points compared to the same period last year, indicating a continued increase in the proportion of sales expenses.

Management expenses: The company's management expenses in the third quarter were 770 million yuan, a year-on-year increase of 4.9%, mainly due to the corresponding increase in business scale and personnel growth. The management expense ratio in the third quarter was 3.2%, a decrease of 0.1 percentage points compared to the same period last year.

Research and development expenses: The company's research and development expenses in the third quarter were 2.888 billion yuan, a year-on-year increase of 7.7%. The research and development expense ratio in the third quarter was 12.2%, an increase of 0.3 percentage points compared to the same period last year. The company continues to increase its investment in research and development. For example, in 2022, the company increased the number and treatment of research and development personnel. The proportion of research and development personnel remains at a high level of 48%, and the average salary of research and development personnel reached 351,100 yuan, a year-on-year increase of 7.9%. Research and development expenses continue to grow, reaching a new historical high this quarter.

4.Net Profit Situation: A Less-than-Expected Recovery

In the third quarter of 2023, Hikvision achieved a net profit attributable to shareholders of 3.51 billion yuan, a year-on-year increase of 14%, which was lower than market expectations (4.2 billion yuan). Although the company's profit side has emerged from the slump during the epidemic, the recovery is still somewhat slow. The performance of the profit statement in this quarter was mainly affected by lower-than-expected revenue and increased expenses.

Hikvision's net profit margin in the third quarter of 2023 was only 15.8%, a year-on-year increase of 1.4 percentage points. After the epidemic, the company's profitability has rebounded, but there is still a significant gap compared to before.

Related Articles by Dolphin Research on Hikvision:

In-depth Analysis

December 22, 2021: "Hikvision (Part 2): Copying Zhang Kun's Homework, Will It Be Harvested?"

December 14, 2021: "Hikvision (Part 1): Contrarian Increase in Holdings, What Is Zhang Kun Betting On?"

Earnings Report Season

August 18, 2023: Earnings Report Review - "Hikvision: The Leader in Security, When Will New Infrastructure Investments Arrive?"

April 15, 2023: Earnings Report Review - "Hikvision: The 'Delicious Cake' That Doesn't Lay Off Employees, How Can It Withstand the Downturn?"

October 28, 2022: Earnings Report Review - "Hikvision's Complete Collapse, Will the Security Leader Miss Out on New Infrastructure Investments?"

August 14, 2022: Conference Call - "The Impact of the Epidemic is Short-term, Economic Slowdown is the Main Culprit (Hikvision 22Q2 Conference Call)"

August 13, 2022: Earnings Report Review - "Another White Horse Stumbles, Can Hikvision Turn the Tide This Time?" On April 21, 2022, phone meeting "Hikvision's Outlook for 2022, How does Management View it? (Summary of Phone Meeting)" was held.

On April 16, 2022, financial report review "Hikvision: Inflation and Epidemic Pressure the "Security Fence"" was released.

Risk disclosure and statement for this article: Dolphin Research and Analysis disclaimer and general disclosures.